AUDIT a4 Flashcards
MCQ-02826
The primary evidence regarding year-end cash balances in the financial statements is
documented in the:
A. Interbank transfer schedule.
B. Standard bank confirmations.
C. Bank reconciliations.
D. Bank deposit lead schedule.
Choice “C” is correct. 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.
Choice “A” is incorrect. The interbank transfer schedule provides evidence about bank
transfers over a period of time. It is used to detect kiting, not to support the year-end
cash balance.
Choice “B” is incorrect. The standard bank confirmation does not provide evidence
about certain transactions that are necessary to compute the cash balance, such as
deposits in transit and outstanding checks.
Choice “D” is incorrect. A “cash lead schedule” is a schedule that summarizes all the
various balances that comprise cash. It is created by the auditor and is not, in and of
itself, evidence supporting cash.
An auditor is in the process of performing substantive procedures on a client’s accounts
payable. In order to test the existence and occurrence assertion, the auditor would most likely perform which of the following auditing procedures?
A. Review a sample of voucher packages for the presence of a purchase requisition or receiving report to determine accounts payable ownership.
B. Vouch selected amounts from the accounts payable listing to the client’s voucher packages.
C. Select cash disbursements made subsequent to year-end and examine supporting documentation to determine if applicable to the prior balance sheet date.
D. Select a sample of vendor statements and agree amounts to the vendor account.
Choice “B” is correct. By vouching selected amounts from the accounts payable listing to the voucher packages, the auditor would be testing the existence and occurrence assertion.
Choice “A” is incorrect. This audit procedure would be used to test the rights and
obligations assertion.
Choice “C” is incorrect. This audit procedure would be used to test the completeness
assertion. Specifically, the procedure is searching for unrecorded liabilities.
Choice “D” is incorrect. This audit procedure would be used to test the completeness
assertion or the valuation, allocation, and accuracy assertion.
To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would:
A. Inspect the stock certificates evidencing the investment.
B. Review the broker’s advice or canceled check for the investment’s acquisition.
C. Examine the audited financial statements of the investee company.
D. Obtain market quotations from financial newspapers or periodicals.
Choice “C” is correct. To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would examine the audited
financial statements of the investee company, including performing recalculations of prorata share of income/loss.
Choices “A” and “B” are incorrect. Inspecting the stock certificates evidencing theinvestment or reviewing the broker’s advice or canceled check for the investment’s
acquisition are procedures that satisfy the existence assertion, not the valuation assertion.
Choice “D” is incorrect. Obtaining market quotations from financial newspapers or periodicals would satisfy the valuation assertion for an investment accounted for by the
cost method.
In searching for unrecorded liabilities, an auditor most likely would examine the:
A. Receiving reports for items received before year-end, but not yet recorded.
B. Cutoff bank statement for deposits recorded in the books, but not by the bank.
C. Details of accounts receivable confirmations that are classified as “exceptions.”
D. Files of purchase requisitions for items ordered just before the year-end
Choice “A” is correct. In searching for unrecorded liabilities, an auditor most likely
would examine the receiving reports for items received before year-end, but not yet
recorded.
Choice “B” is incorrect. An examination of a cutoff bank statement for deposits
recorded in the books, but not by the bank, is performed to search for overstatement of
cash due to kiting. The search for unrecorded liabilities does not include procedures
related to deposits recorded in the books. The search for unrecorded liabilities includes
looking at cash disbursements after year-end.
Choice “C” is incorrect. Exceptions on accounts receivable confirmations most likely
relate to the accounts receivable and sales accounts rather than unrecorded liabilities.
Choice “D” is incorrect. Of the answer choices, examining the file of purchase
requisitions for items ordered just before year-end is not the best procedure to perform
to search for unrecorded liabilities because it may not represent a liability as of yearend. For example, an item may have been ordered but not yet shipped from the vendor
as of year-end.
Which of the following would not be a procedure used to test the valuation, allocation, and
accuracy assertion of inventory?
A. Inquiring about consigned inventory.
B. Performing inventory price tests for a sample of inventory items.
C. Inquiring about obsolete or damaged goods.
D. Examining vendor invoices.
Choice “A” is correct. Inquiring about consigned inventory would be a procedure used
to test for the completeness assertion.
Choice “B” is incorrect. Performing inventory price tests would help to ensure that the
inventory was properly valued at the correct price.
Choice “C” is incorrect. Inquiring about damaged goods or obsolete inventory would
assist the auditor in testing for the proper valuation of the inventory. If there were any
inventory items that were damaged or obsolete, their value should be reduced to reflect
the obsolescence.
Choice “D” is incorrect. Examining vendor invoices would help to identify the proper
valuation of the inventory, as inventory should be initially reported at its cost.
n confirming with an outside agent, such as a financial institution, that the agent is holding
investment securities in the client’s name, an auditor most likely gathers evidence in
support of management’s financial statement assertions of existence and:
A. Valuation and allocation.
B. Understandability of presentation and classification.
C. Rights and obligations.
D. Completeness.
Choice “C” is correct. A confirmation from an outside agent indicating that securities are being held in the client’s name provides evidence with respect to both the existence
assertion and the rights and obligations assertion.
Choice “A” is incorrect. The valuation and allocation assertion for securities is generally
tested by reference to an outside source of price information such as the Wall Street
Journal.
Choice “B” is incorrect. Confirmations do not provide evidence regarding
understandability of presentation and classification.
Choice “D” is incorrect. In order to test the completeness assertion with confirmations,
the auditor would need to select from all possible agents rather than only agents that
currently hold securities. This is not an efficient or likely option.
MCQ-02640
Which of the following internal control activities is not usually performed in the vouchers payable department?
A. Indicating the asset and expense accounts to be debited.
B. Matching the vendor’s invoice with the related receiving report.
C. Approving vouchers for payment by having an authorized employee sign the
vouchers.
D. Accounting for unused prenumbered purchase orders and receiving reports.
Choice “D” is correct. Accounting for unused prenumbered purchase orders and receiving reports is an effective control, but it would not typically be performed in the vouchers payable department.
Choice “A” is incorrect. Indicating the asset and expense accounts to be debited is not
an internal control procedure.
Choice “B” is incorrect. Reconciling the vendor invoice with the related receiving report
is typically performed by a vouchers payable clerk.
Choice “C” is incorrect. The vouchers payable department is responsible for approving
vouchers for payment.
