A4

Question 1

During the revenue cycle, what is something you can do to ensure that all sales have been recorded?

Answer 1

selecting prenumbered shipping documents and matching them with entries in the sales journal (you shouldn’t have a shipping document without a real sale)

*this will also ensure that goods shipped have been properly billed

Question 2

What should the Company do if bad debt expense is higher than normal?

Answer 2

require credit checks for all new customers to avoid selling to people who can’t pay

Question 3

T/F: A billing clerk can prepare invoices and record the resulting increase in AR.

Answer 3

true - these are both recordkeeping functions

Question 4

T/F: Shipping documents are created before sales invoices.

Answer 4

true - “ship and bill”

you would trace shipping documents to sales invoices as a completeness test confirming that the goods shipped were properly billed/invoiced (NOT that no duplicate shipments or billings occurred)

Question 5

What three documents typically go together in the transaction file for the credit sales and cash receipts system?

Answer 5

1. sales invoice
2. credit memo (after credit authorization)
3. remittance advice

Question 6

What is the assertion that verifies that all sales have been recorded?

Answer 6

completeness

*focus on the word “all”, not “recorded”

Question 7

To reduce the risks associated with email responses to AR confirmations, what should the auditor do?

Answer 7

request the senders to mail the original forms to the auditor

Question 8

When would negative confirmations be used?

Answer 8

1. when inherent and control risk are assessed at low
2. a large number of small balances is involved
3. the auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration

Question 9

What two assertions correlate with AR?

Answer 9

1. existence
2. rights and obligations

Question 10

Within the expenditure cycle, the authority to accept incoming goods in receiving should be based on ______?

Answer 10

approved purchase order

Question 11

What are the three documents within a voucher package?

Answer 11

1. invoice
2. purchase order
3. receiving report

Question 12

What is the most effective procedure to ensure that recorded purchases are free of material errors?

Answer 12

the 3-way match for the voucher package by an independent person based on the disbursement check

Question 13

What is one way to test the search for unrecorded liabilities (besides using bank statements)?

Answer 13

examine receiving reports for items received prior to year-end (and not yet sent to AP) but not yet recorded

Question 14

What population would an auditor test from to verify that all merchandise received was recorded?

Answer 14

receiving reports (to verify that the related payable was recorded)

Question 15

When using confirmations to test the completeness assertion for AP, what population would the auditor use?

Answer 15

vendors with whom the entity has previously done business

Question 16

What is the best way for an auditor to detect lapping (cash cycle)?

Answer 16

comparing the dates of the deposited checks per the bank statement with the dates the remittance credits (payment transfers) are recorded

Question 17

If you’re given a chart of dates per book and dates per bank for detection of kiting, what checks would you select as indicative of kiting?

Answer 17

1. checks that have the same receipt date per the bank
2. checks that have disbursement dates per the book as subsequent to year-end

Question 18

What is the purpose of sending out cash confirms to all the banks that the entity does business with?

Answer 18

to seek information about contingent liabilities, security agreements, and deposit account balances

Question 19

Monthly bank statements should be received directly from the banks and reviewed by the _______.

Answer 19

internal auditor (who’s independent from cash)

Question 20

In which source of evidence is the primary evidence regarding year-end cash balances in the F/S documented?

Answer 20

bank reconciliations (ties balance per bank to the F/S)

*NOT the bank confirmations

Question 21

How would you test inventory at warehouses that’s insignificant as a whole?

Answer 21

confirmations (not observation)

Question 22

What is the best internal control for safeguarding investments when without an independent agent?

Answer 22

joint custody by two company officials

Question 23

When an entity uses a trust company as custodian of its marketable securities, how would the possibility of concealing fraud be reduced?

Answer 23

if the trust company has no direct contact with the entity employees responsible for maintaining investment accounting records

Question 24

How would the auditor test the reasonableness of dividend income?

Answer 24

1. electronically accessing the details of dividend records on the Internet
2. 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

Question 25

How would the auditor test the existence and ownership of long-term investments in the form of publicly traded stock?

Answer 25

confirm the number of shares owned that are held by an independent custodian

Question 26

What two assertions typically go together for investments?

Answer 26

1. understandability of presentation and classification (trading, AFS, HTM)
2. valuation and accuracy (fair value or amortized cost)

Question 27

How would the auditor account for the valuation assertion of investments under both the cost and equity methods?

Answer 27

cost method - obtain market quotations from financial newspapers or periodicals

equity method - examine the audited F/S of the investee company

Question 28

How would an auditor test for unrecorded retirements of equipment?

Answer 28

trace old equipment recorded in the books to the actual equipment during a plant tour

Question 29

Why would an auditor inspect payroll tax forms?

Answer 29

to identify potential liabilities for unpaid payroll taxes

Question 30

T/F: The analytical procedure comparing payroll to standards or budgets is the substantive procedure most likely used for payroll.

Answer 30

true

Question 31

What is the primary responsibility of a bank acting as a registrar of capital stock?

Answer 31

verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation

Question 32

T/F: Direct borrowings on Notes Payable should be authorized by the board of directors.

Answer 32

true

Question 33

The auditor should trace corporate stock issuances and treasury stock transactions to _________.

Answer 33

board of directors minutes (to make sure they were authorized)

Question 34

When a company’s stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning _________.

Answer 34

the number of shares issued and outstanding

Question 35

What kind of opinion would the auditor give if the client refused to give permission to talk to the outside attorneys?

Answer 35

disclaimer of opinion

Question 36

What would be some mitigating factors for an entity who has substantial doubt about their ability to continue as a going concern?

Answer 36

1. restructure debt (extend due dates)
2. increase ownership equity
   (NOT accumulate treasury stock)
3. borrow money
4. sell assets
5. reduce / delay expenditures
6. negotiate reductions in required dividends

Question 37

What is something that the auditor is NOT required to share with those charged with governance?

Answer 37

the degree of reliance placed on the management rep letter

Question 38

What factors have to be in place for a material weakness to exist?

Answer 38

likelihood: at least reasonable
magnitude: material

Question 39

T/F: The auditor need not search for significant deficiencies in internal control but should document and communicate such deficiencies that are discovered.

Answer 39

true

Question 40

What else does the person who signs the check need to do in the expenditure cycle?

Answer 40

stamp and cancel supporting documents (to avoid any duplicate payments being made to vendors)

Question 41

What would an auditor be satisfied with when rendering an unmodified opinion in regards to misstatements?

Answer 41

the estimate of the total misstatement (factual, judgmental, and projected) is less than a material amount

Question 42

Which department should authorize write-offs?

Answer 42

treasurer (since their functions are separate from sales)