AUD 2 - Chapter 12 Q's

Question 1

Which of the following accounts would the auditor review in order to obtain reasonable
assurance that additions to the equipment (fixed asset) account are not understated?
A. Amortization expense.
B. Gain on disposal of equipment.
C. Accounts payable.
D. Repairs and maintenance expense

Answer 1

Which of the following accounts would the auditor review in order to obtain reasonable
assurance that additions to the equipment (fixed asset) account are not understated?

D. Repairs and maintenance expense

Question 2

An auditor wants to perform tests of controls on a client’s cash disbursement procedures.
If the control procedures leave no audit trail or documentary evidence, the auditor is most
likely to test the procedures by
A. Confirmation and observation.
B. Observation and inquiry.
C. Analytical procedures and confirmation.
D. Inquiry and analytical procedures.

Answer 2

An auditor wants to perform tests of controls on a client’s cash disbursement procedures.
If the control procedures leave no audit trail or documentary evidence, the auditor is most

B. Observation and inquiry.

Question 3

A company’s internal control system requires that an approved payables voucher,
supported by a purchase order and a receiving report accompany every cheque requisition. To
determine whether cheques are being issued for unauthorized expenditures, an auditor is most
likely to select items for testing from the population of all
A. Purchase orders.
B. Cancelled cheques.
C. Receiving reports.
D. Approved vouchers

Answer 3

A company’s internal control system requires that an approved payables voucher,
supported by a purchase order and a receiving report accompany every cheque requisition. To
determine whether cheques are being issued for unauthorized expenditures, an auditor is most
likely to select items for testing from the population of all

B. Cancelled cheques.

Question 4

The statement that “all purchase orders must be supported by properly approved purchase
requisitions” is a specific example of which general objective?
A. Validity.
B. Completeness.
C. Authorization.
D. Classification

Answer 4

The statement that “all purchase orders must be supported by properly approved purchase
requisitions” is a specific example of which general objective?

C. Authorization.

Question 5

A good environmental control over purchases and payables would be to have:
A. The accounting department independent of the sales department.
B. The purchasing department independent of the receiving department.
C. The information systems department independent of the accounting department.
D. The sales department independent of the shipping department.

Answer 5

A good environmental control over purchases and payables would be to have:

B. The purchasing department independent of the receiving department

Question 6

Audit procedures used in the observation of a client’s physical inventory count are
designed primarily to
A. Test and observe the client’s physical count of inventory.
B. Independently verify the physical counts recorded by the client.
C. Assist the client in taking test counts of year-end inventory.
D. Determine whether inventory contains obsolete goods

Answer 6

Audit procedures used in the observation of a client’s physical inventory count are
designed primarily to

B. Independently verify the physical counts recorded by the client.

Question 7

Rather than counting the entire inventory at year-end, a company may make periodic, or
cycle counts, of selected inventory items at various times during the year. Which of the
following is necessary if the auditor plans to observe inventories at interim dates?
A. Complete recounts by independent teams are performed.
B. Perpetual inventory records are maintained.
C. Unit cost records are integrated with production accounting records.
D. Inventory balances are rarely at low levels

Answer 7

Rather than counting the entire inventory at year-end, a company may make periodic, or
cycle counts, of selected inventory items at various times during the year. Which of the
following is necessary if the auditor plans to observe inventories at interim dates?

B. Perpetual inventory records are maintained.

Question 8

When the auditor selects a sample of inventory items from the perpetual inventory master file then searches out these items in the inventory warehouse, the auditor is collecting
evidence to support which assertion?
A. Presentation.
B. Valuation.
C. Completeness.
D. Existence.

Answer 8

When the auditor selects a sample of inventory items from the perpetual inventory master
file then searches out these items in the inventory warehouse, the auditor is collecting
evidence to support which assertion?

D. Existence.

Question 9

When using confirmations to provide evidence about the completeness assertion for
accounts payable, the appropriate population most likely would be
A. Vendors with whom the entity has previously done business.
B. Amounts recorded in the accounts payable subsidiary ledger.
C. Payees of cheques drawn in the month after the year end.
D. Invoices filed in the company’s open invoice file

Answer 9

When using confirmations to provide evidence about the completeness assertion for
accounts payable, the appropriate population most likely would be

A. Vendors with whom the entity has previously done business.

Question 10

The auditor decided to test accounts payable by sending confirmations to selected
vendors. The auditor’s best approach in selecting the vendor accounts to confirm is to
A. Select vendor accounts with large balances.
B. Select vendor accounts at random in order to apply a statistical sampling procedure.
C. Select vendor accounts with small or zero balances.
D. Select vendor accounts that are past due

Answer 10

The auditor decided to test accounts payable by sending confirmations to selected
vendors. The auditor’s best approach in selecting the vendor accounts to confirm is to

C. Select vendor accounts with small or zero balances.

Question 11

When confirming accounts payable, emphasis should be put on what kind of accounts?
A. Accounts with small or zero balances.
B. All accounts should be equally emphasized.
C. Accounts with large balances.
D. Accounts listed in the accounts payable subsidiary ledger.

Answer 11

When confirming accounts payable, emphasis should be put on what kind of accounts?

A. Accounts with small or zero balances.

Question 12

Which of the following audit procedures is best for identifying unrecorded trade accounts
payable?
A. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine
whether the related payables apply to the prior period.
B. Investigating payables recorded just prior to and just subsequent to the balance sheet date
to determine whether receiving reports support them.
C. Examining unusual relationships between monthly accounts payable balances and recorded
cash payments.
D. Reconciling vendors’ statements to the file of receiving reports to identify items received
just prior to the balance sheet date.

Answer 12

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

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

Question 13

Which of the following procedures is an auditor most likely to perform in searching for unrecorded payables?
A. Reconcile receiving reports with related cash payments made just prior to year-end.
B. Compare the ratio of accounts payable to purchases with the prior year’s ratio.
C. Vouch a sample of creditor balances to supporting invoices, receiving reports, and
purchase orders.
D. Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.

Answer 13

Which of the following procedures is an auditor most likely to perform in searching for unrecorded payables?

D. Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.

Question 14

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. Insist that the client perform physical counts of inventory items several times during the
year.
B. Apply gross profit tests to ascertain the reasonableness of the physical counts.
C. Increase the extent of tests of controls of the inventory cycle.
D. Ask the client to schedule the physical inventory count at the end of the year.

Answer 14

A client maintains perpetual inventory records in both quantities and dollars. If the
assessed level of control risk is high, an auditor would probably

D. Ask the client to schedule the physical inventory count at the end of the year.

Question 15

In assessing control risk for purchases, an auditor vouches a sample of entries in the
accounts payable trial balance to the supporting documents. Which account assertion would this test of controls most likely support?
A. Completeness.
B. Existence or occurrence.
C. Valuation or allocation.
D. Presentation

Answer 15

In assessing control risk for purchases, an auditor vouches a sample of entries in the
accounts payable trial balance to the supporting documents. Which account assertion would this test of controls most likely support?

B. Existence or occurrence.

Question 16

Brown CA was auditing her client Red Manufacturing Company. She selected a sample of
inventory item recorded as issues in the perpetual records and vouched them to production
requisitions. Brown’s audit procedure was intended to satisfy which control objective?
A. Validity.
B. Completeness.
C. Authorization.
D. Accuracy.

Answer 16

Brown CA was auditing her client Red Manufacturing Company. She selected a sample of
inventory item recorded as issues in the perpetual records and vouched them to production
requisitions. Brown’s audit procedure was intended to satisfy which control objective?

A. Validity.

Question 17

Which control objective is associated with observing the inventory record keeping
personnel as they perform their work?
A. Authorization
B. Completeness
C. Environment
D. Accuracy

Answer 17

Which control objective is associated with observing the inventory record keeping
personnel as they perform their work?

C. Environment

Question 18

The control objective associated with selecting a sample of receiving reports and tracing them to the perpetual inventory records is:
A. Accuracy
B. Completeness
C. Validity
D. Classification

Answer 18

The control objective associated with selecting a sample of receiving reports and tracing them to the perpetual inventory records is:

B. Completeness

Question 19

The statement that items on the accounts payable register must be supported by a
completed voucher package containing a services purchase order and evidence the service was provided is a specific example of which control objective?
A. Environment.
B. Validity.
C. Completeness.
D. Accounting and posting.

Answer 19

The statement that items on the accounts payable register must be supported by a
completed voucher package containing a services purchase order and evidence the service was provided is a specific example of which control objective?

B. Validity.

Question 20

To determine whether accounts payable is complete, an auditor performs a test to verify
that all merchandise received is recorded. The population of documents for this test consists
of all
A. Payment vouchers.
B. Receiving reports.
C. Purchase requisitions.
D. Vendor’s invoices

Answer 20

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

B. Receiving reports.

Question 21

"Observe if personnel in the purchasing department are following company policies" is an audit procedure intended to test which control objective?
A. Environment.
B. Accuracy.
C. Accounting and posting.
D. Proper period recording.

Answer 21

“Observe if personnel in the purchasing department are following company policies” is an audit procedure intended to test which control objective?

A. Environment.

Question 22

Mary Monitor CA noted that ABC Co. Ltd. received goods prior to year-end and included them in the physical inventory but did not been record them in the accounting records. In this case which of the following adjustments should be made?
A. Debit Purchases/credit Cost of Goods Sold.
B. No adjustment is necessary.
C. Debit Inventory /credit Accounts Payable.
D. Debit Cost of Goods Sold/credit Accounts Payable.

Answer 22

Mary Monitor CA noted that ABC Co. Ltd. received goods prior to year-end and included them in the physical inventory but did not been record them in the accounting records. In this case which of the following adjustments should be made?

C. Debit Inventory /credit Accounts Payable.

Question 23

Quantities recorded during the physical count of inventories are greater than the quantities in the perpetual records. This could be the result of a failure to record
A. Sales.
B. Sales discounts.
C. Purchases.
D. Purchase discounts.

Answer 23

Quantities recorded during the physical count of inventories are greater than the quantities in the perpetual records. This could be the result of a failure to record

C. Purchases.

Question 24

Purchase cut off procedures should be designed to produce evidence about whether or not merchandise that is included in the inventory of the company
A. Has been paid for.
B. Is physically present in the warehouse.
C. Is owned by the company (legal title has been transferred).
D. Relates to the shipping documents for the merchandise issued in the company’s name.

Answer 24

Purchase cut off procedures should be designed to produce evidence about whether or not merchandise that is included in the inventory of the company

C. Is owned by the company (legal title has been transferred).

Question 25

When auditing merchandise inventory at year-end, the auditor performs a purchase cut off test to obtain evidence that
A. All goods purchased before year-end are received before the physical inventory count.
B. Goods held on consignment for customers are not included in the inventory balance.
C. The stock of inventory on hand at year-end is neither pledged nor sold.
D. All goods owned at year-end are included in the inventory balance.

Answer 25

When auditing merchandise inventory at year-end, the auditor performs a purchase cut off test to obtain evidence that

D. All goods owned at year-end are included in the inventory balance.

Question 26

Which of the following internal control procedures is most likely to be used in order to maintain accurate inventory records?
A. Perpetual inventory records are periodically compared with the current cost of individual
inventory items.
B. A just-in-time inventory ordering system keeps inventory levels at a desired minimum.
C. Requisitions, receiving reports, and purchase orders are independently matched before payment is approved.
D. Periodic inventory counts are used to adjust the perpetual inventory records

Answer 26

Which of the following internal control procedures is most likely to be used in order to maintain accurate inventory records?

D. Periodic inventory counts are used to adjust the perpetual inventory records

Question 27

Martinez CA was auditing his client, Marvelous Retail Limited. He selected a sample of inventory items from the perpetual records and vouched all additions to receiving reports. This procedure was intended to satisfy which control objective?
A. Authorization.
B. Completeness.
C. Validity.
D. Accuracy.

Answer 27

Martinez CA was auditing his client, Marvelous Retail Limited. He selected a sample of inventory items from the perpetual records and vouched all additions to receiving reports. This procedure was intended to satisfy which control objective?

C. Validity.

Question 28

What documentary evidence is appropriate in attempting to determine if recorded
purchase transactions are valid and prices on the vendors’ invoices are correct?
A. Purchase requisitions and accounts payable entries.
B. Receiving reports and purchase orders.
C. Purchase requisitions and purchases orders.
D. Purchase orders and bid quotes.

Answer 28

What documentary evidence is appropriate in attempting to determine if recorded
purchase transactions are valid and prices on the vendors’ invoices are correct?

B. Receiving reports and purchase orders.

Question 29

Which of the following situations indicates a potential material weakness in internal
control over acquisitions and expenditures?
A. Purchase orders are not prepared for services that are acquired directly under authorization of department heads
B. The person who approves purchases also signs the cheques.
C. Unacceptable goods are not recorded on receiving reports.
D. The person who signs the cheques also stamps “paid” on the vouchers.

Answer 29

Which of the following situations indicates a potential material weakness in internal
control over acquisitions and expenditures?

B. The person who approves purchases also signs the cheques.

Question 30

The usual source of journal entries to record the purchase of inventory in the general ledger is
A. Sales invoices updated with cost data from the inventory records department.
B. Purchase invoices updated with cost data from the inventory records department.
C. Bid quotes updated with cost data from the inventory records department.
D. Receiving reports updated with cost data from the accounts payable department

Answer 30

The usual source of journal entries to record the purchase of inventory in the general ledger is

D. Receiving reports updated with cost data from the accounts payable department

Question 31

Physical observation procedures for inventory are designed to audit for existence, completeness and valuation.

Answer 31

Physical observation procedures for inventory are designed to audit for existence, completeness and valuation.
TRUE

Question 32

When auditors trace the test counts they took at the physical inventory count to the final inventory summary, they are gathering evidence on the completeness assertion.

Answer 32

When auditors trace the test counts they took at the physical inventory count to the final inventory summary, they are gathering evidence on the completeness assertion.
TRUE

Question 33

An auditor should not be concerned if a cross-reference of vendor addresses with
employee addresses reveals that there are matches.

Answer 33

An auditor should not be concerned if a cross-reference of vendor addresses with
employee addresses reveals that there are matches.
FALSE

Question 34

Auditors must place more emphasis on the existence and rights assertions when obtaining evidence about accounts payable.

Answer 34

Auditors must place more emphasis on the existence and rights assertions when obtaining evidence about accounts payable.
FALSE

Question 35

If the auditor traces a sample of receiving reports to the perpetual inventory records, the auditor is testing the control of validity.

Answer 35

If the auditor traces a sample of receiving reports to the perpetual inventory records, the auditor is testing the control of validity.
FALSE

Question 36

If the auditor selects a sample of open accounts payable and vouches the details to supporting purchase documents the auditor is testing the objective of validity.

Answer 36

If the auditor selects a sample of open accounts payable and vouches the details to supporting purchase documents the auditor is testing the objective of validity.
TRUE

Question 37

The requirement that “perpetual inventory records must be updated as of the date goods are received” is an example of a control that satisfies the “proper period” internal control objective.

Answer 37

The requirement that “perpetual inventory records must be updated as of the date goods are received” is an example of a control that satisfies the “proper period” internal control objective.
TRUE

Question 38

Information gathering about the control structure often begins with an internal control questionnaire.

Answer 38

Information gathering about the control structure often begins with an internal control questionnaire.
TRUE

Question 39

The requirement that supplier invoices in the accounts payable register be matched with purchase orders and receiving reports is an example that satisfies the “accounting and posting” internal control objective for purchases.

Answer 39

The requirement that supplier invoices in the accounts payable register be matched with purchase orders and receiving reports is an example that satisfies the “accounting and posting” internal control objective for purchases.
FALSE

Question 40

The accounts payable trial balance should not include vendors with nonzero balances.

Answer 40

The accounts payable trial balance should not include vendors with nonzero balances.
FALSE

Question 41

The accounts payable trial balance is a list of payable amounts by vendor. This total should equal the control account total in the general ledger.

Answer 41

The accounts payable trial balance is a list of payable amounts by vendor. This total should equal the control account total in the general ledger.
TRUE

Question 42

Comparing the results of a physical inventory count to the perpetual inventory records is considered a part of the recording function.

Answer 42

Comparing the results of a physical inventory count to the perpetual inventory records is considered a part of the recording function.
FALSE

Question 43

A credit balance in a client’s inventory records would suggest failure to record purchases.

Answer 43

A credit balance in a client’s inventory records would suggest failure to record purchases.
TRUE

Question 44

Limiting access to blank documents, such as purchase orders, is part of the custody duty in the acquisition and expenditure cycle.

Answer 44

Limiting access to blank documents, such as purchase orders, is part of the custody duty in the acquisition and expenditure cycle.
TRUE

Question 45

Employees in the receiving department should inspect materials received as to quality and quantity and prepare a receiving report.

Answer 45

Employees in the receiving department should inspect materials received as to quality and quantity and prepare a receiving report.
TRUE