Assertions

Question 1

How would you test the existence assertion of an asset?

Answer 1

Accounting records to the supporting evidence

Question 2

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

Answer 2

An auditor’s purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management’s assertions about understandability and classification (i.e., classification of the note as current or noncurrent).

Question 3

Tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management’s assertion regarding:

Answer 3

Cutoff tests are designed to determine whether transactions have been recorded in the proper period. Tests to detect credit sales made before the end of the year that have been (improperly) recorded in the subsequent year provide assurance about both cutoff and completeness (i.e., whether all current year sales have been properly included).

Question 4

Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management’s assertion of:

Answer 4

Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management’s assertion of valuation (i.e., has inventory been properly recorded at lower of cost or market?).

Question 5

Which of the following audit procedures probably would provide the most reliable evidence concerning the entity’s assertion of rights and obligations related to inventories?

Answer 5

Inspecting agreements to determine whether any inventory is pledged as collateral or subject to liens provides the most reliable evidence concerning the entity’s assertion of rights and obligations. These documents will probably verify ownership and show lenders’ restrictions on the inventories.

Question 6

Which of the following procedures would an auditor most likely perform to verify management’s assertion of completeness?

Answer 6

In order to verify management’s assertion of completeness, an auditor would most likely compare a sample of shipping documents to related sales invoices to determine that all goods shipped were properly included in sales.

Question 7

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?

Answer 7

Vouching to supporting documents tests the occurrence assertion.

Question 8

An auditor concluded that no excessive costs for idle plant were charged to inventory. This conclusion most likely related to the auditor’s objective to obtain evidence about the financial statement assertions regarding inventory, including understandability and classification, and:

Answer 8

An auditor reviews the overhead allocation to determine that no excessive costs for idle plant were charged to inventory. This is one of the procedures performed by an auditor to determine that the inventory balance is properly valued (assertion of valuation and allocation).

Question 9

An auditor selected items for test counts while observing a client’s physical inventory. The auditor then traced the test counts to the client’s inventory listing. This procedure most likely obtained evidence concerning management’s assertion of:

Answer 9

When an auditor selects items for test counts and traces the test counts to the client’s inventory listing, the auditor has obtained evidence concerning management’s assertion of completeness (All inventory on hand has been properly included in the physical listing.)

Question 10

The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a (an):

Answer 10

To test controls pertaining to the existence of payroll transactions, entries in the payroll register would be the population from which the sample is selected. (To test existence, the auditor needs to start with the accounting records and vouch backward to the source documents.)

Question 11

Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables:

Answer 11

Confirmation of accounts receivable provides evidence that the customer and the receivable exist.

Question 12

Two assertions for which confirmation of accounts receivable balances provides primary evidence are:

Answer 12

Two assertions for which the confirmation of accounts receivable balances provides primary evidence are rights and obligations (does the client have a right to the receivable?) and existence (does the receivable really exist?).

Question 13

The negative confirmation of accounts receivable is useful when?

Answer 13

Control risk relating to receivables is LOW
Many small balances
Consideration of respondent is low

Question 14

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

Answer 14

When an auditor does not receive replies to second requests on year-end accounts receivable confirmations, the auditor would most likely perform alternate procedures to support the existence of the receivables. These procedures include inspection of the shipping records to determine that the merchandise was actually sold to the debtors.

Question 15

An auditor testing long-term investments would ordinarily use analytical review as the primary audit procedure to ascertain the reasonableness of the:

Answer 15

Analytical review is generally used to ascertain the reasonableness of investment income in relationship to the amount invested.

Question 16

An auditor would most likely verify the interest earned on bond investments by:

Answer 16

Recomputing the interest earned is the most likely method of auditing interest earned on bond investments.

Question 17

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

Answer 17

an auditor most likely would examine the audited financial statements of the investee company, including performing recalculations of prorata share of income/loss.

Question 18

In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the:

Answer 18

to ascertain the reasonableness of the completeness of recorded investment income. These procedures would probably include a comparison of the recorded investment income with the expected amount (based upon the related interest rate, dividends declared, etc.) and the income balance audited in the prior year.

Question 19

Which of the following internal controls would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?

Answer 19

Requiring the internal auditor to compare the securities in the bank safe deposit box with recorded investments is the procedure an entity most likely would use in satisfying the completeness assertion related to long-term investments.

Question 20

A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will:

Answer 20

If the auditor is unable to count the securities at the balance sheet date the auditor should request the client to have the bank seal the safe deposit box until the auditor can count the securities.

Question 21

Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal accounting control system that provides for:

Answer 21

Investigation of variances in a formal budget might show maintenance costs over budget or acquisition costs under budget, either of which would trigger an investigation.

Question 22

Which of the following controls is most likely to prevent the improper disposition of equipment?

Answer 22

Separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders is most likely to prevent the improper disposition of equipment.

Question 23

When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection. The policy’s absence most likely indicates the possibility of a (an):

Answer 23

If an auditor discovers that the original insurance policy on plant equipment is not available for inspection, this most likely indicates that there is a lien on the plant equipment, since the original policy would likely be in the possession of the lien holder.

Question 24

In testing for unrecorded retirements of equipment, an auditor most likely would:

Answer 24

Tracing (old) equipment recorded in the books to the actual equipment during a plant tour is a control which tests for unrecorded retirements.

Question 25

The primary evidence regarding year-end cash balances in the financial statements is documented in the?

Answer 25

The primary evidence regarding year-end cash balances in the financial statements is documented in the bank reconciliation, which reconciles the balance per the bank to that per the financial statements.

Question 26

An auditor’s program to examine long-term debt should include steps that require:

Answer 26

Examination of bond trust indentures should be included in audit program of long-term debt to assure that the client was not in violation of any covenants in the indentures.

Question 27

In auditing accounts payable, an auditor’s procedures most likely would focus primarily on management’s assertion of:

Answer 27

When testing liabilities, an auditor generally is concerned about understatement (as opposed to overstatement, for assets). Therefore, in auditing accounts payable, an auditor’s procedures most likely would focus primarily on management’s assertion of completeness (if accounts payable is not complete it would be understated).

Question 28

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

Answer 28

Unrecorded trade accounts payable are best identified by reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

Question 29

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all:

Answer 29

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. This test consists of tracing from receiving reports for inventory received before year-end to the accounts payable trial balance to determine whether the purchase has been properly recorded.

Question 30

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

Answer 30

also prepares the daily deposit slip. (That is his or her job).

Question 31

If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the:

Answer 31

f the objective of a test of details is to detect overstatements of sales (existence assertion), the auditor should trace transactions from the accounting records (i.e., sales journal) to the source documents (e.g., customer order, sales order, shipping documents, etc.).

Question 32

What is an indication of kiting?

Answer 32

The receipt date per bank is recorded before the disbursement date

Question 33

Tracing shipping documents to prenumbered sales invoices provides evidence that:

Answer 33

Tracing from shipping documents (source documents) to sales invoices provides evidence that shipments to customers are properly invoiced

Question 34

Which of the following procedures would an auditor most likely perform to test controls relating to management’s assertion about the completeness of cash receipts for cash sales at a retail outlet?

Answer 34

Observing the consistent use of cash registers and tapes by employees would provide evidence to the auditor regarding the controls over the completeness of cash receipts.

Question 35

Which of the following internal control procedures most likely addresses the completeness assertion for inventory?

Answer 35

The internal control procedure of prenumbering receiving reports and periodically reconciling them to the inventory records most likely addresses the completeness assertion for inventory, because it allows the auditor to determine whether all goods received have been recorded as inventory.

Question 36

An auditor’s purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management’s assertions about:

Answer 36

An auditor’s purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management’s assertions about valuation or allocation, which pertain to the presentation of assets, liabilities, and equity interests at appropriate amounts. The auditor is concerned with the proper valuation of those receivables.

Question 37

To obtain assurance that all inventory items in a client’s inventory listing are valid, an auditor most likely would trace:

Answer 37

Tracing from the inventory listing to the inventory tags and the auditor’s recorded count sheets verifies the validity (existence) of the items.

Question 38

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:

Answer 38

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 assertion

Question 39

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity’s inventory valuation?

Answer 39

Testing the entity’s computation of standard overhead rates generally provides assurance about a client’s inventory valuation.

Question 40

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all:

Answer 40

Analysis of repairs and maintenance expense provides assurance with regard to management’s assertion that expenditures for property and equipment have been capitalized and have not been charged to expense.

Question 41

Which of the following procedures would an auditor most likely perform to obtain assurance that slow-moving and obsolete items included in inventories are properly identified?

Answer 41

Examining an analysis of inventory turnover helps identify slow-moving, excess, defective, and obsolete items included in inventories. In order for inventory to be properly valued, these items may need to be written down.