Audit Test 3

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B) Understating the sales journal amounts.

Which of the following actions would best conceal the theft of cash collections from sales on account?
A) Understating the cash receipts journal amounts.
B) Understating the sales journal amounts.
C) Overstating the accounts receivable control [G/L] account.
D) Overstating the accounts receivable subsidiary ledger.

C) Bill of lading (shipping report) file.

To determine whether the client's internal control operated effectively to minimize the likelihood of failing to bill a customer for a shipment of goods, the auditor should begin by selecting a sample of transactions from the population represented by the
A) Accounts receivable subsidiary ledger.
B) Customer order file.
C) Bill of lading (shipping report) file.
D) Sales invoice file.

A) The nature of the credit authorization process.

Which of the following is not a factor that an auditor would consider when assessing the inherent risk associated with client sales transactions?
A) The nature of the credit authorization process.
B) Billings are made using the percentage-of-completion method of revenue recognition.
C) Each sales transaction is individually negotiated with the customer.
D) The conditions of the sale allow for a right of return or the right to modify the purchase agreement.

C) Customers were billed for goods shipped to them.

Tracing bills of lading (shipping reports) to sales invoices as a test of controls related to the sales and collection process provides evidence that
A) Shipments to customers were recorded in the sales journal.
B) Recorded sales were actually shipped.
C) Customers were billed for goods shipped to them.
D) Customers were billed for the correct amounts

B) Completeness.

Customers are more likely to complain to the client if which of the following assertions for cash receipts is violated?
A) Existence.
B) Completeness.
C) Authorization.
D) Rights and obligations.

C) Trace the record of shipping to inclusion in the accounts receivable subsidiary ledger.

Which of the following would not be considered a test in the area of accounts receivable that relates to the existence assertion?
A) Evaluate proper segregation of duties.
B) Confirm accounts receivable directly with customers.
C) Trace the record of shipping to inclusion in the accounts receivable subsidiary ledger.
D) Review receipt of cash from customers in the period subsequent to the balance sheet date.

A) Current year sales to current year budgeted sales.

Which of the following comparisons would be most useful to an auditor in evaluating the overall results of an entity's sales efforts?
A) Current year sales to current year budgeted sales.
B) Current year ending accounts receivable to prior year ending accounts receivable.
C) Current year bad debts expense as a percentage of accounts receivable to the same value for the prior year.
D) Current year gross profit to prior year gross profit.

A) Valuation or allocation.

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable is most likely to obtain evidence concerning management's assertions relating to
A) Valuation or allocation.
B) Presentation and disclosure.
C) Existence or occurrence.
D) Rights and obligations.

B) Inspect related shipping records and sales invoices documenting the merchandise sold to customers.

Which of the following procedures would an auditor most likely perform related to year-end accounts receivable confirmations when the auditor does not receive replies even after second requests?
A) Review the cash receipts journal for the month prior to year-end.
B) Inspect related shipping records and sales invoices documenting the merchandise sold to customers.
C) Intensify the study of internal control concerning the revenue and collection cycle.
D) Increase assessed detection risk related to existence assertion in this area.

B) Cash is received.

According to SAB 101, which of the following is not a criteria for revenue recognition?
A) Delivery has occurred or services have been rendered.
B) Cash is received.
C) The seller's price to the buyer is determinable.
D) Persuasive evidence of an arrangement exists.

C) The accounts receivable function should be segregated from the invoice preparation function.

Which of the following is not a key segregation of duties in the revenue process?
A) The credit function should be segregated from the billing function.
B) The shipping function should be segregated from the billing function.
C) The accounts receivable function should be segregated from the invoice preparation function.
D) The cash receipts function should be segregated from the accounts receivable function.

A) Shipping documents.

Which of the following is the population the auditor is most likely to draw from in order to test the cutoff assertion for revenue?
A) Shipping documents.
B) Customer sales orders.
C) Customer account receivable balances.
D) The record of sales returns.

D) Write-off of receivables from officers against their bonus pay as those arrangements are inappropriate.

Which of the following is not a typical procedure performed related to other non-trade receivables?
A) Confirmation of the amount with the other party.
B) Evaluation of the collectability of other receivables.
C) Examination of the note for repayment terms and interest arrangements.
D) Write-off of receivables from officers against their bonus pay as those arrangements are inappropriate.

D) Request that the client adjust its accounts receivable balance by $82,000.

If tolerable misstatement for the accounts receivable balance is $75,000 and the aggregate known misstatement found by the auditor is $82,000, the auditor is most likely to
A) Resign from the engagement.
B) Issue a qualified opinion.
C) Request that the client adjust its accounts receivable balance by $7,000.
D) Request that the client adjust its accounts receivable balance by $82,000.

D. Many, Low, Likely

The negative request form of accounts receivable confirmation is particularly useful when :
# of small acct balances is; Assessed level of CR related to receivables is; Consideration by recipient is..?
A. Few, Low, Unlikely
B. Few, High Unlikely
C. Many, High, Likely
D. Many, Low, Likely

B) Functional costs.

Which of the following does not represent a major classification of expenses identified by FASB Concept Statement No. 5?
A) Product costs.
B) Functional costs.
C) Period costs.
D) Allocable costs.

D) Receiving reports.

Auditors perform a test to verify that all merchandise received has been recorded, in part, to satisfy the completeness assertion with regard to accounts payable. Which of the following would represent the population of documents for this test?
A) Purchase requisitions.
B) Payment vouchers.
C) Vendor invoices.
D) Receiving reports.

A) Separating the check signing and check mailing functions.

Which of the following is not considered an important element of segregation of duties in the purchasing process?
A) Separating the check signing and check mailing functions.
B) Separating the accounts payable and check signing functions.
C) Separating the accounts payable and receiving functions.
D) Separating the purchasing function from the receiving function.

A) Counting and inspection of purchased materials.

Which of the following procedures involved in processing accounts payable and cash disbursements should not be performed by the accounts payable department?
A) Counting and inspection of purchased materials.
B) Updating of accounts payable records.
C) Determining appropriate account distribution.
D) Comparing the vendor's invoice against information on the receiving report.

D) Purchase orders, receiving reports, and vendor invoices are independently matched when preparing vouchers.

Which of the following controls would most effectively ensure that recorded purchases are free of material misstatements?
A) The receiving department compares the quantity ordered on purchase orders with the quantity received on receiving reports.
B) Vendor invoices are compared with purchase orders by an employee who is independent of the receiving department.
C) Receiving reports require the signature of the individual who authorized the purchase.
D) Purchase orders, receiving reports, and vendor invoices are independently matched when preparing vouchers.

C) Reconciling monthly statement received from the vendor with the accounts payable subsidiary ledger.

A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this in a timely, efficient manner?
A) Periodically tracing the purchases journal daily totals to the applicable postings in the general ledger.
B) Sending quarterly confirmations to all vendors.
C) Reconciling monthly statement received from the vendor with the accounts payable subsidiary ledger.
D) Tracing the totals from the purchases journal to the various general ledger accounts.

A) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the period before the balance sheet date and whether it was recorded.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
A) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the period before the balance sheet date and whether it was recorded.
B) Investigating payables recorded just before and after the balance sheet date to determine whether they are supported by receiving reports.
C) Examining unusual relationships between monthly accounts payable balances and recorded cash payments.
D) Reconciling monthly vendor statements to the receiving report file to identify items received just before the balance sheet date.

D) Cutoff.

An auditor gathers receiving reports from the few days before and after year-end to determine that purchases made before the end of the current year have not been recorded in the following year to provide assurance about management's assertion of
A) Valuation or allocation.
B) Existence or occurrence.
C) Authorization.
D) Cutoff.

A) Other procedures such as the search for unrecorded liabilities are generally very effective.

Accounts payable (A/P) confirmations are generally used less frequently than accounts receivable confirmations since
A) Other procedures such as the search for unrecorded liabilities are generally very effective.
B) A/P confirmations generally have lower response rates than accounts receivable confirmations.
C) A/P confirmations do not address the existence assertion.
D) A/P confirmations do not address specific audit assertions.

C) Vendors with whom the client has done business with during the year.

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population would most likely be
A) Payees of checks written in the month after year-end.
B) Those vendors with balances in the year-end accounts payable subsidiary ledger.
C) Vendors with whom the client has done business with during the year.
D) Invoices filed in the client's open (unpaid) invoice file at year- end.

A) Requisition of goods.

Which of the following does not represent a major accounting transaction type processed in the purchasing cycle?
A) Requisition of goods.
B) Purchase of goods and services.
C) Payment of liabilities.
D) Return of goods to suppliers.

D) A new IT system placed in operation during the year.

All of the following are inherent risk factors for the purchasing process except:
A) Whether the supply of raw materials is adequate.
B) How volatile raw material prices are.
C) Misstatements detected in prior audits.
D) A new IT system placed in operation during the year.

C) Valuation and allocation.

Identify the assertion that is represented by the following statement: "Accounts payable and accrued expenses are included in the financial statements at appropriate amounts."
A) Existence.
B) Completeness.
C) Valuation and allocation.
D) Rights and Obligations.

D) The company does business overseas.

Which of the following best represents a situation in which an auditor would use a tax specialist for the audit of the tax provision?
A) The company has several temporary differences.
B) The company has several permanent differences.
C) The company has deferred tax liabilities.
D) The company does business overseas.

B) Plan and perform analytical procedures on accounts used in the purchasing process.

Which of the following is not one of the major steps in setting control risk for the purchasing process?
A) Understand and document the purchasing process.
B) Plan and perform analytical procedures on accounts used in the purchasing process.
C) Plan and perform tests of controls on purchase transactions.
D) Set and document the control risk for the purchasing process.

C) Processing of purchase orders.

Fleming, the purchasing manager at Sparks Hardware Wholesalers, has a relative named Patterson who owns a retail hardware store. Fleming arranged for hardware to be delivered by manufacturers directly to the retail store on a C.O.D. (cash-on-delivery) basis to enable Patterson to buy at lower wholesale prices. Fleming was most likely able to do this because of Sparks' poor internal control regarding
A) Perpetual inventory records.
B) Processing of cash receipts.
C) Processing of purchase orders.
D) Processing of invoices.

D) Cost accounting from review of variance reports.

Key segregations of duties in the inventory management process include separation of all of the following except:
A) Inventory management from cost accounting.
B) Cost accounting from the general ledger function.
C) Supervision of physical inventory from perpetual inventory recordkeeping.
D) Cost accounting from review of variance reports.

A) The lack of prenumbered materials requisition forms.

Which of the following is not an inherent risk factor in the audit of the inventory management process?
A) The lack of prenumbered materials requisition forms.
B) Industry competition.
C) The acquisition of raw materials from related parties.
D) Technology changes.

D) Periodic independent reconciliation of perpetual records with actual goods on hand.

Which of the following control activities would be most effective in maintaining accurate perpetual inventory records?
A) Independent matching of purchase orders, receiving reports, and vendor invoices prior to payment.
B) Independent count of goods received by storeroom personnel.
C) Periodic independent reconciliation of inventory control account with the subsidiary detailed records.
D) Periodic independent reconciliation of perpetual records with actual goods on hand.

A) An overstatement of ending inventory.

A decrease in inventory turnover that is not consistent with the change in sales may signal to the auditor
A) An overstatement of ending inventory.
B) The existence of many open purchase orders.
C) A change from FIFO to LIFO (assume prices are increasing).
D) Duplicate payments on inventory orders.

C) Represented by inventory tags are included in the client's inventory balance (Completeness).

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all of the selected items
A) Represented by inventory tags are actual inventory owned by the client (Rights and obligations).
B) Included on the inventory listing have been counted.
C) Represented by inventory tags are included in the client's inventory balance (Completeness).
D) Included in the listing are represented by inventory tags (Existence).

C) Verifying that all inventory owned by the client is on hand at the main warehousing location for the physical count.

Which of the following is not one of the auditor's objectives relating to the examination of inventories in a financial statement audit?
A) Verifying that the client has used proper inventory pricing.
B) Verifying that the inventory counted is actually owned by the client.
C) Verifying that all inventory owned by the client is on hand at the main warehousing location for the physical count.
D) Ascertaining the physical quantities of inventory on hand.

B) Request that the client take the physical count on or very near year-end.

A client maintains perpetual inventory records in terms of both quantities and dollar amounts. If the assessed level of control risk is high, the auditor would probably
A) Insist that the client take a physical count of inventory at least four times a year.
B) Request that the client take the physical count on or very near year-end.
C) Rely mainly on tests of controls in the inventory and warehousing area.
D) Rely on analytical procedures (i.e., gross profit test and inventory turnover) to ascertain the reasonableness of the physical count.

B) Sales returns.

While observing a client's annual physical inventory count, an auditor recorded test counts for several inventory items and noticed that certain test counts were higher than recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record
A) Purchase returns.
B) Sales returns.
C) Sales.
D) Either sales or purchase returns.

D) Valuation and allocation.

An auditor would most likely make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's assertion of
A) Rights and obligations.
B) Presentation and disclosure.
C) Existence or occurrence.
D) Valuation and allocation.

B) Purchase order.

Which of the following is not a typical document included in the Inventory Management Process?
A) Receiving report.
B) Purchase order.
C) Inventory status report.
D) Shipping order.

C) Receiving.

Which of the following is not a major function in the inventory management process?
A) Inventory management.
B) Manufacturing.
C) Receiving.
D) Cost accounting.

C) Valuation and allocation.

Inventory obsolescence relates to
A) Completeness.
B) Occurrence.
C) Valuation and allocation.
D) Classification.

C) Segregation of duties.

The most effective control for preventing fictitious inventory is
A) Using a perpetual inventory system.
B) Using a periodic inventory system.
C) Segregation of duties.
D) Periodic review of inventory levels by those in charge of inventory requisitions.

B) Maintenance of the cost of manufacturing in cost records.

Which of the following is not a role of the inventory management function (not the inventory management process as a whole)?
A) Authorization of production.
B) Maintenance of the cost of manufacturing in cost records.
C) Maintenance of inventory at appropriate levels.
D) Issuance of purchase requisitions.

A) Valuation and allocation.

In auditing intangible assets, an auditor would likely review or re-compute amortization expense and determine whether the write-off period appears reasonable. This would support management's assertion of
A) Valuation and allocation.
B) Existence.
C) Completeness.
D) Rights & obligations.

C) Recording operating leases.

Property, plant, and equipment transactions include all of the following, except:
A) Self-construction of a new office building.
B) Acquiring capital assets in exchange for stock.
C) Recording operating leases.
D) Abandoning capital assets.

C) The employee who computes depreciation for accounting purposes should be separate from the employee who computes depreciation for tax purposes.

Which of the following is not an example of segregation of duties in the property management process?
A) The employee responsible for taking a physical inventory of property should be independent of the record-keeping function.
B) The property records function should be separate from the general ledger function.
C) The employee who computes depreciation for accounting purposes should be separate from the employee who computes depreciation for tax purposes.
D) The property records function should be separate from the custodial [handling of assets] function.

D) Establishing a written company policy regarding the acquisition of raw material.

Which of the following is not a common internal control activity related to the acquisition of property, plant, and equipment?
A) Using a budget to forecast and control acquisitions and retirements.
B) Analyzing monthly variances between authorized expenditures and actual costs.
C) Requiring acquisitions to be authorized in relevant departments by the appropriate level of management.
D) Establishing a written company policy regarding the acquisition of raw material.

D) Replacements for plant assets are automatically authorized and processed in the next-to-last year of their estimated useful life.

Which of the following would be considered an internal control weakness associated with plant assets?
A) The estimated useful lives used for financial reporting purposes in some cases are slightly different than IRS classifications used for tax purposes.
B) Factory equipment acquisitions are initiated by the department head requesting the item, approved by the divisional manager, and sent to the purchasing department to acquire bids (estimates).
C) Periodic physical examination of plant assets is made and independently compared to the plant asset subsidiary ledger.
D) Replacements for plant assets are automatically authorized and processed in the next-to-last year of their estimated useful life.

B) Limited or no tests of controls and extensive substantive tests of current year transactions and ending balances.

When there are numerous plant asset transactions during the year, an auditor who plans to assess control risk at a high level for a non-public client usually performs
A) Extensive test of controls and limited tests of current year transactions.
B) Limited or no tests of controls and extensive substantive tests of current year transactions and ending balances.
C) Primarily substantive analytical procedures on year end balances.
D) Primarily substantive analytical procedures on current year transactions.

B) Existence.

In testing plant asset account balances, an auditor decides to physically examine a sample of new additions listed on a client-prepared analysis. The procedure most likely contains evidence concerning management's assertion of
A) Valuation.
B) Existence.
C) Rights & Obligations.
D) Completeness.

C) Inspect the client's plant asset ledger along with insurance and tax records, and then tour the facilities.

In performing a search for unrecorded retirements of plant assets, an auditor most likely would
A) Analyze the client's repairs & maintenance account and then tour the plant facilities.
B) Tour the client facilities and then inspect the client's plant asset ledger along with insurance and tax records.
C) Inspect the client's plant asset ledger along with insurance and tax records, and then tour the facilities.
D) Tour the client facilities and then analyze the repairs and maintenance account.

A) Excessive recurring losses on the disposal of assets.

An auditor may conclude that depreciation expense charges are insufficient by noting
A) Excessive recurring losses on the disposal of assets.
B) Insured values in excess of book values.
C) Continual trade-ins on relatively new assets.
D) Large amounts of fully-depreciated assets remain in operation.

B) Depreciation expenses for tax purposes.

Information regarding which of the following would normally not be included in a client's financial statement disclosures related to plant assets?
A) Capital leases.
B) Depreciation expenses for tax purposes.
C) Major acquisitions/disposals of operating assets.
D) Depreciation methods and useful lives.

A) Trademarks.

An example of a deferred charge is
A) Trademarks.
B) Prepaid interest.
C) Prepaid insurance.
D) Goodwill.

C) Amortized over the period of coverage.

Prepaid insurance should be
A) Amortized over the fiscal period.
B) Expensed when paid.
C) Amortized over the period of coverage.
D) Amortized over the calendar period.

C) Occurrence.

Vouching significant PP&E additions and dispositions to vendor invoices or other supporting documentation is used to test
A) Classification.
B) Cutoff.
C) Occurrence.
D) Completeness.

D) Completeness.

Tracing a sample of purchase requisitions to receiving reports and to the PP&E records is used to test
A) Classification.
B) Cutoff.
C) Occurrence.
D) Completeness.

D) Classification.

Reviewing the expenditures included in repairs and maintenance for unusually large items is used to test
A) Completeness.
B) Occurrence.
C) Existence.
D) Classification.

A) Occurrence.

Tracing a sample of entries in the cash receipts journal to daily deposit slips tests which of the following assertions for cash?
A) Occurrence.
B) Completeness.
C) Valuation.
D) Cutoff.

C) Existence.

The auditor is most concerned with which management assertion during the audit of cash?
A) Valuation and Allocation.
B) Rights and Obligations.
C) Existence.
D) Presentation and Disclosure.

C) An employee fraudulently covers a cash shortage by transferring money from one bank account to another.

Kiting can best be defined as a situation in which
A) A client employee is diverting deposits to his personal bank account.
B) The client fails to complete bank reconciliations on a timely basis.
C) An employee fraudulently covers a cash shortage by transferring money from one bank account to another.
D) Client checks include unauthorized signatures.

C) It assists in verifying deposits in transit and outstanding checks from the year-end bank reconciliation on a timely basis.

Which of the following best explains why an auditor obtains a bank cutoff statement in connection with his/her examination of year-end cash balances?
A) It is the best available procedure to detect kiting.
B) Clients with poor liquidity may be likely to alter the year-end bank statement amounts.
C) It assists in verifying deposits in transit and outstanding checks from the year-end bank reconciliation on a timely basis.
D) It is required per GAAS if the auditor is unable to prepare a bank transfer schedule.

D) Review of the December check register for both accounts.

On 12/31/11, Hoover Co. erroneously credited accounts payable (Dr. Cash; Cr. Accounts Payable) for a transfer of funds between two bank accounts that resulted in an overstatement of both cash and accounts payable at year-end. The check was not recorded until it cleared the bank on 1/2/12. Which of the following procedures would be least effective in detecting this misstatement?
A) Review of the 12/31/11 bank reconciliations for the 2 bank accounts.
B) Review of the schedule of interbank transfers.
C) Review of the accounts payable supporting documentation at 12/31/11.
D) Review of the December check register for both accounts.

B) Check # 2.

The following information was taken from the bank transfer schedule prepared for the audit of Salt Fork Co. Assume all checks were actually dated and mailed on 12/30.
LOOK ONLINE QUIZZES #6 CH16
Which check may be indicative of kiting?
A) Check # 1.
B) Check # 2.
C) Check # 3.
D) Check # 4.

C) It can be effective in detecting unrecorded checks that have not yet cleared the bank since cash disbursements per book and bank will not equal.

Which of the following statements is false regarding a four-column bank reconciliation or "proof of cash"?
A) It is generally prepared by auditors in situations where internal controls in the cash area are considered very weak.
B) It can be effective in detecting kiting since cash receipts and disbursements are reconciled with those on the bank statement.
C) It can be effective in detecting unrecorded checks that have not yet cleared the bank since cash disbursements per book and bank will not equal.
D) It is often used by the auditor to detect certain types of fraud.

A) Whoever is responsible for investment activities should not also ensure that all dividend and interest income was received.

Key segregations of duties for investments include all of the following except:
A) Whoever is responsible for investment activities should not also ensure that all dividend and interest income was received.
B) Whoever initiates the purchase of investments should not also grant final approval.
C) Whoever oversees security valuation should not also acquire securities.
D) Whoever maintains custody of the securities should not also account for the securities.

D) Confirms the number of shares owned with an independent registrar.

To establish the existence and ownership of an investment in common stock of a public company, an auditor ordinarily performs a security count or
A) Determines the market share at the balance sheet date using published quotations.
B) Corresponds with the investee regarding the number of shares owned.
C) Relies on the internal control structure if the auditor has tested the controls and has reasonable assurance they are operating as prescribed.
D) Confirms the number of shares owned with an independent registrar.

A) Diversified.

Which of the following is not a classification of investment securities according to GAAP?
A) Diversified.
B) Held-to-maturity.
C) Trading.
D) Available-for-sale.

D) All of the above.

The cash account is affected by the
A) Revenue cycle.
B) Financing cycle.
C) Purchasing cycle.
D) All of the above.

B) Cutoff.

Comparing the dates for a sample of checks with the dates the checks cleared the bank is used to test
A) Existence.
B) Cutoff.
C) Accuracy.
D) Authorization.

B) Bank transfer schedule.

The auditor typically uses the following procedures to detect fraud in the cash accounts:
A) Bank confirmations.
B) Bank transfer schedule.
C) Normal bank reconciliation procedures.
D) Inquiries of management.

D) Auditors typically perform limited testing of the controls over the petty cash fund.

Which of the following is true regarding petty cash?
A) The petty cash fund should be maintained by someone involved in other cash functions.
B) The petty cash fund is almost always the subject of heavy substantive testing.
C) Few entities maintain petty cash funds because of the risk of defalcation.
D) Auditors typically perform limited testing of the controls over the petty cash fund.

A) Level 1.

"Quoted prices from an active market" is an example of what level of valuation criteria?
A) Level 1.
B) Level 3.
C) Lower level.
D) Basic level.

C. Write-offs of customer accounts

For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve
A. Employee overtime wages
B. Credit granted to customers
C. Write-offs of customer accounts
D. Cash disbursements

D. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded?
A. The billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the customer's authorized credit limit and current account balance.
B. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account each month.
C. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by the customers.
D. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

C. Segregation of duties between receiving cash and posting the accounts receivable ledger.

Which of the following internal controls would be most likely to deter the lapping of collections from customers?
A. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries.
B. Authorization of write-offs of uncollectible accounts by a supervisor independent of the credit approval function.
C. Segregation of duties between receiving cash and posting the accounts receivable ledger.
D. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.

B. Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding the credit limit.

Smith Corporation has numerous customers. A customer file is kept on disk. Each customer file contains a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to
A. Develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations.
B. Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding the credit limit.
C. Request a printout of all account balances so that they can be manually checked against the credit limits.
D. Request a printout of a sample of account balances so that they can be individually checked against the respective credit limits.

A. Understating the sales journal.

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?
A. Understating the sales journal.
B. Overstating the accounts receivable control account.
C. Overstating the accounts receivable subsidiary ledger.
D. Understating the cash receipts journal.

D. Fictitious sales in 2012.

If accounts receivable turnover (credit sales/receivables) was 7.1 times in 2011 compared to only 5.6 times in 2012, it is possible that there were
A. Unrecorded credit sales in 2012
B. Unrecorded cash receipts in 2011
C. More thorough credit investigations made by the company late in 2011.
D. Fictitious sales in 2012.

B. Completeness

If the number of days' sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated?
A. Existence or occurrence
B. Completeness
C. Rights and Obligations
D. Classification

A. Unrecorded sales for the year.

Which of the following is most likely to be detected by an auditor's review of a client's sales cutoff?
A. Unrecorded sales for the year.
B. Lapping of year-end accounts receivable.
C. Excessive sales discounts.
D. Unauthorized goods returned for credits.

C. The auditor cannot infer that all nonrespondents have verified their account information.

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because
A. A majority of recipients usually lack the willingness to respond objectively.
B. Some recipients may report incorrect balances that require extensive follow-up.
C. The auditor cannot infer that all nonrespondents have verified their account information.
D. Negative confirmations do not produce evidence that is statistically quantifiable.

A. Low, HIgh, Likely

The negative request form of accounts receivable confirmation is useful particularly whe....1)"The assessed level of control risk relating to receivables is" 2)"The number of small balances is" 3)"Consideration by the recipient is"
A. Low, HIgh, Likely
B. Low, Low, Unlikely
C. High, Low, Likely
D. High, High, Likely

A. No reply to a positive confirmation request is received.

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when
A. No reply to a positive confirmation request is received.
B. No reply to a negative confirmation request is received.
C. The collectibility of the receivables is in doubt.
D. Pledging of the receivables is probable.

B. Valuation and allocation.

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of
A. Existence
B. Valuation and allocation.
C. Completeness.
D. Rights and obligations.

C. Entering of the voucher into the voucher register.

In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition, and receiving report are verified. The next step in the system is
A. Cancellation of the supporting documents.
B. Entry of the check amount in the check register.
C. Entering of the voucher into the voucher register.
D. Approval of the voucher for payment.

C. The vendor shipping document and the purchase order.

When goods are received, the receiving clerk should match the goods with
A. The purchase order and the requisition form.
B. The vendor invoice and the purchase order.
C. The vendor shipping document and the purchase order.
D. The vendor invoice and the vendor shipping document.

B. Receiving department

Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the
A. Department that initiated the requisition
B. Receiving department
C. Purchasing agent
D. Accounts payable department

D. Accounting for unused prenumbered purchase orders and receiving reports.

Which of the following control activities is not usually performed in the accounts payable department?
A. Matching the vendor's invoice with the related receiving report.
B. Approving vouchers for payment by having an authorized employee sign the vouchers.
C. Indicating the asset and expense accounts to be debited.
D. Accounting for unused prenumbered purchase orders and receiving reports.

B. Recompute the calculations on vendors' invoices.

In a properly designed purchasing process, the same employee most likely would match vendors' invoices with receiving reports and also
A. Post the detailed accounts payable records.
B. Recompute the calculations on vendors' invoices.
C. Reconcile the accounts payroll ledger.
D. Cancel vendors' invoices after payment.

B. Treasurer.

For effective internal control purposes, which of the following individuals should be responsible for mailing signed checks?
A. receptionist.
B. Treasurer.
C. Accounts payable clerk.
D. Payroll clerk.

C. receiving reports.

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all
A. vendor invoices.
B. purchase orders.
C. receiving reports.
D. canceled checks.

D. Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
A. Examination of unusual relationships between monthly accounts payable balances and recorded cash payments.
B. Reconciliation of vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date.
C. Investigation of payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports.
D. Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

C. Purchased and received before the end of the year was recorded.

Purchase cutoff procedures should be designed to test whether all inventory
A. Purchased and received before the end of the year was paid for.
B. Ordered before the end of the year was received.
C. Purchased and received before the end of the year was recorded.
D. Owned by the company is in the possession of the company at the end of the year.

C. Search for unrecorded liabilities.

Which of the following procedures is least likely to be performed before the balance sheet date?
A. Test of internal control over cash.
B. Confirmation of receivables.
C. Search for unrecorded liabilities.
D. Observation of inventory.

A. Vendors with whom the entity has previously done business.

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be
A. Vendors with whom the entity has previously done business.
B. Amounts recorded in the accounts payable subsidiary ledger.
C. Payees of checks drawn in the month after year-end.
D. Invoices filed in the entity's open invoice file.

D. Custody of work in process and finished goods is properly maintained.

The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and that
A. Independent internal verification of activity reports is established.
B. Transfers to the finished goods department are documented by a completed production report and a quality control report.
C. Production orders are prenumbered and signed by a supervisor.
D. Custody of work in process and finished goods is properly maintained.

A. Inventory manager does not have ability to record inventory transactions.

Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions?
A. Inventory manager does not have ability to record inventory transactions.
B. Summary of the receiving reports is independently compared to the inventory status report.
C. Inventory is periodically reviewed for slow-moving or obsolete items, which may require a write-down.
D. Subsidiary ledgers are periodically reconciled with inventory control accounts.

C. Independent comparisons of finished goods records with counts of goods on hand.

Which of the following would most likely be an internal control activity designed to detect errors and fraud concerning the custody of inventory?
A. Periodic reconciliation of work in process with job cost sheets.
B. Segregation of functions between general accounting and cost accounting.
C. Independent comparisons of finished goods records with counts of goods on hand.
D. Approval of inventory journal entries by the storekeeper.

B. Compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory.

Independent internal verification of inventory (ie, proper segregation of duties) occurs when employees who
A. Issue raw materials obtain materials requisitions for each issue and prepare daily totals of materials issued.
B. Compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory.
C. Obtain receipts for the transfer of completed work to finished goods prepare a completed production report.
D. Are independent of issuing production orders update records from completed job cost sheets and production cost reports on a timely basis.

D. Examination of materials requisitions and reperformance of client controls designed to process and record issuances.

An auditor's tests of controls over the issuance of raw materials to production would most likely include
A. Reconciliation of raw materials and work-in-process perpetual inventory records to general ledger balances.
B. Inquiry of the custodian about the procedures followed when defective materials are received from vendors.
C. Observation that raw materials are stored in secure areas and that storeroom security is supervised by a responsible individual.
D. Examination of materials requisitions and reperformance of client controls designed to process and record issuances.

C. Receiving reports are prenumbered and periodically reconciled.

Which of the following internal control activities is most likely to address the completeness assertion for inventory?
A. The work-in-process account is periodically reconciled with subsidiary records.
B. Employees responsible for custody of finished goods do not perform the receiving function.
C. Receiving reports are prenumbered and periodically reconciled.
D. There is a separation of duties between payroll department and inventory accounting personnel.

D. Request that the client schedule the physical inventory count at the end of the year.

A client maintains perpetual inventory records in both quantities and dollars. If the level of control risk were set at high, an auditor would probably
A. Insist that the client perform physical counts of inventory items several times during the year.
B. Apply gross profit tests to ascertain the reasonableness of the physical counts.
C. Increase the extent of tests of controls of the inventory system.
D. Request that the client schedule the physical inventory count at the end of the year.

B. Represented by inventory tags are included in the listing.

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items
A. Included in the listing have been counted.
B. Represented by inventory tags are included in the listing.
C. Included in the listing are represented by inventory tags.
D. Represented by inventory tags are bona fide.

D. All goods owned at year-end are included in the inventory balance.

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that
a. All goods purchased before year-end are received before the physical inventory count.
B. No goods held on consignment for customers are included in the inventory balance.
C. Goods observed during the physical count are pledged or sold.
D. All goods owned at year-end are included in the inventory balance.

D. Valuation

Inquiries of warehouse personnel concerning possibly obsolete or slow-moving inventory items provide assurance about management's assertion of
A. Completeness.
B. Existence.
C. Presentation.
D. Valuation

B. Perpetual inventory records are maintained.

Periodic or cycle counts of selected inventory items are made at various times during the year rather than via a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventory at interim dates?
A. Complete recounts are performed by independent teams.
B. Perpetual inventory records are maintained.
C. Unit cost records are integrated with production-accounting records.
D. Inventory balances are rarely at low levels.

A. Economic re-order quantity.

An auditor would probably be least interested in which of the following fields in an electronic perpetual inventory file?
A. Economic re-order quantity.
B. Warehouse location.
C. Date of last purchase.
D. Quantity sold.

D. During physical observation of inventory verify that "bill-and-hold" inventory is segregated and not included in the ending inventory count.

Which of the following audit procedures would probably provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventory?
A. Tracing of test counts noted during the entity's physical count to the entity's summarization of quantities.
B. Inquiry of management to determine whether there are significant purchase commitments that should be considered for disclosure.
C. Selection of the last few shipping advices used before the physical count and determination of whether the shipments were recorded as sales.
D. During physical observation of inventory verify that "bill-and-hold" inventory is segregated and not included in the ending inventory count.

C. Third-party lien holder with a secured interest in the equipment

When auditing prepaid insurance, an auditor discovers that the original insurance policy on a key piece of manufacturing equipment is not available for inspection. The policy's absence most likely indicates the possibility of a(n)
A. Insurance premium due but not recorded
B. Fictitious piece of equipment
C. Third-party lien holder with a secured interest in the equipment
D. Understatement of insurance expense

A. Periodic physical inspection and reconciliation of plant and equipment to the detailed accounting records by the internal audit staff.

Which of the following internal controls is most likely to justify a reduction of control risk concerning plant and equipment acquisitions?
A. Periodic physical inspection and reconciliation of plant and equipment to the detailed accounting records by the internal audit staff.
B. Comparison of current-year plant and equipment account balances with prior-year actual balances.
C. Review of pre-numbered purchase orders to detect unrecorded trade-ins.
D. Approval of periodic depreciation entries by a supervisor independent of the accounting department.

B. Inspection of equipment and reconciliation with accounting records.

To strengthen control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic
A. Increase in insurance coverage.
B. Inspection of equipment and reconciliation with accounting records.
C. Verification of liens, pledges, and collateralizations.
D. Accounting for work orders.

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

Due to a weakness observed in a client's control over recording retirement of equipment, the auditor may decide to
A. Trace additions to the "other assets" account to search for equipment that is still on hand but no longer being used.
B. Select certain items of equipment from the accounting records and locate them in the plant.
C. Inspect certain items of equipment in the plant and trace those items to the accounting records.
D. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year.

A. Separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders.

Which of the following procedures is most likely to prevent the improper disposition of equipment?
A. Separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders.
B. The use of serial numbers to identify equipment that could be sold.
C. Periodic comparison of removal work orders to authorizing documentation.
D. Periodic analysis of the scrap sales and the repairs and maintenance accounts.

A. Investigation of variances within a formal budgeting system.

Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for
A. Investigation of variances within a formal budgeting system.
B. Review and approval of the monthly depreciation entry by the plant supervisor.
C. Segregation of duties of employees in the accounts payable department.
D. Examination by the internal auditor of vendor invoices and canceled checks for property acquisitions.

D. The company has made no acquisitions of other companies during the fiscal year under audit.

Which of the following situations would not support the auditor's decision to reduce control risk below maximum for the audit of intangible assets?
A. The client employs a qualified specialist who reviews the value of the intangible assets on an annual basis for impairment.
B. The auditor documented, tested, and developed an understanding of the acquisition process and found the key controls to be effective.
C. The IT system that maintains the records for intangible assets has adequate controls to prevent unauthorized access.
D. The company has made no acquisitions of other companies during the fiscal year under audit.

A. Review and approval of the periodic equipment depreciation entry by a supervisor who does not actively participate in its preparation.

Which of the following control activities would most likely allow for a reduction in the scope of the auditor's tests of depreciation expense?
A. Review and approval of the periodic equipment depreciation entry by a supervisor who does not actively participate in its preparation.
B. Comparison of equipment account balances for the current year with the current-year budget and prior-year actual balances.
C. Review of the miscellaneous income account for salvage credits and scrap sales of partially depreciated equipment.
D. Authorization of payment of vendor's invoices by a designated employee who is independent of the equipment-receiving function.

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

When there are numerous property and equipment transactions during the year, an auditor who plans to set the control risk at a low level usually performs
A. substantive analytical procedures for property and equipment balances at the end of the year.
B. Tests of controls and extensive tests of property and equipment balances at the end of the year.
C. Substantive analytical procedures for current-year property and equipment transactions.
D. Tests of controls and limited tests of current-year property and equipment transactions.

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

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the assertion that all
A. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.
B. Expenditures for property and equipment have not been charged to expense.
C. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period.
D. Expenditures for property and equipment have been recorded in the proper period.

A. Inspecting documents and physically examining assets.

Which of the following combinations of procedures would an auditor be most likely to perform to obtain evidence about fixed-asset additions?
A. Inspecting documents and physically examining assets.
B. Recomputing calculations and obtaining written management representations.
C. Observing operating activities and comparing balances to prior-period balances.
D. Confirming ownership and corroborating transactions through inquiries of client personnel.

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