A4

Question 1

The function of cash receipts is part of the treasurer’s department and should be separate from:

Answer 1

the role of posting credits to the A/R ledger

Question 2

Failure to separate the recordkeeping function from the custodial function allows an individual to:

Answer 2

misappropriate cash and then cover up the theft by posting credits against the related A/R balance

Question 3

Upon receipt of cash, a _______ should be prepared

Answer 3

remittance listing (duplicate listing)

Question 4

Computer controls related to pricing and mathematical accuracy will reduce:

Answer 4

billing errors

Question 5

Matching shipping documents with approved sales orders ensures that:

Answer 5

invoices are properly authorized and only goods ordered have been shipped (reduces billing errors)

Question 6

Comparing shipping totals with sales invoice totals is an effective control to reduce:

Answer 6

billing errors

Question 7

Selecting from a population of _______ allows the auditor to test whether corresponding invoices exist for each sale

Answer 7

shipping documents

Question 8

Proper authorization for sales involves:

Answer 8

obtaining credit approval before filling the order

Question 9

Separation of duties between billing and cash receipts relates to:

Answer 9

the prevention of theft of cash

Question 10

The use of an approved price list to determine selling price relates to:

Answer 10

the accuracy and appropriateness of selling price

Question 11

Sending copies of approved sales orders to shipping, billing, and accounting provides information necessary to ensure:

Answer 11

that the proper goods are shipped, the invoice is prepared appropriately, and the sale and receivable are properly recorded

Question 12

Examination of AR and cash receipts provides the auditor with evidence for __________ assertions of sales transactions, thus limiting the need to test sales transactions

Answer 12

occurrence, completeness

Question 13

Examination of beginning and ending inventory balances may provide limited evidence of:

Answer 13

the occurrence of purchases and the COGS

Question 14

Cutoffs of sales and purchases provides evidence regarding:

Answer 14

the sales occurring close to year-end

Question 15

In order to detect understatements, one must:

Answer 15

trace from supporting documentation to accounting records

Question 16

In order to detect overstatements, one must:

Answer 16

trace from accounting records to supporting documents

Question 17

Blank forms may result in ______ response rates because:

Answer 17

lower, greater effort is required for response

Question 18

Blank forms provide a _____ degree of assurance because:

Answer 18

greater, the recipient cannot sign off without checking the balance

Question 19

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, _______ may encourage further responses.

Answer 19

asking the client to contact its customers

Question 20

Confirmations are designed to provide evidence of _______, so nonresponses would require alternative procedures focused on _____ as well.

Answer 20

existence

Question 21

Negative confirmations are used when:

Answer 21

1. the combined assessed level of inherent and control risk is 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 22

If a small number of accounts are involved and a large number of errors are anticipated, _________ should be used

Answer 22

positive confirmations

Question 23

By _____________ in the balance being confirmed, the auditor also makes it more likely that those customers will respond

Answer 23

making it easier for customers to determine which items are included

Question 24

A copy of the remittance listing is sent to the ______ and used to:

Answer 24

AR clerk, update the subsidiary AR records

Question 25

When confirming the total accounts receivable balance, it is beneficial to include a client-prepared statement of account that shows the details of the account balances so that:

Answer 25

the recipients can easily verify the receivable balance

Question 26

Preparing invoices and recording the related recievables are:

Answer 26

recordkeeping functions

Question 27

Because of the significant discrepancies on past confirmations, the auditor would choose to use ________ in the current year’s audit

Answer 27

individual invoices

Question 28

By confirming individual transaction detail on the individual invoices, there should be _____ discrepancies than confirmations sent out to customers in the past

Answer 28

fewer

Question 29

the confirmation process typically doesn’t focus on overdue balances because:

Answer 29

it is primarily a test of existence, not valuation

Question 30

_______ is primarily a test of existence, or overstatement

Answer 30

confirmation

Question 31

Credit checks help the company determine the likelihood of:

Answer 31

a debtor’s ability to pay

Question 32

Tracing transactions from the subsidiary ledger to the general ledger tests:

Answer 32

completeness of AR

Question 33

tracing a sample of invoices to recording in the general ledger tests:

Answer 33

completeness of AR

Question 34

______ ______ and ______ are an input document at the beginning of a credit sales and cash receipts system flowchart

Answer 34

1. sales invoices
2. credit memos
3. Remittance advices (for customer payments)

Question 35

Two assertions for which the confirmation of AR balances provides primary evidence are:

Answer 35

rights and obligations and existence

Question 36

The negative request form of AR confirmation is useful particularly when:

Answer 36

1. assessed level of control risk relating to receivables is low
2. number of small balances is many
3. consideration by the recipient is likely

Question 37

An auditor would consider a cashier’s job description to contain compatible duties if the cashier receives remittances from the mailroom and:

Answer 37

also prepares he daily deposit slip

Question 38

The prelist of individual checks is prepared by:

Answer 38

a clerk in the mailroom upon opening the mail

Question 39

the monthly bank reconciliation is prepared by:

Answer 39

an internal auditor or someone else that is independent of the cash receipts and cash disbursement functions

Question 40

A sales cut-off test is used to detect:

Answer 40

unrecorded sales or sales allocated to the wrong period

Question 41

tracing bills of lading to the sales invoice provides assurance that shipments to customers were:

Answer 41

invoiced

Question 42

The auditor is able to detect liabilities not recorded at year-end by comparing cash payments made after the balance sheet date to

Answer 42

related receiving reports and vendor invoices

Question 43

By stamping the voucher “paid”, the check signer cancels the voucher so:

Answer 43

it cannot be resubmitted for payment

Question 44

Reconciling the vendor invoice with the related receiving report is typically performed by:

Answer 44

vouchers payable clerk

Question 45

under properly designed internal control, the same employee most likely would match vendors invoices with receiving reports and also:

Answer 45

recompute the calculations on vendors’ invoices (authorization)

Question 46

purchase orders should be issued by the:

Answer 46

purchasing department

Question 47

accounts payable is relatively difficult to predict because:

Answer 47

it may fluctuate at management’s discretion

Question 48

What procedure would an auditor least likely perform before balance sheet date?

Answer 48

confirmation of AP

Question 49

Who should be responsible for preparing a purchase order, matching the receiving report and invoice with the purchase order, and paying for the related purchase?

Answer 49

1. purchasing department is responsible for preparing the purchase order
2. AP department is responsible for matching documents
3. treasurer is responsible for making payment

Question 50

having the check signer review and cancel the voucher packet is:

Answer 50

preventative control of avoiding duplicate payments

Question 51

An auditor would compare cash payments made after the balance sheet date with the AP trial date in search for:

Answer 51

unrecorded liabilities

Question 52

When testing the completeness assertion for AP, the appropriate population would be:

Answer 52

list of vendors with whom the entity has previously done business

Question 53

Under an effective system of internal control, the accounts payable clerk should ensure that:

Answer 53

supporting documents are in agreement before the voucher is submitted for payment

Question 54

The supporting documentation should be cancelled by _____

Answer 54

the treasurer

Question 55

The ______ would generally obliterate the quantity ordered before sending the PO to receiving

Answer 55

purchase department

Question 56

unrecorded trade accounts payable are best identified by:

Answer 56

reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period

Question 57

When performing a search for unrecorded payables, an auditor most likely would:

Answer 57

compare cash payments occurring after the balance sheet date with the AP trial balance to determine that disbursements that pertain to the prior year’s business under audit have been properly accrued. known as out-of-period-search

Question 58

When performing a search for unrecorded payables, an auditor most likely would:

Answer 58

examine cash disbursements recorded after the balance sheet date to determine whether the payables related to the prior period have been included in the AP trial balance

Question 59

For effective internal accounting control, the AP department should compare the info on each vendor’s invoice with the receiving report and the purchase order to assure:

Answer 59

that goods were received and that the purchase was properly authorized

Question 60

Because the employee is destroying the invoices and related vouchers, the documentation remaining to test would be:

Answer 60

cash disbursements

Question 61

The most effective control activity to detect vouchers that were prepared for the payment of goods that were not received is to:

Answer 61

match PO, receiving report, and vendors invoice for each voucher in the AP department

Question 62

The internal control procedure of prenumbering receiving reports and periodically reconciling them to the inventory records most likely addresses the:

Answer 62

completeness assertion for inventory

Question 63

The most effective control in assuring that recorded purchases are free of material errors is the:

Answer 63

independent matching of the purchase order, receiving report, and vendor invoices in preparing the vouchers on which the disbursement check is based

Question 64

When nonconforming goods are returned to a vendor, the purchasing department should send _____ to the accounting department to ensure that the AP balance is reduced appropriately

Answer 64

debit memo

Question 65

a credit memo is generally used to reduce:

Answer 65

AR

Question 66

In a well designed internal control, employees in the purchasing department most likely would approve POs and:

Answer 66

negotiate terms with vendors

Question 67

_______ authorize requisition of goods

Answer 67

the store department

Question 68

______ occurs when a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank

Answer 68

Kiting

Question 69

Frequent kiting may result in a high level of deposits coupled with:

Answer 69

low average balance

Question 70

The standard aicpa bank confirmation form includes:

Answer 70

cash balances on deposit at the bank and collateral pledged on loans originating from the bank

Question 71

A bank employee may not have access to all info about transactions with the audit client and thus may be:

Answer 71

unaware of all the financial relationships the bank has with the client

Question 72

Since the disbursement was not recorded until Jan 2002 while the receipt was recorded in December 2001, cash will be _______ at Dec 2001

Answer 72

overstated

Question 73

Good internal control for cash includes:

Answer 73

the separation of cash handling, recordkeeping, and reconciliation of bank statements.

Question 74

when ______ occurs, an employee uses current remittances to conceal remittances that have been stolen previously

Answer 74

lapping

Question 75

what internal control would reduce the risk of diversion of customer receipts by employees?

Answer 75

bank lockbox system

Question 76

Performance of monthly bank reconciliations would be effective at:

Answer 76

detecting a theft that has already occurred

Question 77

An auditor would identify a contingent liability by obtaining a __________

Answer 77

bank confirmation, it has a exceptions and comments box specifically to disclose as endorser of loans, for open letters of credit

Question 78

Transfer agent confirmations relate to:

Answer 78

purchase and sale of securities

Question 79

On receiving a client’s bank cutoff statement, an auditor most likely would trace:

Answer 79

prior year checks or deposits listed in the cutoff statement to the year end checklist

Question 80

The standard cash confirmation request seeks info on:

Answer 80

contingent liabilities and security agreements in addition to info related to deposit account balances

Question 81

A bank cut off statement is used to detect _____ activities that may not otherwise be discovered

Answer 81

kiting

Question 82

The primary evidence regarding year-end cash balances in the FS is documented in the bank reconciliation, which:

Answer 82

reconciles the balance per bank to that per the financial statements

Question 83

the interbank transfer schedule provides evidence about:

Answer 83

bank transfers over a period of time used to detect kiting

Question 84

a ________ is a schedule that summarizes all the various balances that comprise cash

Answer 84

cash lead schedule

Question 85

the primary purpose of sending a standard confirmation request to financial institutions is to:

Answer 85

corroborate info regarding deposit and loan balances

Question 86

an auditor should trace bank transfers for the last part of the audit period and first part of subsequent period to:

Answer 86

detect whether cash balances over overstated because of kiting (concealing a cash shortage by depositing in one bank an unrecorded check of another disbursement bank, recording the same funds in both bank accounts)

Question 87

In a ________ system, the remittances are mailed directly to the bank where they are immediately deposited. The bank sends the remittances and deposit detail to the entity on a daily basis

Answer 87

lockbox system

Question 88

lapping can be deterred by appropriate segregation of duties between:

Answer 88

receiving cash and posting to the AR ledger

Question 89

The controller may have responsibilities relating to cash, such as:

Answer 89

authorization of expenditures

Question 90

internal auditor is independent of functions relating to cash and should be able to receive:

Answer 90

the monthly bank statement from the bank

Question 91

failure to record _________ would result in actual inventory quantities being greater than those recorded in the perpetual inventory records

Answer 91

sales returns

Question 92

failure to record _________ would result in actual inventory quantities being less than those recorded in the perpetual inventory records

Answer 92

sales or purchase returns

Question 93

failure to record _________ would result in a difference in recorded costs

Answer 93

purchase discounts

Question 94

Testing the computation of standard overhead rates relates to:

Answer 94

the accumulation of costs during the manufacturing process

Question 95

during a tour of the manufacturing plant or production facility, the auditor should be alert for:

Answer 95

items that appear to be old, obsolete, or defective

Question 96

review of inventory experience and trends may indicate:

Answer 96

slow-moving, defective, or obsolete inventory items

Question 97

comparisons of inventory balances with anticipated sales volume might indicate:

Answer 97

higher inventory levels than would be expected, perhaps due to slow-moving, defective, or obsolete inventory items

Question 98

tracing totals from the inventory listing to the general ledger inventory account provides evidence of:

Answer 98

completeness

Question 99

what condition may an auditor’s observation procedure for inventory be performed during or after the end of the period under audit?

Answer 99

when well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts

Question 100

the completeness assertion is focused on:

Answer 100

unrecorded transactions

Question 101

Tracing items from the tag listing back to the physical inventory quantities is a test for:

Answer 101

existence of the inventory on the tag listing

Question 102

tracing items from the physical inventory quantities to the tag listing is a test for:

Answer 102

completeness

Question 103

An auditor would analyze inventory turnover rates to obtain evidence concerning management’s assertions about:

Answer 103

valuation and allocation (if the inventory is becoming older, an obsolescence reserve might be required)

Question 104

The auditor should _____ the physical inventory count of goods held in public warehouses if the inventory held is significant;

Answer 104

observe

Question 105

The auditor should _____ the physical inventory count of goods held in public warehouses if the inventory held is insignificant:

Answer 105

confirm

Question 106

tracing from the inventory schedule to the inventory tags and auditor’s recorded count sheets verifies the:

Answer 106

existence (validity) of the items

Question 107

Observation of physical inventory counts provides evidence about;

Answer 107

existence and completeness

Question 108

Inspecting loan agreements under which an entity’s inventories are pledged provides evidence regarding completeness with respect to:

Answer 108

presentation and disclosure, since it should be disclosed on the FS

Question 109

in order to maintain accurate perpetual inventory records, _______ should be used to adjust perpetual records

Answer 109

periodic inventory counts

Question 110

By comparing perpetual inventory records to current costs, the company ensures that:

Answer 110

inventory is appropriately valued at the lower of cost or market

Question 111

Consignment agreements should be examined to ensure that:

Answer 111

the entity has ownership rights to the inventory

Question 112

Inventories should be reduced, when appropriate, to ___________ or _________, and this is related to the valuation of inventory

Answer 112

to replacement cost or net realizable value

Question 113

The auditor’s overall responsibility is to obtain sufficient appropriate audit evidence to provide reasonable assurance that fair value ______ and ______ are in conformity with GAAP

Answer 113

measurements and disclosures

Question 114

______ should make fair value measurements and disclosures in accordance with GAAP and should identify and support any significant assumptions used

Answer 114

management

Question 115

After performing a count of negotiable securities, the auditor would generally obtain:

Answer 115

an acknowledgement from the client that the securities were returned intact

Question 116

a description of the client’s procedures that prevent the negotiation of securities by just one person is included in:

Answer 116

audit documentation

Question 117

an evaluation of the client’s internal control concerning physical access to the securities is included in:

Answer 117

audit documentation

Question 118

an analysis of realized gains and losses from the sale of securities during the year is included in:

Answer 118

audit documentation

Question 119

Joint custody by two company officials over assets like cash and marketable securities helps:

Answer 119

safeguard the assets

Question 120

The auditor would ________ to establish the existence and ownership of a long-term investment in publicly traded securities

Answer 120

confirm the number of shares held by an independent custodian

Question 121

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

Answer 121

the trust company deals only with the person reconciling the accounts, and not employees responsible for maintaining investment records

Question 122

Investments may be classified as:

Answer 122

trading, available for sale, or held to maturity

Question 123

name the assertions. auditor scans clients 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.

Answer 123

understandability and classification, valuation and accuracy. (classification of each investment in one of the categories determines how it will be shown on the balance sheet and whether it will be valued at market or amortized cost)

Question 124

In auditing investments in securities and derivatives, the auditor must assess the reasonableness and appropriateness of:

Answer 124

assumptions, market variables, and valuation models

Question 125

the generally accepted accounting principles require transactions and events to be reported in accordance with _________, even if this differs from their form

Answer 125

economic substance

Question 126

generally accepted accounting principles specify that, in order to qualify for hedge treatment, the entity must:

Answer 126

demonstrate and disclose a number of transaction features including risk exposure.

Question 127

To test management’s assertions of fair value, the auditor would:

Answer 127

obtain quoted market prices from financial publications, the exchanges, the National association of securities dealers automated quotations system (NASDAQ), or pricing services. if quoted market prices weren’t available, estimates based on valuation models would be used

Question 128

obtaining a current value appraisal of the collateral is an audit procedure to test:

Answer 128

valuation of the collateral of a delinquent loan receivable

Question 129

under equity method accounting, the amortization of the excess of the investor’s cost over the investment’s underlying book value reduces the investor’s income for the equity method investment. if amortization is too _____, this could lower the return on the investment

Answer 129

high

Question 130

equity method investments ______ reported at fair value

Answer 130

are NOT

Question 131

equity method investments are accounted for separate from investments classified as:

Answer 131

trading or available for sale

Question 132

dividend income from investments is tested by:

Answer 132

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 133

Stock ledgers maintained by independent registrars indicate:

Answer 133

how many shares of stock are issued and outstanding, and identify the shareholders of record

Question 134

______ is generally used to ascertain the reasonableness of investment income in relationship to the amount invested

Answer 134

analytical review / procedures

Question 135

______ and _____ is generally evaluated by inspection of securities, review of brokerage statements, or confirmation with an outside independent custodian

Answer 135

existence and ownership

Question 136

To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor would:

Answer 136

examine the audited FS of the investee company, including performing recalculations of prorate share of income/loss

Question 137

what would satisfy the valuation assertion for marketable equity securities: under cost method. under equity method.

Answer 137

obtaining market quotations from financial newspaper or periodicals under cost method

examine the audited FS of the investee company under equity method

Question 138

analytical procedures to ascertain the reasonableness of the completeness of recorded investment income

Answer 138

comparison of recorded investment income with the expected amount (based upon the related interest rate, dividends declared), and the income balance audited in the prior year

Question 139

To identify and quantify the existence of unrealized gains and losses in the portfolio, an auditor would: for cost method. for equity method.

Answer 139

1. examine trading prices in WSJ for those long-term investments carried under the cost method
2. review the audited financial statements of the investee company under equity method

Question 140

classification between balance sheet portfolios would most likely be tested by:

Answer 140

confirming the terms of the investment, making inquires of management regarding how long they intend to hold the securities

Question 141

If the auditor is unable to count the securities at the balance sheet date, the auditor should:

Answer 141

request the client to have the bank seal the safe deposit box until the auditor can count the securities

Question 142

The auditor would expect the client to use a valuation model in the current year that: (name all 3 levels) (which one is priority)

Answer 142

Level 1: uses observable quoted prices in the active market
Level 2: use of inputs other than quoted market prices
Level 3: unobservable inputs (most likely used in prior year)

Question 143

The auditor would evaluate whether the valuation model is:

Answer 143

1. appropriately applied based on GAAP
2. appropriate for the debt security being valued
3. appropriate for the environment in which the entity operates

Question 144

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to:

Answer 144

identify potential liabilities for unpair payroll taxes

Question 145

payroll deductions are verified by:

Answer 145

inspecting the payroll register and tracing deductions back to employee authorization forms held in the personnel department

Question 146

Verifying the preparation of the monthly payroll account bank reconciliation would provide significant evidence for:

Answer 146

the accuracy assertion for payroll transactions

Question 147

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:

Answer 147

whether unrecorded disposals occurred

Question 148

the retirement of plant assess necessitates the removal (decrease) of accumulated depreciated related to the retired asset by ________ accumulated depreciation

Answer 148

debiting

Question 149

If control risk is assessed low for assertions related to payroll, substantive tests of payroll balances would be limited to:

Answer 149

applying analytical procedures, and recalculating year end accruals

Question 150

questions relating to ________ would not be a part of a questionnaire related to controls over the initiation and execution of equipment purchases

Answer 150

access controls for assets

Question 151

what questions would be included on a questionnaire related to controls over initiation and execution of equipment purchases?

Answer 151

1. about controls related to competitive bids
2. controls related to the authorization of major repairs
3. about the existence of prenumbered POs

Question 152

determining that proper amounts of depreciation are expensed provides assurance with _____&_____ related to the asset and ______ in terms of FS presentation

Answer 152

valuation, allocation, and accuracy

Question 153

In auditing long-term bonds payable, an auditor would:

Answer 153

1. compare interest expense with the bond payable amount for reasonableness
2. examine documentation of the bond instruments to determine the existence of any liens on the assets
3. recalculate bond premiums and discounts
4. confirm the outstanding bonds payable balance

Question 154

In auditing the granting of stock options, the auditor would:

Answer 154

trace the transactions to approval by the board of directors

Question 155

converted stock options may be distributed from ________

Answer 155

authorized common shares

Question 156

Unclaimed payroll checks (assets) should be returned to _______ for follow up.

Answer 156

independent party not related to payroll department (who is in charge of recordkeeping)

Question 157

If a client uses a stock transfer agent, confirmations should be used to provide evidence of:

Answer 157

shares authorized, issued, and outstanding, provide evidence of the individual transactions

Question 158

proper authorization of stock rights and warrants would best be verified by:

Answer 158

reviewing the minutes of board of director meetings

Question 159

The auditor would review asset records for old assets, or observe assets that aren’t being used to determine:

Answer 159

whether assets that cannot be repaired have been properly written off

Question 160

in a _____ test, data in two or more fields are checked for consistency

Answer 160

reasonableness

Question 161

a _____ test identifies amounts that fall outside a predetermined range

Answer 161

range

Question 162

Restrictions on retained earnings are for _____ or _____ of retained earnings. the purpose is to restrict dividends, and the restrictions should be:

Answer 162

contractual or legal appropriation, disclosed in the FS

Question 163

the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. this audit procedure is intended to verify assertions related to:

Answer 163

understandability and classification

Question 164

The analytical procedure comparing payroll to standards or budgets is ____ likely to be used when auditing payroll then observing entity employees during payroll distribution

Answer 164

most, (with electronic payroll distribution it isn’t as likely to be performed)

Question 165

analysis of repair and maintenance expense provides assurance with regard to management’s assertion that:

Answer 165

expenditures for PPE have been capitalized and have not been charged to expense

Question 166

an auditor’s purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence about the assertion:

Answer 166

understandability and classification (classification of the note as current or noncurrent)

Question 167

to test controls pertaining to the existence of payroll transactions, entries in the ______ would be the population from which the sample is selected

Answer 167

payroll register

Question 168

when assessed level of control risk is low, auditor would perform _______ to test related payroll balances

Answer 168

analytical procedures

Question 169

when assessed level of control risk is high, auditor would perform _______ to test related payroll balances

Answer 169

substantive test of details

Question 170

An auditor would perform ________ when analytical procedures indicate unusual fluctuations in recurring payroll entries

Answer 170

substantive test of details

Question 171

An auditor would extend substantive tests of payroll when _______ are discovered in performing test of details

Answer 171

significant errors (overpayments)

Question 172

investigation of variances in a formal budget might show: ________ or ________, either would trigger an investigation

Answer 172

maintenance costs over budget or acquisition costs under budget

Question 173

if an auditor discovers that the original insurance policy on plant equipment isn’t available for inspection, this indicates that there is:

Answer 173

a lien on the plant equipment, since the original policy would likely be in the possession of the lien holder

Question 174

FAS 107 requires

Answer 174

• disclosure of fair values of financial instruments.
• auditor needs to audit year end market values of long-term debt.
• does not require that debt securities be written down to a lower market value

Question 175

auditor should trace corporate stock issuances and treasury stock transactions to _____________ to make sure they were authorized

Answer 175

the minutes of the board of directors

Question 176

articles of incorporation include:

Answer 176

shares authorized and their par value

Question 177

numbered stock certificates for shares that are issued and outstanding would be in the hands of:

Answer 177

stockholders

Question 178

The number of shares subject to agreements to repurchase should be in:

Answer 178

board minutes and any repurchase agreements

Question 179

restrictions on the payment of dividends should be in:

Answer 179

board minutes or confirmed by the bank if restrictions are due to outstanding loans

Question 180

guarantees of preferred stock liquidation value should be in:

Answer 180

board minutes or stock redemption agreement

Question 181

large companies often use a registrar to provide registration services and maintain the stockholder list. The primary responsibility of the registrar is to:

Answer 181

verify that stock is used only with proper authorization

Question 182

_________ bears responsibility for proper declaration of dividends

Answer 182

board of directors

Question 183

until checks are actually signed, they do not represent:

Answer 183

assets

Question 184

the adverse effects of evens causing an auditor to believe there is a substantial doubt about an entity’s ability to continue as a going concern would be lessened by:

Answer 184

evidence relating to the marketability of assets that management plans to sell. (by providing evidence that there is a ready market for assets that could be converted to cash, management has demonstrated that the company could remain in operation for a longer period of time)

Question 185

Evidence regarding the ability to expand operations into new product lines, the feasibility of plans to purchase leased equipment at less than market value, or committed arrangements to convert preferred stock to longterm debt would not be sufficient to lessen doubts about an entity’s ability to continue as a going concern, unless:

Answer 185

it could also demonstrate that the events would provide adequate cash flow to fund operations for at least the next year

Question 186

the auditor considers any of managements plans that might _________ the adverse effects of particular conditions and events

Answer 186

serve to lessen

Question 187

plans to increase ownership equity, to borrow money, to restructure debt, to sell assets, and reduce or delay expenditures might all be considered:

Answer 187

mitigating factors (lessen substantial doubt to continue as a going concern)

Question 188

inadequate disclosure of the substantial doubt about an entity’s ability to continue as a going concern is a:

Answer 188

departure from GAAP resulting in either a qualified or adverse opinion

Question 189

indications of possible financial difficulties may cause an auditor to:

Answer 189

have substantial doubt to continue as a going concern

Question 190

the lack of payment of preferred, cumulative dividends might cause:

Answer 190

auditor to have substantial doubt to continue as a going concern

Question 191

if auditor concludes that there is substantial doubt to continue as a going concern, the emphasis of matter paragraph would include:

Answer 191

“substantial doubt of the entitys ability to continue as a going concern”

possibily but not required the phrase “possible discontinuation of operations”

Question 192

reasonable period, not to exceed one year is implied in:

Answer 192

the definition of going concern. (so is implied in reporting)

Question 193

If substantial doubt about the entity’s ability to continue as a going concern has been removed in the current period, the emphasis of matter paragraph included in the prior period auditor’s report:

Answer 193

should not be repeated, and no description of the reasons or plans for recovery need be included

Question 194

negotiating reductions in required dividends would conserve cash, which would be:

Answer 194

a mitigating factor in auditors concerns about entity’s ability to continue as going concern

Question 195

if an auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern and that the entity’s disclosures are adequate, then the audit report opinion may be:

Answer 195

unmodified with emphasis of matter paragraph or disclaimed (generally unmodified is issued but the auditor isn’t prohibited from choosing to issue a disclaimer for example areas involving a high degree of uncertainty)

Question 196

the independent auditor’s procedures with respect to litigation, claims, and assessments should indicate discussing with management:

Answer 196

the controls adopted for identifying, evaluating, and accounting for litigation, claims and assessments

Question 197

leasing rather than purchasing operating facilities results in reduced (or delayed) expenditures, which is:

Answer 197

a mitigating factor in a going concern situation

Question 198

A lawyers refusal to furnish the info requested in an inquiry letter is not a reason to withdraw from the engagement, as long as:

Answer 198

the lawyers refusal isn’t based on the clients request

Question 199

A lawyers refusal to furnish the info requested in an inquiry letter would be:

Answer 199

limitation on the scope of the audit

Question 200

in evaluating the reasonableness of an accounting estimate, the auditor should first:

Answer 200

obtain an understanding of how management developed its estimate

Question 201

after first obtaining an understanding of how management developed its estimate, the auditor should use one or a combination of the following approaches:

Answer 201

1. review and test the process used by management to develop the estimate
2. develop an independent expectation of the estimate to corroborate the reasonableness of management’s estimate,
3. review subsequent events

Question 202

in evaluating the reasonableness of an estimate, an auditor would normally concentrate on key factors and assumptions that are:

Answer 202

1. significant to the accounting estimate
2. sensitive to variations
3. deviations from historical patterns
4. subjective and susceptible to misstatements and bias

Question 203

a letter of audit inquiry to the clients lawyer is the auditor’s primary means of:

Answer 203

obtaining corroboration of the info furnished by management concerning litigation, claims and assessments

Question 204

________ is best able to corroborate the description and evaluation of contingencies provided by management

Answer 204

legal counsel

Question 205

the letter of inquiry to the clients attorney is a request made by __________

Answer 205

client management. they would request the attorney to respond directly to the auditor

Question 206

procedures that may be effective in an audit of contingent liabilities:

Answer 206

1. reviewing board minutes
2. discussing long-term purchase commitments with the purchasing agent
3. reviewing long-term leases
4. obtaining a client rep letter
5. standard bank confirmation (contains confirm of discounted drafts and guarantees of notes and other open letters of credit)

Question 207

The scope of an audit is not restricted when an attorneys response is limited:

Answer 207

to matters to which the attorney has given substantive attention in the form of legal rep. the attorney can limit her response to matters that are considered individually or collectively to be material

Question 208

The scope of an audit may be restricted when an attorneys response is limited to:

Answer 208

1. an evaluation of the likelihood of an unfavorable outcome of the matter disclosed by the entity.
2. the attorney’s opinion of the entity’s historical experiences in recent similar litigation
3. the probable outcome of asserted claims and pending or threatened litigation

Question 209

The scope of an audit may be restricted when an attorneys response is limited to an evaluation of the likelihood of an unfavorable outcome of the matter disclosed by the entity. the attorney’s response should also address:

Answer 209

the nature of the claim, the progress to date, and the intended response

Question 210

The scope of an audit may be restricted when an attorneys response is limited to the attorney’s opinion of the entity’s historical experiences in recent similar litigation. the attorney’s response should also address:

Answer 210

the current situation, which may not parallel historical experience

Question 211

The scope of an audit may be restricted when an attorneys response is limited to the probable outcome of asserted claims and pending or threatened litigation. the attorney’s response should also address:

Answer 211

the nature of the claim, the progress to date, intended response, and unasserted claims

Question 212

The auditor may accept the letter from external counsel identifying pending claims even though the CPA didn’t get:

Answer 212

a specific amount of loss

Question 213

an auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it _______ managements incentive compensation for the period

Answer 213

increases

Question 214

if control accounts in the general ledger don’t reconcile to the subsidiary ledgers, there may be a problem in:

Answer 214

the way transactions were recorded and posted

Question 215

in response to discovering a deviation from a prescribed control procedure, the auditor should make inquires to:

Answer 215

understand the potential consequence of the deviation

Question 216

the other side of the journal entry for AP is typically:

Answer 216

expense

Question 217

If expenses are not recorded, this means that income is:

Answer 217

overstated

Question 218

misstatements recorded on the summary should be supported by additional evidence such as:

Answer 218

inspection of documents, observations. inquiry alone is NOT enough

Question 219

Immaterial misstatements from prior years ________ considered in the evaluation of audit findings in the current year.

Answer 219

should be

Question 220

auditors focus on correcting misstatements existing in the balance sheet, regardless of: .

Answer 220

the years that misstatements originated.

Question 221

an immaterial error from prior years needs to be considered because:

Answer 221

at some point it may become material

Question 222

when determining whether uncorrected misstatements are material, an auditor of a nonissuer would not consider:

Answer 222

the cost of correcting the misstatements

Question 223

the qualititative factor that the auditor considers when the client gives the explanation that it is “too costly to correct” which relates to correcting the system that created the error. this factor is considered if the auditor believes that management had _______ to intentionally _____ a system to calculate an amount that represents an immaterial misstatement

Answer 223

motivation, design

Question 224

if employees have the opportunity to change their time worked after their time cards are approved, this represents a deficiency in:

Answer 224

the design of the control

Question 225

control deficiencies may be noted in the:

Answer 225

design of controls or in the failure in operation of an effectively designed control

Question 226

The representation letter should include management’s belief that the effects of any uncorrected FS misstatements aggregated by the auditor during the current engagement and pertaining to the latest period presented are:

Answer 226

immaterial to the FS taken as a whole

Question 227

what matters would materiality limits not apply in obtaining written management representations?

Answer 227

acknowledgement of its responsibility for the FS, availability of financial records, management fraud, and completeness and availability of minutes

Question 228

it is appropriate for the __________ to contain a statement regarding subsequent events

Answer 228

representation letter

Question 229

the representation letter typically includes information in four categories:

Answer 229

1. FS
2. completeness;
3. recognition, measurement and disclosure
4. subsequent events

Question 230

management acknowledges its responsibility for the design of controls to detect and prevent fraud in its:

Answer 230

representation letter

Question 231

______________ obtained by the auditor should include a statement that the significant assumptions used by management in making accounting estimates are reasonable

Answer 231

written representations

Question 232

immaterial fraud involving _________ must be included in the representation letter.

Answer 232

management or employees who have significant roles in internal control

Question 233

material fraud involving _________ must be included in the representation letter.

Answer 233

employees

Question 234

management representation letters need to address _______ being covered in the report

Answer 234

all of the years

Question 235

the group engagement team should communicate to the component auditors the __________ that are relevant to the work of the component auditor. (group assumes no responsibility)

Answer 235

significant risks of MM of the group FS

Question 236

the component auditor should communicate to the group engagement team when they are assuming responsibility for the work of the component auditor:

Answer 236

1. list of corrected and uncorrected misstatements of the financial info of the component
2. the responses to significant risks of MM

Question 237

the group engagement team should communicate to the component auditors the __________ that are relevant to the work of the component auditor. (group assumes responsibility)

Answer 237

the component materiality and threshold above which misstatements cannot be regarded as clearly trivial to the group FS

Question 238

according to the AICPA code of professional conduct, a member CPA generally is required to obtain client consent before disclosing confidential client info to a third party service provider when:

Answer 238

the member doesn’t enter into a confidentiality agreement with the provider

Question 239

because timely communication may be important, the auditor may choose to communicate significant deficiencies:

Answer 239

during the course of the audit rather than after the audit is concluded

Question 240

all material weaknesses are significant deficiencies, but:

Answer 240

not all significant deficiencies are material weaknesses

Question 241

an auditor’s required report on communication of significant deficiencies in internal control should state:

Answer 241

is intended solely for the use of management, those charged with governance, and others within the organization

Question 242

any report issued on significant deficiencies should indicate that:

Answer 242

1. the purpose of the audit was to report on FS and not provide assurance on internal control
2. definition of material weakness and if applicable significant deficiency
3. restriction on use

Question 243

a control deficiency exists when deficiencies are not:

Answer 243

detected within a timely period by employees in the normal course of performing their assigned functions

Question 244

a material weakness is a deficiency, or combination of deficiencies, such that there is a ________ possibility that a material misstatement of the entity’s FS will not be prevented or detected/corrected

Answer 244

reasonable

Question 245

the auditor is required to communicate what to management and those charged with governance? material weakness? significant deficiencies?

Answer 245

Yes, yes, also a definition of material weakness, definition of significant deficiencies, and a list of weaknesses/deficiencies noted

Question 246

the auditor is required to communicate to _______ regarding management consultation with other auditors

Answer 246

those charged with governance

Question 247

if those charged with governance are not involved with managing the entity, the auditor should communicate:

Answer 247

material, corrected misstatements brought to managements attention as a result of the audit

Question 248

for the audits of issuers, the communication with governance must be made:

Answer 248

before the auditor’s report is filed with the SEC

Question 249

for the audits of nonissuers, the communication with governanace is not required to occur before the issuance of the auditor’s report as long as the communication occurs:

Answer 249

on a timely basis

Question 250

communication regarding independence must be made:

Answer 250

in writing prior to accepting the engagement

Question 251

unless all of those charged with governance are also involved with managing the entity, the auditor is required to communicate:

Answer 251

1. significant audit adjustments

2. significant matters relating to consultation with other accountants

Question 252

the auditor is always required to communicate ________ to those charged with governance

Answer 252

changes in significant accounting policies

Question 253

according to the SEC, members of an issuer’s audit committee may not accept any:

Answer 253

consulting, advisory, or other compensatory fee from the registrant for services other than as a member of the board

Question 254

deficiency in operation exists when:

Answer 254

properly designed control is either not executed as designed or the person performing the control doesn’t have either the authority or the skill to perform the control

Question 255

audit risk of noncompliance is:

Answer 255

planning concept that represents the risk the auditor might express an inappropriate audit opinion on the entity’s compliance when material noncompliance exists

Question 256

inherent risk of noncompliance is:

Answer 256

the susceptibility of a requirement to noncompliance and is a component of the risk of material noncompliance

Question 257

during planning, an auditor of a nonissuer should communicate to those charged with governance that the audit doesn’t relieve:

Answer 257

management of its responsibilities for the FS

Question 258

cash flow hedge gains or losses are recorded in the appropriate account: assertion and audit procedure

Answer 258

assertion: classification
procedure: evaluate the assumptions and valuation models used by management

Question 259

trading and available for sale securities are valued at the appropriate amount: assertion and audit procedure

Answer 259

assertion: valuation
procedure: obtain evidence of the quoted year end FV from published sources

Question 260

equity investments are valued at the appropriate amount: assertion and audit procedure

Answer 260

assertion: valuation
procedure: obtain the audited FS of the investee

Question 261

determine that classification of marketable securities is correct: assertion and audit procedure

Answer 261

assertion: classification
procedure: inspect approved records of client’s investment strategies

Question 262

correction of errors for Year 1 statements should not:

Answer 262

affect the Year 2 income statement (debit or credit to retained earnings)

Question 263

an observed deviation rate that exceeds the auditor’s expected rate is an example of a deficiency in:

Answer 263

operation of controls

Question 264

a control deficiency in design occurs when:

Answer 264

a neccessary control is missing or when an existing control doesnt achieve the desired objective

Question 265

For nonissuers, previously communicated significant deficiencies and material weaknesses that have not been corrected should be:

Answer 265

communicated again, in writing, during the current audit by referring to the previously issued written communication and the date of that communication

Question 266

For nonissuers, if an auditor has communicated other deficiencies in a prior period and management has chosen not to correct the deficiencies for cost or other reasons, the auditor:

Answer 266

doenst have to repeat communication in the current period

Question 267

for nonissuers, written communication of significant deficiencies should include:

Answer 267

• defintion of significant deficiency
• description of the significant deficiency that includes an explanation of the potential effect
• sufficient info to enable those charged with governance and mangement to understand the context of the communication
• restriction on the use of the communication to managment, those charged with governance, others in the organization, and any other governmental authority to which the auditor is required to report

Question 268

the auditor is (required/not required? to report the absence of significant deficiencies or material weaknesses during the integrated audit of a nonissuer

Answer 268

not required

Question 269

evidence of failure in the operation of internal controls:

Answer 269

• undue bias or lack of objectivity
• misrepresentation by client personnel to the auditor
• managment override of controls

Question 270

insufficient control consciousness is an example of:

Answer 270

deficiency in the design of controls

Question 271

The SEC has strongly recommended that companies establish audit committees, but:

Answer 271

not required

Question 272

reasons why companies have audit committees:

Answer 272

• large accounting firm
• new york stock exchange requires listed companies
• strengthen the public’s sense of the independence of the external auditor

Question 273

the main function of an audit committee is to:

Answer 273

• enhance IC by creating a means of direct communication between the outside directors and the independent auditor
• select and appoint independent auditor, set the audit fee, assures independence of auditor and reviews the scope of the audit
• helps solve disagreements relating to the accounting treatment of only material items in FS

Question 274

The auditor is not responsible for requesting mangament’s _____ for uncorrected MM, but is responsible for requesting management’s ____ of uncorrected MM

Answer 274

explanation, correction

Question 275

When communicating findings to mangement during the audit of an issuer, the auditor is responsible for:

Answer 275

• requresting management’s correction of uncorrected material misstatements
• communication of frequently occuring misstatements indicating bias in the prep of FS
• communication of uncorrected, nontrival misstatements and their possible effect on the audit opinion, including the effect of uncorrected misstatements related to prior periods

Question 276

a nonresponsive and or inadequate response from those charged with governance is an example of:

Answer 276

inadequate two way communication and may be indicative of an unsatisfactory control environment, which may affect the auditor’s assessment of risk of MM

Question 277

As a result of the SOX, auditors of issuers are required to report to the audit committee:

Answer 277

• all critical accounting policies
• all material alternative GAAP accounting treatements
• significant communications with mangement (including the schedule of unadjusted differences)

Question 278

examining a sample of sales invoices for proper classification into the appropriate revenue accounts is an audit procedure used to test:

Answer 278

understandability and classification assertion for sales transactions

Question 279

AP confirmations are used if:

Answer 279

• monthly vendor statements are not available
• if there are disputed amounts
• if the client’s IC over AP is weak

Question 280

If an auditor performs tests on year end bank recs or sends standard bank confirmations to all banks where the client has transacted business during the year, the auditor would be testing the _____ assertions pertaining to client’s cash balance

Answer 280

completeness and valuation and allowance

Question 281

postivie confirmations would be inappropirate if:

Answer 281

majority of AR accounts are small (negative confirmations should be used)

Question 282

The auditor is required to determine if the client’s accounting estimates are reasonable, which may include a comparison with industry standards. However, the auditor is not required to determine if the accounting estimates are consistent with the client’s primary competitors. although in the same industry, the client’s bussinesses could have unique features that may impact:

Answer 282

the rationale behind the accounting estimates used by the client

Question 283

derivativies that are actually refleted on the client’s BS at quarter end are not contingencies. why?

Answer 283

the amount is provided and there is no possible or probable outcome

Question 284

reviewing any type of transaction that is already recorded on the BS will not identify:

Answer 284

contingencies

Question 285

what may identify contingencies:

Answer 285

• client rep letter
• discussing sales contracts with the sales manager (may be pertaining to the client’s future revenue recognition)
• review the status of long term leases (related to leases)

Question 286

when is not using AR confirmations allowed?

Answer 286

• inherent and control risk are very low and other procedures can be used to reduce audit risk to a low level
• it would be ineffective
• AR is immaterial

Question 287

By ensuring that all required disclosures related to PPE are adequately disclosed in the footnotes, the auditor would be testing the ____ assertion

Answer 287

completeness

Question 288

assuming the client discloses their derivative transactions at fair value, the auditor should perform:

Answer 288

• whether the client specifices in their reporting framework the method used to determine FV
• evaluate if the client’s determination of FS is consistent with their specified valuation method
• when FS is obtained from broker-dealter, sttempt to gain an understanding of the method used by the broker-dealer to determine FS

Question 289

The auditor should ensure that the footnotes to the FS disclose any specific restrictions on cash,:

Answer 289

• any compensating balance requirements

- a policy exists that defines the client’s cash and cash evivalents account/transactions

Question 290

Even though the entire litigation loss will be covered by insurance, XYZ company still needs to:

Answer 290

accrue for the loss and disclose the litigation in a footnote. Note: Insurance recoveries are not recorded until received. In addition, insurance recoveries are not allowed to be netted against insurance losses.