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Which of the following is not true regarding audit documentation for a specific audit?
a. Audit documentation should be sufficient to enable members of the audit team with supervisory
responsibilities to understand the nature, timing, extent, and results of auditing procedures performed.
b. Audit documentation should indicate which member(s) of the audit team performed and reviewed the
c. Audit documentation should demonstrate compliance with quality control standards.
d. Audit documentation should demonstrate compliance with the standards of fieldwork .
Choice "c" is correct. Quality control standards relate to the conduct of a firm's audit practice as a whole, and
compliance with such standards would not be demonstrated by audit documentation for one specific audit
Audit documentation serves mainly to:
a. Provide the principal support for the auditor's report.
b. Satisfy the auditor's responsibilities concerning the Code of Professional Conduct.
c. Monitor the effectiveness of the CPA firm's quality control activities.
d. Document the level of independence maintained by the auditor.
Choice "a" is correct. Audit documentation serves mainly to provide 1) the principal support for the auditor's
report; 2) assistance in the planning, conduct, and supervision of the audit; 3) accountability; and 4) useful
An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but
containing columns for:
a. Cash flow increases and decreases.
b. Audit objectives and assertions.
c. Reclassifications and adjustments.
d. Reconciliations and tickmarks.
Choice "c" is correct. The working trial balance generally contains a column for adjustments and
Factors affecting the nature and extent of audit documentation include:
1. The risk of material misstatement;
2. The extent to which judgment was required in performing the work and evaluating the results;
3. The nature of the specific auditing procedure;
4. The significance of the evidence obtained;
5. The nature and extent of any problems identified ; and
6. The need to document conclusions that may not be obvious
Which of the following documentation is required for an audit in accordance with generally accepted auditing
a. A flowchart or an internal control questionnaire that evaluates the effectiveness of the entity's internal
b. A management representation letter that summarizes the timing and details of the auditor's planned
c. An indication in the audit documentation that the accounting records agree or reconcile with the financial
d. A list of the procedures performed and the findings obtained.
Choice "c" is correct. The quantity, type, and content of audit documentation vary with the circumstances, but
it should be sufficient to show that the accounting records agree or reconcile with the financial statements.
Which of the following is not true about the report release date?
a. It is defined as the date after which existing documentation must not be deleted, and additions to the
documentation file must be documented as such.
b. It is often the date on which the report is delivered to the client.
c. It is the date on which the auditor grants the client permission to use the report.
d. It is used to define the beginning of the retention period .
Choice "a" is correct. The documentation completion date (and not the report release date) is defined as the
date after which existing documentation must not be deleted, and additions to the documentation file must be
documented as such.
Which of the following statements is most accurate regarding sufficient and appropriate documentation?
a. Accounting estimates are not considered sufficient and appropriate documentation.
b. Sufficient and appropriate documentation should include evidence that the audit working papers have
c. If additional evidence is required to document significant findings or issues, the original evidence is not
considered sufficient and appropriate and therefore should be deleted from the working papers.
d. Audit documentation is the property of the client, and sufficient and appropriate copies should be retained
by the auditor for at least five years.
Choice "b" is correct. Sufficient and appropriate documentation should include evidence that the audit
working papers have been reviewed.
Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and
a. The current year's accounts receivable with the prior year's accounts receivable.
b. The current year's payroll expense with the prior year's payroll expense.
c. The budgeted current year's sales with the prior year's sales.
d. The budgeted current year's warranty expense with the current year's contingent liabilities.
Choice "b" is correct. The most likely analytical review procedure involving costs and expenses would be to
compare the current year's payroll expense (average amount per employee) to the prior year, taking into
consideration an average increase in wage rates. This is a very effective technique in auditing payroll
The objective of tests of details of transactions performed as substantive tests is to:
a. Comply with generally accepted auditing standards.
b. Attain assurance about the reliability of the information system relevant to financial reporting.
c. Detect material misstatements in the financial statements.
d. Evaluate whether management's controls operated effectively.
Choice "c" is correct. Substantive tests are concerned with dollar amounts and consist of tests of details of
transactions and balances and analytical procedures. The objective of tests of details of transactions
performed as substantive tests is to detect material (dollar) misstatements in the financial statements.
Which of the following would not be considered an analytical procedure?
a. Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and
the total hours worked.
b. Projecting an error rate by comparing the results of a statistical sample with the actual population
c. Computing accounts receivable turnover by dividing credit sales by the average net receivables.
d. Developing the expected current-year sales based on the sales trend of the prior five years.
Choice "b" is correct. Analytical procedures involve comparison of recorded amounts, or ratios developed
from recorded amounts, to expectations developed by the auditor. Projecting an error rate from a statistical
sample does not involve such a comparison.
In determining whether transactions have been recorded, the direction of the audit testing should be from the:
a. General ledger balances.
b. Adjusted trial balance.
c. Original source documents.
d. General journal entries.
Choice "c" is correct. To determine whether transactions have been recorded (completeness assertion), the auditor should test from the source documents to the accounting records (general ledger, trial balances, etc.).
Choices "a", "b", and "d" are incorrect. Testing from the accounting records to the source documents
provides evidence of existence or occurrence, not completeness.
Which of the following presumptions is correct about the reliability of audit evidence?
a. Information obtained indirectly from outside sources is the most reliable evidential matter.
b. To be reliable, audit evidence should be conclusive rather than persuasive.
c. Reliability of audit evidence refers to the amount of corroborative evidence obtained.
d. An effective internal control structure provides more assurance about the reliability of audit evidence.
Choice "d" is correct. Reliability of audit evidence is enhanced by a satisfactory internal control structure.
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving
transactions from which of the following accounts most likely would yield the highest level of evidence?
a. Accounts receivable.
b. Interest expense.
c. Accounts payable.
d. Travel and entertainment expense.
Choice "b" is correct. Relationships among income statement accounts tend to be more predictable than
balance sheet accounts (accounts receivable, accounts payable) because they represent transactions over a
period of time rather than at one point in time. In addition, relationships involving transactions subject to
management discretion (travel and entertainment) are less predictable.
For audits of financial statements made in accordance with generally accepted auditing standards, the use of
analytical procedures is required to some extent:
1. as a substantive test
2. in the final review stage
Choice "c" is correct. Analytical procedures are required to be applied to some extent in planning and in the
final review stage. In addition, although not required , analytical procedures may be used as a substantive test
when they are more effective or efficient than tests of details.
Which of the following types of audit evidence generally is the most reliable?
a. Inquiries made of management.
b. Confirmation of account information.
c. Analytical procedures.
d. Review of prior-year audit procedures.
Choice "b" is correct. Confirmations are among the most reliable types of evidence, as they constitute
external evidence sent directly to the auditor.
An auditor compares annual revenues and expenses with similar amounts from the prior year and
investigates all changes exceeding 10%. This procedure most likely could indicate that:
a. Fourth quarter payroll taxes were properly accrued and recorded , but were not paid until early in the
b. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income
account for trading securities.
c. The annual provision for uncollectible accounts expense was inadequate because of worsening economic
d. Notice of an increase in property tax rates was received by management, but was not recorded until early
in the subsequent year.
Choice "b" is correct. Unrealized gains on available-for-sale securities should properly be recorded in other
comprehensive income. If such gains were erroneously recorded in the income account for trading securities,
this might be discovered through comparison of the current year and prior year revenues and expenses
(assuming the error occurred only in the current year, and not in the prior year).
Which of the following procedures would yield the most reliable evidence?
a. A scanning of trial balances.
b. An inquiry of client personnel.
c. A comparison of beginning and ending retained earnings.
d. A recalculation of bad debt expense.
Choice "d" is correct. The auditor's direct personal knowledge (obtained through observation, examination,
inspection , or recalculation) is one of the most reliable forms of evidence.
Which of the following procedures would be most effective in reducing attestation risk?
a. Discussion with responsible individuals.
b. Examination of evidence.
c. Inquiries of senior management.
d. Analytical procedures.
Choice "b" is correct. Evidence obtained directly by the accountant (e.g., through physical examination)
provides more persuasive evidence than evidence obtained through inquiry, discussion, or analytical
procedures, and therefore reduces attestation risk.
Which of the following procedures would an auditor most likely perform in auditing the statement of cash
a. Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts.
b. Vouch a sample of cash receipts and disbursements for the last few days of the current year.
c. Reconcile the cutoff bank statement to the proof of cash to verify the accuracy of the year-end cash
d. Confirm the amounts included in the statement of cash flows with the entity's financial institution.
Choice "a" is correct. To audit the statement of cash flows , the auditor reconciles the amounts on the
statement to amounts on other financial statements.
Which of the following most likely would cause an auditor to consider whether a client's financial statements
contain material misstatements?
a. Management did not disclose to the auditor that it consulted with other accountants about significant
b. The chief financial officer will not sign the management representation letter until the last day of the
auditor's field work.
c. Audit trails of computer-generated transactions exist only for a short time.
d. The results of an analytical procedure disclose unexpected differences.
Choice "d" is correct. If the results of an analytical procedure disclose unexpected differences, the auditor
should consider that the financial statements may contain a material misstatement.
Analytical procedures are most appropriate when testing which of the following types of transactions?
a. Payroll and benefit liabilities.
b. Acquisitions and disposals of fixed assets.
c. Operating expense transactions.
d. Long-term debt transactions.
Choice "c" is correct. Relationships involving income statement accounts tend to be more predictable than
relationships involving only balance sheet accounts because income statement accounts represent
transactions over a period of time, whereas balance sheet accounts represent amounts as of a point in time.
When applying analytical procedures during an audit, which of the following is the best approach for
a. Considering unaudited account balances and ratios to calculate what adjusted balances should be.
b. Identifying reasonable explanations for unexpected differences before talking to client management.
c. Considering the pattern of several unusual changes without trying to explain what caused them.
d. Comparing client data with client-determined expected results to reduce detailed tests of account
Choice "b" is correct. Identifying reasonable explanations for unexpected differences before talking to client
management helps the auditor in assessing if management's explanation is reasonable. Management's
explanation should always be corroborated with other evidence.
An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet
without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the
employees approves the invoices for payment. After the invoices are paid , the employee destroys the
invoices and the related vouchers. In gathering evidence regarding the fraud , the auditor most likely would
select items for testing from the file of all:
a. Cash disbursements.
b. Approved vouchers.
c. Receiving reports.
d. Vendors' invoices.
Choice "a" is correct. Since the employee is destroying the invoices and related vouchers, the most obvious
documentation remaining would be the file of all cash disbursements. The auditor would select items from
this file and then attempt to trace from specific cash disbursements to the related invoices and approved
vouchers. Missing documentation might be indicative of fraud .
Tracing shipping documents to prenumbered sales invoices provides evidence that:
a. No duplicate shipments or billings occurred.
b. Shipments to customers were properly invoiced.
c. All goods ordered by customers were shipped.
d. All prenumbered sales invoices were accounted for.
Choice "b" is correct. By tracing from the shipping documents to the invoices, the auditor confirms that goods
that were shipped were properly billed
An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to:
a. Verify that payroll taxes are deducted from employees' gross pay.
b. Determine whether internal control activities are operating effectively.
c. Uncover fictitious employees who are receiving payroll checks.
d. Identify potential liabilities for unpaid payroll taxes.
Choice "d" is correct. An auditor reviews the reconciliation of payroll tax forms that a client is responsible for
filing in order to identify potential liabilities for unpaid payroll taxes.
An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year
than for the prior year. This may indicate that:
a. Fictitious credit sales have been recorded during the year.
b. Employees have stolen inventory just before the year-end.
c. The client recently tightened its credit-granting policies.
d. An employee has been lapping receivables in both years.
Choice "a" is correct. Recording fictitious sales generally has the same impact on revenues and receivables:
both would be overstated by the same dollar amount. However, this will cause the accounts receivable
turnover ratio to decrease, because the sales figure for the year is generally much larger than the average
receivables amount. Since the numerator (sales) is being increased far less proportionately than is the
denominator (receivables), overall the ratio will decline. (Try using actual numbers if you want to see how this
works: Assume sales of $2,000,000 and average receivables of $300,000. What will happen to the ratio if
you increase both of these numbers by $50,000? It will go from 6.7% to 5.9%--a decline.)
Which of the following strategies most likely could improve the response rate of the confirmation of accounts
a. Including a list of items or invoices that constitute the account balance.
b. Restricting the selection of accounts to be confirmed to those customers with relatively large balances.
c. Requesting customers to respond to the confirmation requests directly to the auditor by fax or e-mail.
d. Notifying the recipients that second requests will be mailed if they fail to respond in a timely manner.
Choice "a" is correct. Some accounting systems facilitate the confirmation of single transactions rather than
entire balances. In such cases, inclusion of statements of account showing details of the balances being
confirmed makes it easier for the customers to confirm the balances, and therefore may improve the overall
In performing a count of negotiable securities, an auditor records the details of the count on a security count
worksheet. What other information is usually included on this worksheet?
a. An acknowledgment by a client representative that the securities were returned intact.
b. An analysis of realized gains and losses from the sale of securities during the year.
c. An evaluation of the client's internal control concerning physical access to the securities.
d. A description of the client's procedures that prevent the negotiation of securities by just one person.
Choice "a" is correct. After performing a count of negotiable securities, the auditor would generally obtain an
acknowledgment from the client that the securities were returned intact. This helps maintain accountability for
the securities, and reduces the likelihood of employee misappropriation (e.g., if a client employee were to
steal a security and blame the auditor).
In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant
and equipment. This procedure is designed to obtain evidence concerning management's assertions of:
2. understandability and classification
Choice "b" is correct. Inspection of plant and equipment by the auditor provides evidence concerning the
existence of the equipment; if the auditor can see it, it exists. However, physical inspection does not provide
any evidence concerning whether the amounts paid for plant and equipment are properly presented,
described , and disclosed. Only reviewing drafts of the financial statements will provide evidence regarding
understandability and classification.
In auditing accounts receivable, the negative form of confirmation request most likely would be used when:
a. The total recorded amount of accounts receivable is immaterial to the financial statements taken as a
b. Response rates in prior years to properly designed positive confirmation requests were inadequate.
c. Recipients are likely to return positive confirmation requests without verifying the accuracy of the
d. The combined assessed level of inherent risk and control risk relative to accounts receivable is low.
Choice "d" is correct. Negative confirmations are most likely to be used when the assessed level of audit risk,
including inherent and control risk, is low.
An auditor usually tests the reasonableness of dividend income from investments in publicly-held companies
by computing the amounts that should have been received by referring to:
a. Dividend record books produced by investment advisory services.
b. Stock indentures published by corporate transfer agents.
c. Stock ledgers maintained by independent registrars.
d. Annual audited financial statements issued by the investee companies.
Choice "a" is correct. Dividend income from investments is tested by referring to the dividend record books
produced by investment advisory services, such as "Moody's Dividend Record." These books state the
dividend that was declared and paid by the investee.
In determining the effectiveness of an entity's internal controls relating to the occurrence assertion for payroll
transactions, an auditor most likely would inquire about and:
a. Observe the segregation of duties concerning personnel responsibilities and payroll disbursement.
b. Inspect evidence of accounting for prenumbered payroll checks.
c. Recompute the payroll deductions for employee fringe benefits.
d. Verify the preparation of the monthly payroll account bank reconciliation.
Choice "a" is correct. The occurrence assertion as it relates to payroll transactions would correspond to an
audit objective to determine that payroll transactions actually occurred (i.e. , that all payroll checks were issued
to valid employees for hours actually worked). Segregation of duties between personnel and payroll
departments is an important control to ensure that only valid employees receive paychecks.
A weakness in internal control over recording retirements of equipment may cause an auditor to:
a. Inspect certain items of equipment in the plant and trace those items to the accounting records.
b. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment
during the year.
c. Trace additions to the "other assets" account to search for equipment that is still on hand but no longer
d. Select certain items of equipment from the accounting records and locate them in the plant.
Choice "d" is correct. Testing to see whether equipment listed in the accounting records is physically present
in the plant and still in service is an effective way to test whether unrecorded disposals occurred.
Which of the following explanations most likely would satisfy an auditor who questions management about
significant debits to the accumulated depreciation accounts?
a. The estimated remaining useful lives of plant assets were revised upward.
b. Plant assets were retired during the year.
c. The prior year's depreciation expense was erroneously understated .
d. Overhead allocations were revised at year-end.
Choice "b" is correct. A debit to accumulated depreciation decreases the balance in that account. The
retirement of plant assets necessitates the removal (decrease) of accumulated depreciation related to the
retired asset by debiting accumulated depreciation .
An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to
support management's financial statement assertion of completeness with respect to:
a. Presentation and disclosure.
b. Transactions and events.
c. Account balances.
d. All of the above.
Choice "a" is correct. Inspecting loan agreements under which an entity's inventories are pledged provides
evidence regarding completeness with respect to presentation and disclosure, since such information must be
disclosed in the financial statements.
In confirming with an outside agent, such as a financial institution , that the agent is holding investment
securities in the client's name, an auditor most likely gathers evidence in support of management's financial
statement assertions of existence and:
a. Valuation and allocation.
b. Rights and obligations.
d. Understandability and classification.
Choice "b" is correct. A confirmation from an outside agent indicating that securities are being held in the
client's name provides evidence with respect to both the existence assertion and the rights and obligations
Which of the following statements is correct concerning the use of negative confirmation requests?
a. Unreturned negative confirmation requests rarely provide significant explicit evidence.
b. Negative confirmation requests are effective when detection risk is low.
c. Unreturned negative confirmation requests indicate that alternative procedures are necessary.
d. Negative confirmation requests are effective when understatements of account balances are suspected.
Choice "a" is correct. Although returned negative confirmations may provide evidence about the financial
statement assertions, unreturned negative confirmation requests do not provide explicit evidence that the
intended third parties received the confirmation requests and verified that the information contained in them is
When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations,
the auditor most likely would:
a. Inspect the allowance account to verify whether the accounts were subsequently written off.
b. Increase the assessed level of detection risk for the valuation and completeness assertions.
c. Ask the client to contact the customers to request that the confirmations be returned .
d. Increase the assessed level of inherent risk for the revenue cycle.
Choice "c" is correct. When using positive confirmation requests, the auditor should generally follow up with a
second and sometimes third request to those parties from whom replies have not been received . In addition,
asking the client to contact its customers may encourage further responses.
In confirming a client's accounts receivable in prior years, an auditor found that there were many differences
between the recorded account balances and the confirmation replies. These differences, which were not
misstatements, required substantial time to resolve. In defining the sampling unit for the current year's audit,
the auditor most likely would choose:
a. Individual overdue balances.
b. Individual invoices.
c. Small account balances.
d. Large account balances
Choice "b" is correct. The auditor should consider the nature of the information requested when determining
the sampling unit for the current year audit. Certain respondents' accounting systems may facilitate the
confirmation of single transactions rather than of entire balances.
When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances
most likely would be limited to applying analytical procedures and:
a. Observing the distribution of paychecks.
b. Footing and crossfooting the payroll register.
c. Inspecting payroll tax returns.
d. Recalculating payroll accruals.
Choice "d" is correct. If the control risk is assessed as low, less substantive testing is necessary. In such an
instance, substantive testing would normally be limited to analytical procedures and recalculating year-end
Which of the following questions would an auditor least likely include on an internal control questionnaire
concerning the initiation and execution of equipment transactions?
a. Are requests for major repairs approved at a higher level than the department initiating the request?
b. Are prenumbered purchase orders used for equipment and periodically accounted for?
c. Are requests for purchases of equipment reviewed for consideration of soliciting competitive bids?
d. Are procedures in place to monitor and properly restrict access to equipment?
Choice "d" is correct. Questions relating to access controls for assets would not normally be a part of a
questionnaire related to controls over the initiation and execution of equipment purchases.
In auditing accounts receivable the negative form of confirmation request most likely would be used when:
a. Recipients are likely to return positive confirmation requests without verifying the accuracy of the
b. The combined assessed level of inherent and control risk relative to accounts receivable is low.
c. A small number of accounts receivable are involved but a relatively large number of errors are expected.
d. The auditor performs a dual purpose test that assesses control risk and obtains substantive evidence.
Choice "b" is correct. Negative confirmations are used when the combined assessed level of inherent and
control risk is low, a large number of small balances is involved, and the auditor has no reason to believe that
the recipients of the requests are unlikely to give them consideration.
A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control
risk is high , an auditor would probably:
a. Increase the extent of tests of controls of the inventory cycle.
b. Request the client to schedule the physical inventory count at the end of the year.
c. Insist that the client perform physical counts of inventory items several times during the year.
d. Apply gross profit tests to ascertain the reasonableness of the physical counts.
Choice "b" is correct. The assessment of control risk affects the nature, timing , and extent of substantive
audit procedures. If the assessed level of control risk is high, the auditor would generally request that the
client schedule the inventory at the end of the year.
In auditing long-term bonds payable, an auditor most likely would:
a. Perform analytical procedures on the bond premium and discount accounts.
b. Examine documentation of assets purchased with bond proceeds for liens.
c. Compare interest expense with the bond payable amount for reasonableness.
d. Confirm the existence of individual bondholders at year-end.
Choice "c" is correct. Comparing interest expense with the bond payable amount for reasonableness
provides evidence that all interest expense was included and that the outstanding balance of the bonds
payable is reasonable, as well as providing limited evidence concerning the amortization of bond discounts or
In performing tests concerning the granting of stock options, an auditor should:
a. Confirm the transaction with the Secretary of State in the state of incorporation .
b. Verify the existence of option holders in the entity's payroll records or stock ledgers.
c. Determine that sufficient treasury stock is available to cover any new stock issued.
d. Trace the authorization for the transaction to a vote of the board of directors.
Choice "d" is correct. In auditing the granting of stock options, the auditor would normally trace the
transactions to approval by the board of directors.
An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit
assertion that all:
a. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period .
b. Expenditures for property and equipment have been recorded in the proper period.
c. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.
d. Expenditures for property and equipment have not been charged to expense.
Choice "d" is correct. Analysis of repairs and maintenance expense provides assurance with regard to
management's assertion that expenditures for property and equipment have been capitalized
When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing
fraud most likely would be reduced if the:
a. Trust company has no direct contact with the entity employees responsible for maintaining investment
accounting records .
b. Securities are registered in the name of the trust company, rather than the entity itself.
c. Interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities.
d. Trust company places the securities in a bank safe-deposit vault under the custodian's exclusive control.
Choice "a" is correct. When an entity uses a trust company as custodian of its marketable securities, the
possibility of concealing fraud would be reduced if the trust company deals only with the person reconciling
the accounts, and not with the employees responsible for maintaining investment records.
During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are
restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most
likely is intended to verify management's assertions related to:
Choice "d" is correct. Restrictions on retained earnings are for contractual or legal appropriation of retained
earnings. The purpose is to restrict dividends, and such restrictions should be disclosed in the financial
On receiving a client's bank cutoff statement, an auditor most likely would trace:
a. Prior-year checks listed in the cutoff statement to the year-end outstanding checklist.
b. Deposits in transit listed in the cutoff statement to the year-end bank reconciliation.
c. Checks dated after year-end listed in the cutoff statement to the year-end outstanding checklist.
d. Deposits recorded in the cash receipts journal after year-end to the cutoff statement.
Choice "a" is correct. The auditor should obtain bank cutoff statements that include transactions for 10 to 15
days after year-end. The outstanding checks and deposits in transit at year-end on the bank reconciliation
should agree with the information in the bank cutoff statement.
Which of the following procedures concerning accounts receivable would an auditor most likely perform to
obtain audit evidence supporting the effective operation of controls?
a. Observing an entity's employee prepare the schedule of past due accounts receivable.
b. Sending confirmation requests to an entity's principal customers to verify the existence of accounts
c. Inspecting an entity's analysis of accounts receivable for unusual balances.
d. Comparing an entity's uncollectible accounts expense to actual uncollectible accounts receivable.
Choice "a" is correct. In order to obtain audit evidence supporting the effective operation of controls, an
auditor must obtain evidence regarding how controls were applied, the consistency with which controls were
applied, and by whom or by what means controls were applied. Observing preparation of the schedule of
past due accounts receivable provides some of this evidence.
In testing controls over cash disbursements, an auditor most likely would determine that the person who signs
a. Reviews the monthly bank reconciliation.
b. Returns the checks to accounts payable.
c. Is denied access to the supporting documents.
d. Is responsible for mailing the checks.
Choice "d" is correct. Once signed, the check should be mailed to the payee by the check signer or an
employee operating under the supervision of the check signer to prevent defalcations of checks. Generally
this occurs in the treasurer's department.
For effective internal control, the accounts payable department generally should:
a. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.
b. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized employee.
c. Obliterate the quantity ordered on the receiving department copy of the purchase order.
d. Establish the agreement of the vendor's invoice with the receiving report and purchase order.
Choice "d" is correct. Under an effective system of internal control, the accounts payable clerk should ensure
that supporting documents (invoice, receiving report, and purchase order) are in agreement before the
voucher is submitted for payment.
Which of the following sets of information does an auditor usually confirm on one form?
a. Accounts payable and purchase commitments.
b. Cash in bank and collateral for loans.
c. Inventory on consignment and contingent liabilities.
d. Accounts receivable and accrued interest receivable.
Choice "b" is correct. The standard AICPA bank confirmation form includes spaces for the bank to confirm
both cash balances on deposit at the bank and collateral pledged on loans originating from the bank.
Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?
a. Vouch a sample of accounts payable entries recorded just before year-end to the unmatched receiving
b. Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial
c. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor
d. Scan the cash disbursements entries recorded just before year-end for indications of unusual
Choice "c" is correct. The auditor is able to detect liabilities not recorded at year-end by comparing cash
payments made after the balance sheet date to the related receiving reports and vendor invoices; any
payments made on transactions dated before year-end reflect a liability that should have been recorded.
An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and
the cash disbursements journal. The purpose of this substantive audit procedure most likely was to:
a. Identify unusually large purchases that should be investigated further.
b. Verify that cash disbursements were for goods actually received.
c. Determine that purchases were properly recorded.
d. Test whether payments were for goods actually ordered.
Choice "c" is correct. In general , an audit procedure can be restated as the question to be answered. In this
case, tracing a sample of purchase orders and related receiving reports to the purchases journal and the cash
disbursements journal seeks to answer the question, "Were all purchases properly recorded?" (the
Sound internal control dictates that, immediately upon receiving checks from customers by mail, a responsible
a. Add the checks to the daily cash summary.
b. Verify that each check is supported by a prenumbered sales invoice.
c. Prepare a duplicate listing of checks received.
d. Record the checks in the cash receipts journal.
Choice "c" is correct. Upon receipt of cash , a remittance listing should be prepared.
To provide assurance that each voucher is submitted and paid only once, an auditor most likely would
examine a sample of paid vouchers and determine whether each voucher is:
a. Supported by a vendor's invoice.
b. Stamped "paid" by the check signer.
c. Prenumbered and accounted for.
d. Approved for authorized purchases.
Choice "b" is correct. By stamping the voucher "paid," the check signer cancels the voucher so it cannot be
resubmitted for payment.
In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the
supporting documents. Which assertion would this test of controls most likely support?
d. Rights and obligations.
Choice "b" is correct. Vouching to supporting documents tests the occurrence assertion
Which of the following tests of controls most likely would help assure an auditor that goods shipped are
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 prenumbering.
Choice "b" is correct. Tracing from a sample of shipping documents to matching sales invoices would provide
support for the completeness assertion for billing.
Which of the following internal controls most likely would assure that all billed sales are correctly posted to the
accounts receivable ledger?
a. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
b. Each sales invoice is supported by a prenumbered shipping document.
c. The accounts receivable ledger is reconciled daily to the control account in the general ledger.
d. Each shipment on credit is supported by a prenumbered sales invoice.
Choice "a" is correct. Comparison of daily sales summaries to daily postings to the accounts receivable
ledger would ensure the completeness of the accounts receivable ledger.
Under properly designed internal control, 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 payable ledger.
d. Cancel vendors' invoices after payment.
Choice "b" is correct. Matching vendor's invoices with receiving reports provides authorization for payment
and is generally performed in the accounts payable department. Recalculation of vendor invoices is
compatible with this authorization function.
An auditor tests an entity's control of obtaining credit approval before shipping goods to customers in support
of management's financial statement assertion of:
a. Valuation and allocation.
d. Rights and obligations.
Choice "a" is correct. By ensuring that credit approval is obtained before goods are shipped to customers, the
auditor is testing management's assertion that accounts receivable are collectible (valuation or allocation).
An independent auditor asked a client's internal auditor to assist in preparing a standard financial institution
confirmation request for a payroll account that had been closed during the year under audit. After the internal
auditor prepared the form , the controller signed it and mailed it to the bank. What was the major flaw in this
The auditor should control the mailing of independent confirmations.
To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating
effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of
transactions from the population represented by the:
a. Sales order file .
b. Customer order file .
c. Shipping document file.
d. Sales invoice file .
Choice "c" is correct. Shipping documents provide evidence that a sale occurred , and therefore selecting
from a population of shipping documents allows the auditor to test whether corresponding invoices exist for
An auditor scans a client's investment records for the period just before and just after the year-end to
determine that any transfers between categories of investments have been properly recorded. The primary
purpose of this procedure is to obtain evidence about management's financial statement assertions of:
a. Rights and obligations, and existence.
b. Valuation and accuracy, and rights and obligations.
c. Existence, and understandability and classification.
d. Understandability and classification, and valuation and accuracy.
Choice "d" is correct. Investments may be classified as trading , available-for-sale, or held-to-maturity. The
classification of each investment into one of these three categories determines how it will be shown on the
balance sheet (understandability and classification) and whether it will be valued at market or at amortized
cost (valuation and accuracy).
Which of the following procedures represents a weakness in internal controls for payroll?
a. The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll
b. The accounting department wires transfers funds to the payroll bank account. The transfer is based on
totals from the payroll department summary.
c. The payroll department prepares checks using a signature plate. The treasurer supervises the process
before payroll checks are distributed.
d. The payroll department prepares checks. The chief financial officer signs the payroll checks.
Choice "a" is correct. Unclaimed payroll checks should be returned to an independent party for follow up.
Returning such checks (assets) to the payroll department (recordkeeping) represents an inadequate
segregation of duties.
An auditor who uses a transaction cycle approach to assessing control risk most likely would test control
activities related to transactions involving the sale of goods to customers with the:
a. Collection of receivables.
b. Purchase of merchandise inventory.
c. Payment of accounts payable.
d. Sale of long-term debt.
Choice "a" is correct. The revenue cycle includes sales, receivables , and cash receipts, so an auditor using a
transaction cycle approach would be likely to test sales and receivables together.
Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared
shipping documents provides evidence that:
a. Shipments to customers were properly billed .
b. Entries in the accounts receivable subsidiary ledger were for sales actually shipped.
c. Sales billed to customers were actually shipped.
d. No duplicate shipments to customers were made.
Choice "c" is correct. Tracing from invoices to shipping documents would provide evidence that sales billed to
customers were actually shipped. An invoice for which the corresponding shipping documents could not be
located might be indicative of fictitious sales (i.e., sales that were recorded but never actually shipped).
An auditor's inquiries of management disclosed that the entity recently invested in a series of energy
derivatives to hedge against the risks associated with fluctuating oil prices. Under these circumstances, the
a. Perform analytical procedures to determine if the derivatives are properly valued.
b. Examine the contracts for possible risk exposure and the need to recognize losses.
c. Confirm the marketability of the derivatives with a commodity specialist.
d. Document the derivatives in the auditor's communication with those charged with governance.
Choice "b" is correct. Generally accepted accounting principles specify that, in order to qualify for hedge
treatment, the entity must demonstrate and disclose a number of transaction features including risk exposure.
The auditor would therefore need to examine the contracts to evaluate the character of the hedge and the
degree to which losses should be recognized in the determination of income, as well as the character of any
An auditor usually determines whether dividend income from publicly-held investments is reasonable by
computing the amounts that should have been received by referring to:
a. Stock ledgers maintained by independent registrars.
b. Dividend records on file with the SEC.
c. Records produced by investment services.
d. Minutes of the in vestee's board of directors.
Choice "c" is correct. Investment income from dividends is generally recalculated by comparing recorded
income with dividend record books produced by investment advisory services such as "Moody's Dividend
Record." These books state the dividend that was declared and paid by the investee.
After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and
examines evidence of credit approval. This test of controls most likely supports management's financial
statement assertion(s) of:
1. Rights and obligations
2. Allocation and Valuation
1. no 2. yes
Choice "c" is correct. By ensuring that credit approval is obtained before goods are shipped to customers, the
auditor is testing management's assertion that accounts receivable are collectible (allocation and valuation).
Ensuring that credit approval is obtained before goods are shipped does not support the rights and obligations
Which of the following strategies most likely could improve the response rate of the confirmations of accounts
a. Restrict the selection of accounts to be confirmed to those customers with large balances.
b. Include a list of items or invoices that constitute the customers' account balances.
c. Explain to customers that discrepancies will be investigated by an independent third party.
d. Ask customers to respond to the confirmation requests directly to the auditor by fax
Choice "b" is correct. The auditor should consider the types of information respondents will be readily able to
confirm. For instance, some accounting systems facilitate the confirmation of single transactions rather than
entire balances. In such cases, the auditor might consider including a client-prepared statement of account
showing details of the customer's account balance being confirmed. By making it easier for customers to
determine which items are included in the balance being confirmed , the auditor also makes it more likely that
those customers will respond.
An auditor's tests of controls for completeness for the revenue cycle usually include determining whether:
a. Each receivable is collected subsequent to the year end.
b. An invoice is prepared for each shipping document.
c. Each invoice is supported by a customer purchase order.
d. Each credit memo is properly approved.
Choice "b" is correct. The auditor often traces a sample of shipping documents to sales invoices to test
completeness of sales.
An auditor is testing the reasonableness of dividend income from investments in publicly-held companies.
The auditor most likely would compute the amount that should have been received and recorded by the client
a. Reading the details of the board of directors' meetings.
b. Confirming the details with the in vestee companies' registrars.
c. Electronically accessing the details of dividend records on the Internet.
d. Examining the details of the client's most recent cutoff bank statement.
Choice "c" is correct. Electronically accessing the details of dividend records on the Internet is an efficient
means of verifying dividend rates for multiple investments in a short amount of time.
In auditing an entity's computerized payroll transactions, an auditor would be least likely to use test data to
test controls concerning:
a. Overpayment of employees for hours not worked.
b. Control and distribution of unclaimed checks.
c. Withholding of taxes and Social Security contributions.
d. Missing employee identification numbers.
Choice "b" is correct. In auditing an entity's computerized payroll transactions, an auditor would be least likely
to use test data to test controls concerning control and distribution of unclaimed checks, since these sorts of
controls are typically not automated. Controls surrounding unclaimed checks typically rely on proper
segregation of duties, which is best evaluated through the auditor's direct observation.
An auditor is determining if internal control relative to the revenue cycle of a wholesaling entity is operating
effectively in minimizing the failure to prepare sales invoices. The auditor most likely would select a sample of
transactions from the population represented by the:
a. Cash receipts file.
b. Shipping document file.
c. Customer order file .
d. Sales invoice file.
Choice "b" is correct. Shipping documents provide evidence that a sale occurred, and tracing from shipping
documents to sales invoices might identify instances in which a sale occurred but the associated invoice was
not prepared (i.e., if no related invoice can be found ).
Which of the following procedures would be most appropriate for testing the completeness assertion as it
applies to inventory?
a. Scanning perpetual inventory, production, and purchasing records.
b. Examining paid vendor invoices.
c. Tracing inventory items from the tag listing back to the physical inventory quantities.
d. Performing cutoff procedures for shipping and receiving.
Choice "d" is correct. Performing cutoff procedures provides assurance that goods in transit (shipped or
received) are appropriately included or excluded from inventory and this procedure is most appropriate for
testing the completeness assertion.
To be effective, analytical procedures in the overall review stage of an audit engagement should be
a. The staff accountant who performed the substantive auditing procedures.
b. The managing partner who has responsibility for all audit engagements at that practice office.
c. A manager or partner who has a comprehensive knowledge of the client's business and industry.
d. The CPA firm's quality control manager or partner who has responsibility for the firm's peer review
Choice "c" is correct. The manager and partner on a specific job generally bear a great deal of responsibility
for the audit and the report. Typically they would perform analytical procedures during the final review stage,
to evaluate overall financial statement presentation and to assess the conclusions reached. In order to
evaluate the results of the analysis and to perform an effective review , the manager or partner should have a
comprehensive knowledge of the client's business and the industry.
Analytical procedures used in the overall review stage of an audit generally include:
a. Gathering evidence concerning account balances that have not changed from the prior year.
b. Retesting control activities that appeared to be ineffective during the assessment of control risk.
c. Considering unusual or unexpected account balances that were not previously identified.
d. Performing tests of transactions to corroborate management's financial statement assertions.
Choice "c" is correct. The objective of analytical procedures used in the overall review stage of the audit is to
assist the auditor in assessing conclusions reached and in the evaluation of the overall financial statement
presentation. Analytical procedures applied in the overall review stage are used to consider the adequacy of
evidence gathered in response to unusual or unexpected balances identified in planning the audit, and to
identify unusual or unexpected balances or relationships that were not previously identified .
Analytical procedures performed in the final review stage of an audit generally would include:
a. Reassessing the factors that assisted the auditor in deciding on preliminary materiality levels and audit
b. Considering the adequacy of the evidence gathered in response to unexpected balances identified in
c. Summarizing uncorrected misstatements specifically identified through tests of details of transactions and
d. Calculating projected uncorrected misstatements estimated through audit sampling techniques.
Choice "b" is correct. Analytical procedures applied during the final review stage should be used to determine
whether adequate evidence has been gathered in response to unusual or unexpected balances identified
during the audit.
An auditor finds several errors in the financial statements that the client prefers not to correct. The auditor
determines that the errors are not material in the aggregate. Which of the following actions by the auditor is
a. Document the errors in the summary of uncorrected errors, and document the conclusion that the errors
do not cause the financial statements to be misstated .
b. Document the conclusion that the errors do not cause the financial statements to be misstated , but do
not summarize uncorrected errors in the working papers.
c. Summarize the uncorrected errors in the working papers, but do not document whether the errors cause
the financial statements to be misstated .
d. Do not summarize the uncorrected errors in the working papers, and do not document a conclusion
about whether the uncorrected errors cause the financial statements to be misstated.
Choice "a" is correct. The auditor should document the errors in the summary of uncorrected errors, and
document the conclusion that the errors do not cause the financial statements to be misstated .
Lore would use which of the following to determine the average days sales in inventory?
A. 365 avg inventory
B.365 inventory turnover
C. avg inventory Sales/ 365
D. Sales/365 inventory turnover
Choice "b" is correct. Average number of days sales in inventory is defined as 365 days per year divided by
the inventory turnover.
In analyzing a company's financial statements, which financial statement would a potential investor primarily
use to assess the company's liquidity and financial flexibility?
a. Balance sheet.
b. Income statement.
c. Statement of retained earnings.
d. Statement of cash flows.
Choice "a" is correct. Liquidity ratios and coverage ratios focus on balance sheet account balances.
Cash $ 300
Accounts receivable, net 1,200
Prepaid expenses 100
Other assets 400
Total assets $2,500
Curry also had current liabilities of $1 ,000 at December 31 , 20X2, and net credit sales of $7,200 for the year
What is Curry's acid-test ratio at December 31 , 20X2?
The acid-test ratio is calculated by taking the current assets excluding inventory and
prepaid expenses and dividing by current liabilities. In this case, cash and accounts receivable ($300 +
$1,200 = $1,500) are divided by current liabilities ($1 ,000), resulting in a ratio of $1 ,500/$1 ,000, or 1.5.
In a comparison of 20X2 to 20X1 , Neir Co.'s inventory turnover ratio increased substantially although sales
and inventory amounts were essentially unchanged. Which of the following statements explains the
increased inventory turnover ratio?
a. Cost of goods sold decreased .
b. Accounts receivable turnover increased.
c. Total asset turnover increased .
d. Gross profit percentage decreased.
Gross profit percentage decreased.
Cost of sales/
Inventory turnover ratio = Average inventory
In order for the inventory turnover ratio to increase, either cost of sales must increase or average inventory must decrease. Since the question indicates that inventory is unchanged, cost of sales must have increased. If the cost of sales increased and sales remained constant, the gross profit percentage would decrease.
An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year
than for the prior year. This may indicate that:
a. Obsolete inventory has not yet been reduced to fair market value.
b. There was an improper cutoff of sales at the end of the year.
c. An unusually large receivable was written off near the end of the year.
d. The aging of accounts receivable was improperly performed in both years.
Choice "b" is correct. Accounts receivable turnover is calculated as sales I receivables. A decline in this ratio
may indicate that there was an improper cutoff of sales at the end of the year. For example, if sales made at
the beginning of the subsequent year were inadvertently recorded in the current year, both sales and
receivables would be overstated by the same amount. This would generally result in a larger proportionate
effect on receivables (since the receivables balance is smaller than sales for the year), and an overall
decrease in the ratio.
Which of the following ratios would an engagement partner most likely consider in the overall review stage of
a. Total liabilities/net sales.
b. Accounts receivable/inventory.
c. Cost of goods sold/average inventory.
d. Current assets/quick assets.
Choice "c" is correct. Inventory turnover is a measure of how quickly inventory is sold, which can be used as
an indicator of enterprise performance. In general, the higher the turnover, the better the entity's
The audit documentation that makes up the current file most likely would include a copy of the:
a. Bank reconciliation .
b. Pension plan contract.
c. Articles of incorporation.
d. Flowchart of the internal control.
Choice "a" is correct. The audit documentation that makes up the current file most likely would include a copy
of the bank reconciliation.
The third standard of fieldwork states that the auditor must obtain sufficient appropriate audit evidence by
performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements
under audit. The appropriate audit evidence required by this standard may be obtained, in part, through:
a. Flowcharting the internal control structure.
b. Proper planning of the audit engagement.
c. Analytical procedures.
d. Audit documentation .
Choice "c" is correct. Analytical procedures are substantive tests that provide audit evidence used to assess
the reasonableness of account balances.
In testing the existence assertion for an asset, an auditor ordinarily works from the:
a. Financial statements to the potentially unrecorded items.
b. Potentially unrecorded items to the financial statements.
c. Accounting records to the supporting evidence.
d. Supporting evidence to the accounting records.
Choice "c" is correct. In testing the existence assertion for an asset, an auditor ordinarily works from the
accounting records to the supporting evidence.
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving
transactions from which of the following accounts most likely would yield the highest level of evidence?
a. Accounts payable.
b. Advertising expense.
c. Accounts receivable.
d. Payroll expense.
Choice "d" is correct. Auditors try to identify predictable relationships when using analytical review
procedures. Payroll expense is predictable because it is based on objective information (number of
employees and pay rates). It can generally be computed directly by the auditor.
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