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Auditing 2 final practice

Which of the following is the most important control procedure over acquisitions of property, plant, and equipment?

a. Establishing a written company policy distinguishing between capital and revenue expenditures.

b. Using a budget to forecast and control acquisitions and retirements.

c. Analyzing monthly variances between authorized expenditures and actual costs.

d. Requiring acquisitions to be made by user departments.

b. Using a budget to forecast and control acquisitions and retirements.

Which of the following is not one of the auditors' objectives in auditing depreciation?

a. Establishing the reasonableness of the client's replacement policy.

b. Establishing that the methods used are appropriate.

c. Establishing that the methods are consistently applied.

d. Establishing the reasonableness of depreciation computations.

a. Establishing the reasonableness of the client's replacement policy.

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs:

a. Tests of controls and extensive tests of property and equipment balances at the end of the year.

b. Analytical procedures for current year property and equipment transactions.

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

d. Analytical procedures for property and equipment balances at the end of the year.

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

4. The auditors may expect a proper debit to goodwill due to:

a. Purchase of a trademark.

b. Establishment of an extraordinarily profitable product.

c. A business combination.

d. Capitalization of human resources.

c. A business combination.

The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client:

a. Confirmation.

b. Observation.

c. Recomputation.

d. Inquiry.

c. Recomputation.

For which of the following accounts is it most likely that most of the audit work can be performed in advance of the balance sheet date?

a. Accounts receivable.

b. Cash.

c. Current marketable securities.

d. Property, plant and equipment.

b. Cash.

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 auditors of vendor invoices and canceled checks for property acquisitions.

a. Investigation of variances within a formal budgeting system.

When performing an audit of the property, plant and equipment accounts, an auditor should expect which of the following to be most likely to indicate a departure from generally accepted accounting principles?

a. Repairs have been capitalized to repair equipment that had broken down.

b. Interest has been capitalized for self-constructed assets.

c. Assets have been acquired from affiliated corporations with the related transactions recorded and described in the financial statements.

d. The cost of freight-in on an acquisition has been capitalized.

a. Repairs have been capitalized to repair equipment that had broken down.

Which of the following is a customary audit procedure for the verification of the legal ownership of real property?

a. Examination of correspondence with the
corporate counsel concerning acquisition matters.

b. Examination of ownership documents registered and on file at a public hall of records.

c. Examination of corporate minutes and resolutions concerning the approval to acquire property, plant and equipment.

d. Examination of deeds and title guaranty policies on hand.

d. Examination of deeds and title guaranty policies on hand.

For which of the following ledger accounts would the auditor be most likely to analyze the details to identify understatements of equipment acquisitions?

a. Service Revenue.

b. Sales.

c. Repairs and maintenance expense.

d. Sales salaries expense.

c. Repairs and maintenance expense.

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

a. Discussing capitalization policies with Lowell's controller.

b. Examining maintenance expense accounts.

c. Observing, during the physical inventory observation, that the warehouse had been painted.

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

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

In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the:

a. Extent of the control risk.

b. Extent of property abandoned during the year.

c. Adequacy of replacement funds.

d. Reasonableness of the depreciation.

c. Adequacy of replacement funds.

In testing for unrecorded retirements of equipment, an auditor might.

a. Select items of equipment from the accounting records and then attempt to locate them during the plant tour.

b. Compare depreciation expense with the prior year's depreciation expense.

c. Trace equipment items observed during the plant tour to the equipment subsidiary ledger.

d. Scan the general journal for unusual equipment retirements.

a. Select items of equipment from the accounting records and then attempt to locate them during the plant tour.

Which of the following is not a control that should be established for purchases of equipment?

a. Establishing a budget for capital acquisitions.

b. Requiring that the department in need of the equipment order the equipment.

c. Requiring that the receiving department receive the equipment.

d. Establishing an accounting policy regarding the minimum dollar amount of purchase that will be considered for capitalization.

b. Requiring that the department in need of the equipment order the equipment.

Which of the following is used to obtain evidence that the client's equipment accounts are not understated?

a. Analyzing repairs and maintenance expense accounts.

b. Vouching purchases of plant and equipment.

c. Recomputing depreciation expense.

d. Analyzing the miscellaneous revenue account.

a. Analyzing repairs and maintenance expense accounts.

Which of the following is not a test primarily used to test property, plant and equipment accounts for overstatement?

a. Investigation of reductions in insurance coverage.

b. Review of property tax bills.

c. Examination of retirement work orders prepared during the year.

d. Vouching retirements of plant and equipment.

d. Vouching retirements of plant and equipment.

The auditors are least likely to learn of retirements of equipment through which of the following?

a. Review of the purchase returns and allowances account.

b. Review of depreciation.

c. Analysis of the debits to the accumulated depreciation account.

d. Review of insurance policy riders.

a. Review of the purchase returns and allowances account.

Which of the following best describes the auditors' approach to the audit of the ending balance of property, plant and equipment for a continuing nonpublic client?

a. Direct audit of the ending balance.

b. Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts.

c. Audit of changes in the accounts since inception of the company.

d. Audit of selected purchases and retirements for the last few years.

b. Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts.

A continuing audit client's property, plant and equipment and accounts receivable accounts have approximately the same year-end balance. In this circumstance, when compared to property, plant and equipment one would normally expect the audit of accounts receivable to require:

a. More audit time.

b. Less audit time.

c. Approximately the same amount of audit time.

d. Similar confirmation procedures.

a. More audit time.

Which of the following best describes the auditors' typical observation of plant and equipment?

a. The auditors observe a physical inventory of plant and equipment, annually.

b. The auditors observe all additions to plant and equipment made during the year.

c. The auditors observe all major plant and equipment items in the clients' accounts each year.

d. The auditors observe major additions to plant and equipment made during the year.

d. The auditors observe major additions to plant and equipment made during the year.

A likely analytical procedure to test the accuracy of purchase discounts would be to compute the ratio of cash discounts earned to

a. Accounts payable.

b. Notes payable.

c. Purchases.

d. Sales discounts.

c. Purchases.

An auditor wishes to perform tests of controls on a client's cash disbursements relating to accounts payable. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by:

a. Confirmation and observation.

b. Observation and inquiry.

c. Analytical procedures and confirmation.

d. Inquiry and analytical procedures.
c. Analytical procedures and confirmation.

d. Inquiry and analytical procedures.

b. Observation and inquiry.

When the auditors select a sample of items from the vouchers payable register for the last month of the period under audit and trace these items to underlying documents, the auditors are gathering evidence primarily in support of the assertion that:

a. Recorded obligations were paid.

b. Incurred obligations were recorded in the correct period.

c. Recorded obligations occurred prior to year-end.

d. Cash disbursements were recorded as incurred obligation.

c. Recorded obligations occurred prior to year-end.

Which of the following procedures for detecting unrecorded transactions at the client's December 31 year-end is least likely to result in discovery of an unrecorded year-end account payable?

a. Examination of invoices received after year-end.

b. Examination of vouchers payable entered in the January voucher register.

c. Examination of January receiving reports prepared for goods shipped FOB destination in December to the client.

d. Confirmation of year-end accounts payable.

c. Examination of January receiving reports prepared for goods shipped FOB destination in December to the client.

For good internal control, a copy of a receiving report should be sent to all of the following departments except:

a. Accounts payable.

b. Purchasing.

c. Stores.

d. Shipping.

d. Shipping.

Most of the audit work on accounts payable is typically performed:

a. Before the balance sheet date.

b. At the balance sheet date in conjunction with inventory cutoff tests.

c. After the balance sheet date.

d. Simultaneously with the audit of accrued liabilities.

c. After the balance sheet date.

Which of the following procedures is least likely to be completed before the balance sheet date?

a. Observation of inventory.

b. Review of internal control over cash disbursements.

c. Search for unrecorded liabilities.

d. Confirmation of receivables.

c. Search for unrecorded liabilities.

Which statement is correct with respect to accounts payable confirmations?

a. The negative form is used in most circumstances

b. Accounts with new suppliers are always confirmed

c. They are a required auditing procedure

d. They are more frequently used in situations in which some vendors don't send monthly statements.

d. They are more frequently used in situations in which some vendors don't send monthly statements.

Which of the following audit procedures is aimed most directly at testing the completeness assertion for accounts payable:

a. Footing the list of accounts payable.

b. Examining underlying documentation for cash disbursements in the period after year-end.

c. Tracing shipping reports issued on or before year-end to related customer purchase orders and invoices.

d. Tracing shipping reports after year-end to related customer purchase orders and invoices.

b. Examining underlying documentation for cash disbursements in the period after year-end.

With properly designed internal control, the same employee should not be permitted to:

a. Sign checks and cancel supporting documents.

b. Receive merchandise and prepare a receiving report.

c. Prepare disbursement vouchers and sign checks.

d. Initiate a request to order merchandise and approve merchandise received.

c. Prepare disbursement vouchers and sign checks.

Which of the following best describes the auditors' approach to the audit of accrued liabilities?

a. Test computations.

b. Confirmation.

c. Observation.

d. A low planned assessed level of control risk.

a. Test computations.

The auditor will most likely perform extensive tests for possible understatement of:

a. Revenues.

b. Assets.

c. Liabilities.

d. Capital.

c. Liabilities.

Which of the following assertions is of principle concern to the auditors in the examination of accounts payable?

a. Existence.

b. Completeness.

c. Valuation.

d. Authorization.

b. Completeness.

The assertion most directly addressed when performing the search for unrecorded liabilities is:

a. Completeness.

b. Existence.

c. Presentation.

d. Rights.

a. Completeness.

Which of the following is the best control procedure to prevent the payment of an invoice twice?

a. Review of supporting documentation by the person signing the check.

b. Requiring dual signatures on checks.

c. Use of a check protector.

d. Reconciliation of vendor statements to accounts payable.

a. Review of supporting documentation by the person signing the check.

Which of the following is a control procedure that is usually applied to accounts payable?



a. Periodic confirmation of accounts payable.

b. Mailing statements to vendors detailing their account.

c. Periodic aging of accounts payable.

d. Reconciliation of vendor statements with accounts payable.

d. Reconciliation of vendor statements with accounts payable.

Unrecorded liabilities are most likely to be found during the review of which of the following documents?

a. Unpaid bills.

b. Shipping records.

c. Bills of lading.

d. Unmatched sales invoices.

a. Unpaid bills.

When an auditor finds a debit to accounts payable, which of the following accounts is most likely to be credited?

a. Accounts Receivable.

b. Accrued liabilities.

c. Cash

d. Cost of goods sold.

c. Cash

Accrued liabilities generally differ from accounts payable in that accrued liabilities:

a. Accumulate over time.

b. Are usually confirmed at year-end.

c. Depend upon the existence of a transaction for original recording of the account.

d. Are never included in cost of goods sold.

a. Accumulate over time.

The confirmation of accounts payable is most closely associated with:

a. Assertion risk.

b. Detection risk.

c. Inherent risk.

d. Relative risk.

b. Detection risk.

Which of the following is an example of an accrued liability?

a. Accounts payable.

b. Notes payable.

c. Prepaid Insurance.

d. Product warranty liability.

d. Product warranty liability.

The auditors' search for unrecorded liabilities is completed:

a. During an interim period.

b. At the balance sheet date.

c. Subsequent to the balance sheet date.

d. At any time during the examination.

c. Subsequent to the balance sheet date.

Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?

a. Scan the sales journal for sequential and unusual entries.

b. Examine shipping documents for matching sales invoices.

c. Compare the accounts receivable ledger to daily sales summaries.

d. Inspect unused sales invoices for consecutive pre-numbering.

b. Examine shipping documents for matching sales invoices.

Which of the following audit procedures is least likely to detect an unrecorded liability?

a. Analysis and recomputation of interest expense.

b. Analysis and recomputation of depreciation expense.

c. Mailing of a cash confirmation form.

d. Reading of the minutes of meetings of the board of directors.

b. Analysis and recomputation of depreciation expense.

Auditors should be aware that a voucher system may result in which of the following at year-end:

a. Understatement of liabilities.

b. Overstatement of assets.

c. Understatement of owners' equity.

d. Overstatement of expenses.

a. Understatement of liabilities.

Which of the following manipulations would understate accounts payable on the financial statements?

a. Overstatement of purchases

b. Closing the cash disbursements journal prior to year-end

c. Leaving the cash receipts journal open after year-end

d. Overstating purchase returns.

d. Overstating purchase returns.

An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order, and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select for testing from the population of:

a. Purchase orders.

b. Canceled checks.

c. Receiving reports.

d. Approved vouchers.

b. Canceled checks.

A client recorded a payable for a large purchase twice. Which of the following controls would be most likely to detect this error in a timely and efficient manner?

a. Footing the purchases journal.

b. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

c. Tracing totals from the purchases journal to the ledger accounts.

d. Sending written quarterly confirmations to all vendors.

b. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

The form typically used to confirm accounts payable:

a. Does not require a response from the vendor.

b. Confirms the balance recorded by the client at year-end.

c. Requires the vendor to indicate the amount of the payable.

d. Is the same as the form used to confirm accounts receivable.

c. Requires the vendor to indicate the amount of the payable.

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