Audit Section 3

Question 1

An example of an entity being expected to accrue a loss contingency for the period under audit is

Answer 1

Legal counsel communicated that an unfavorable judgment from current litigation was reasonably possible. (Example of a recognized subsequent event)

Question 2

When there is a material loss affects the audit report and there are creditors relying on the financial statements, the client properly should adjust the financial statements. Since they are refusing to do so, the auditor would most likely

Answer 2

notify the board of directors of the situation in an attempt to encourage the adjustment.

Question 3

When an auditor issues a report that is dual dated for a subsequent event occurring after the original date of the auditor’s report, but before issuance of the related financial statements, the auditor’s responsibility for events occurring subsequent to the original report date is

Answer 3

limited to the specific event referenced.

Question 4

When facts are discovered after issuing an auditor’s report that would have caused the auditor to revise the report, the auditor should discuss the matter with

Answer 4

management and, if it is determined that the financial statements need revision, ask how management intends to address the matter in the financial statements.

Question 5

When subsequently discovered information is found both to be reliable and to have existed at the date of the auditor’s report, the auditor should

Answer 5

determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.

Question 6

Long-term debt that matures within one year is reported as a

Answer 6

current liability on the balance sheet. An auditor reviews changes in long-term debt occurring after year-end to evaluate whether such debt is appropriately classified on the balance sheet.

Question 7

What would an auditor most likely perform in obtaining evidence about subsequent events

Answer 7

Investigate changes in long-term debt occurring after year-end

Question 8

Since the auditor’s report was newly dated as of April 11, Year 4, the auditor is responsible for subsequent events until that date. The period between the date of the financial statements and the date of the auditor’s report is the subsequent period, during which the auditor is responsible for

Answer 8

investigating certain subsequent events

Question 9

DUAL DATE is

Answer 9

when a major event comes to the auditor’s attention between the report date and issuance of the report; the financial statements may include the event as an adjustment or disclosure.

Question 10

An auditor tests accounting records by using

Answer 10

analytical procedures and substantive procedures.

Question 11

Accounting records consist of records of initial

Answer 11

journal entries and any supporting records.

Question 12

Internal consistency among a client’s accounting records provides

Answer 12

limited evidence that the financial statements are fairly presented.

Question 13

A client’s accounting records are

Answer 13

not sufficient support for an audit opinion. The auditor must test the accuracy of the accounting records by performing analytical procedures and substantive procedures.

Question 14

When confirmations are sent out by the auditor and received back directly, this represents a form of

Answer 14

external evidence. While external evidence is considered the second most reliable evidence, an auditor’s direct personal knowledge (obtained through examination, re-computation, inspection, and observation) is the most reliable form of evidence.

Question 15

PCAOB standards state that the relevance of audit evidences depends on

Answer 15

A. Whether the audit procedure is designed to directly test an assertion.
B. Whether the audit procedure is designed to test for an understatement or overstatement.
C. The timing of the audit procedure.

Question 16

The auditor’s risk assessment affects

Answer 16

the nature, extent, and timing of audit procedures, but does not determine the relevance of audit evidence.

Question 17

In order to obtain a reasonable basis for an audit opinion regarding the fairness of the client’s financial statements, the auditor should usually obtain and rely on evidence that is:

Answer 17

Persuasive because it is usually not possible or practical to obtain assurance beyond all doubt (100% of accounting data tested), the auditor should usually rely on audit evidence that is persuasive. Persuasiveness is a subjective concept, and is unique to each audit.

Question 18

An auditor is in the process of gathering evidence during the current audit. Which of the following would not be considered corroborating evidence?

Answer 18

Sales invoices if an auditor reviews a client’s invoices, he or she would be examining the underlying accounting records of the client. Other underlying accounting records the auditor may review include contracts, ledgers, worksheets, checks, and journal entries.

Question 19

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods

Answer 19

Provide an objective basis for quantitatively evaluating sample risk. By using statistical sampling, the auditor can quantify sampling risk to assist in limiting it to a level considered acceptable.

Question 20

The auditor decided to increase the level of the preliminary assessment of control risk because

Answer 20

the 7% tolerable rate (maximum rate of deviations that an auditor would be willing to accept without altering his/her planned reliance on the control) was less than the 8% upper deviation rate.

Question 21

The risk of incorrect acceptance is an aspect of sampling risk that the auditor considers when

Answer 21

designing an audit procedure where sampling is used. This is considered before any potential misstatement is identified.

Question 22

Qualitative factor that an auditor of a nonissuer may consider relevant when evaluating whether misstatements are material

Answer 22

A. The potential effect of the misstatement on the entity’s compliance with a contractual agreement.
B. The significance of the financial statement element affected by the misstatement.
C. The masking effect of the misstatement on a change in earnings in the context of industry conditions.

Question 23

If the actual deviation rate in the population exceeds the maximum deviation rate based on the sample, control risk will be

Answer 23

understated, because the control will be less effective than sample results would indicate.

Question 24

The missing invoice should be counted as a deviation, resulting in a 2% sample deviation rate.
However, this information alone is not sufficient to determine whether the control can be relied upon. The auditor would also need to know the

Answer 24

upper deviation rate or the allowance for sampling risk, which would allow the auditor to calculate the upper deviation rate). It is the upper deviation rate that needs to be compared to the tolerable rate in making decisions.

Question 25

An auditor who uses statistical sampling for attributes in testing controls should reduce the planned reliance on a prescribed control when the:

Answer 25

Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.

Question 26

Nonsampling risk includes all aspects of audit risk that are not due to sampling. Examples of nonsampling risk include

Answer 26

The auditor selecting inappropriate auditing procedures, using inappropriate audit evidence, and failure by the auditor to recognize misstatements in documents examined.

Question 27

Stratified mean per unit (MPU) sampling is statical technique that mat be more efficient than unstratified MPU because it usually

Answer 27

produces an estimate having a desired level of precision with a smaller sample size

Question 28

Probability Proportional Size (PPS) sampling, also known as dollar unit sampling is

Answer 28

The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan bc the inputs can be tolerable misstatements

Question 29

The expected rate of deviation of the population to be tested is

Answer 29

one of the items the auditor considers when planning an audit sample for tests of controls.

Question 30

When an auditor of a nonissuer uses statistical sampling techniques to perform a test of controls related to an assertion, factors that influence the sample size include

Answer 30

The expected rate of deviation of the population to be tested.

Question 31

When testing a sample of an audit clients bank reconciliations during the year under audit, an auditor notices that several immaterial deposits in transit did not clear the bank in a timely manner

Answer 31

The auditor should consider the implications for the integrity of management or employees and the possible effect on the other aspects of the audit

Question 32

The asset can not be tolerated if the projected error is

Answer 32

higher than the tolerable misstatement

Question 33

The auditor selected a sample of every twentieth item. The overstatement is $3,700 and the understatement is $200.

Answer 33

1. (1/20) = .05
2. 3,700 - 200 =3,500
3. 3,500 / .05 = 70,000

Question 34

After identification of misstatements in the sample, the next step is to

Answer 34

be project the detected error to the entire population

Question 35

An auditor randomly samples 50 out of 1,000 items and discovers an overstatement of $3,000. What is the projected misstatement for the entire population?

Answer 35

1. (50 / 1,000) = 5%
2. (3,000 / .05) = 60,000

Question 36

An inner join uses only the records that

Answer 36

both data sets have in common. Therefore is there is any matching records in two data sets thats the answer.

Question 37

Scatter plot allows

Answer 37

for the auditor to graphically show the relationship among variables. They allow for the regression lines to be added to show the direction and strength of correlation

Question 38

Descriptive Analytics

Answer 38

describes what happened within the data. Aging the accounts receivable data would summarize and describe the data.

Question 39

Diagnostic Analytics

Answer 39

explained why something happened.

Question 40

Predictive Analytics

Answer 40

provide expected or predicted outcomes based on historical data.

Question 41

Prescriptive Analytics

Answer 41

prescribe or recommend actions to be taken based on advanced analytics to reach a desired goal

Question 42

Verifying assertions of accuracy and occurrence for all material transactions

Answer 42

are tested as part of substantive procedures

Question 43

An auditor may apply audit data analytics (ADAs) when concluding an audit if

Answer 43

1) The auditor will have a deeper knowledge of the entity being audited and may reperform tests done in the risk assessment process
2) To gain comfort that no material misstatements went unidentified during the audit
3) To update existing analytics with numbers that were revised during the audit

Question 44

Unstructured data is

Answer 44

social media posts because it is not organized and has a variety of data formats and types including texts, numbers, images, audio and video

Question 45

When utilizing a graph

Answer 45

scaling is an appropriate consideration to avoid misinterpretation of differences

Question 46

Data obtained through verbal interviews with fixed asset manager is considered

Answer 46

more reliable than data provided by client because data obtained directly by auditor is more reliable

Question 47

An auditor is confirming accounts receivable using positive confirmations. The auditor decides to leave the accounts receivable amount blank rather than stating the amount owed. The auditor should be aware that the blank form may be less efficient because

Answer 47

Blank forms may result in lower response rates because a greater effort is required for response.

Question 48

Sales personnel will have a tendency to maximize sales volume by selling to customers that may not be creditworthy, thereby resulting in

Answer 48

high bad debt write-offs. To prevent sales to customers that may not be creditworthy, employees involved in the credit-granting function are separated from the sales function.

Question 49

Controls most likely would help ensure that all credit sales transactions of an entity are recorded

Answer 49

The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

Question 50

Shipping documents provide evidence that

Answer 50

a sale occurred, and therefore selecting from a population of shipping documents allows the auditor to test whether corresponding invoices exist for each sale.

Question 51

Preparing invoices and recording the related receivables are both recordkeeping functions that

Answer 51

would not be inconsistent with each other.

Question 52

An accounting clerk receives customer payments and records the resulting reduction in accounts receivable.

Answer 52

This would allow the clerk to misappropriate cash while still reducing the receivable, such as in a lapping scheme.

Question 53

The cashier performs the monthly bank reconciliation.

Answer 53

The purpose of a bank reconciliation is to uncover unexplained discrepancies between the bank balance and the cash on hand. If the reconciliation is not performed by someone independent, the cashier may be able to misappropriate cash and conceal the theft.

Question 54

The purchasing manager approves vendor invoices for payment.

Answer 54

This would allow the purchasing manager to purchase and pay for unauthorized goods with little oversight from others.

Question 55

The cash receipts clerk should not have both

Answer 55

record keeping responsibilities and custody of assets.

Question 56

Preparing payroll checks and preparing the payroll register are both

Answer 56

recordkeeping responsibilities, so there is no violation of the concept of segregation of duties. Remember, until the checks are actually signed, they do not represent assets.

Question 57

The accounts payable clerk should have access to the

Answer 57

purchase order, the receiving report, and the vendor invoice, in order to compare the three and determine whether the invoice is appropriate for payment.

Question 58

Detecting a possible understatement in sales is tantamount to testing completeness (i.e., if an understatement is found, sales are not complete). To test completeness, one needs to start with

Answer 58

supporting documentation, such as shipping documents, and trace forward to recording in the accounting records, such as the sales invoices and sales journal. Should the auditor find a shipping document for which there is no entry in the sales journal, an understatement error (or a completeness problem) will have been discovered.

Question 59

Sound internal control dictates that, immediately upon receiving checks from customers by mail, a responsible employee should:

Answer 59

Prepare a duplicate listing of checks received. Upon receipt of cash, a remittance listing should be prepared.

Question 60

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity’s aging of receivables to support the assertion of

Answer 60

valuation and allocation (i.e., to determine whether the allowance for doubtful accounts properly adjusts the receivables balance to net realizable value).

Question 61

Evaluating the adequacy of the allowance for doubtful accounts does not pertain to existence. To support the assertion of existence, an auditor would most likely

Answer 61

confirm accounts receivable

Question 62

completeness assertion

Answer 62

An auditor would trace from shipping records to the sales journal and the accounts receivable ledger to determine if all shipments were properly recorded as sales

Question 63

The assertion of rights and obligations relating to accounts receivable would be supported by examining appropriate

Answer 63

supporting documentation, not by evaluating the allowance for doubtful accounts.

Question 64

The completeness assertion is most closely related

Answer 64

to the completeness audit objective that verifies all sales have been recorded.

Question 65

The occurrence assertion is most closely related to

Answer 65

the occurrence audit objective that verifies sales are valid

Question 66

The accuracy assertion is most closely related to the

Answer 66

accuracy audit objective that verifies sales are properly valued.

Question 67

The cutoff assertion is most closely related to the

Answer 67

timing audit objective that verifies sales are recorded in the correct accounting period.

Question 68

Assertions about valuation and allocation deal with

Answer 68

whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts, and any resulting valuation adjustments are appropriately recorded. For example, management asserts that trade accounts receivable included in the balance sheet are stated at net realizable value.

Question 69

Assertions about understandability of presentation and classification deal with whether

Answer 69

financial information is appropriately presented and described, and disclosures are clearly expressed. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion.

Question 70

Assertions about existence deal with whether

Answer 70

assets, liabilities, and equity interest of the entity exist at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion.

Question 71

Assertions about rights and obligations deal with

Answer 71

whether assets are the rights of the entity and liabilities are the obligations of the entity at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion.

Question 72

Cutoff tests are designed to determine whether transactions have

Answer 72

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 73

In recording fictitious sales, the client will likely have created

Answer 73

phony sales invoices, but no related shipment will have occurred.

Question 74

A purchase order number is

Answer 74

unlikely to be used in an audit data analytic procedure related to the revenue cycle. A purchase order number is more likely to be used in an audit data analytic procedure related to the expenditure cycle.

Question 75

Sending confirmations to customers is the most appropriate audit procedure to test

Answer 75

the existence of accounts receivable.

Question 76

E-mail responses to requests for confirmations of accounts receivable present a problem to the auditor, since the

Answer 76

sender might not be as requested and the content might be altered. To reduce these risks, the auditor should request the senders to mail the original forms to the auditor.

Question 77

Could improve the response rate of the confirmations of accounts receivable

Answer 77

Include a list of items or invoices that constitute the customers’ account balances. (Trying to make it easier for them to respond)

Question 78

Confirmation responses received electronically should be

Answer 78

verified by calling the sender. It is possible for such responses to look like they came from the respondent when in fact they were actually generated by another party, such as the client.

Question 79

Confirmations are not required if

Answer 79

the balance of receivables is immaterial.

Question 80

What would be an appropriate alternative procedure when responses are not received.

Answer 80

Verification of subsequent cash receipts provides excellent evidence about year-end receivables

Question 81

Negative confirmations only request a response when

Answer 81

the amount stated is incorrect, so there would be no need to perform additional procedures in this case.

Question 82

In auditing accounts receivable the negative form of confirmation request most likely would be used when

Answer 82

The combined assessed level of inherent and control risk relative to accounts receivable is low.

Question 83

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because

Answer 83

The auditor cannot infer that all nonrespondents have verified their account information.

Question 84

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

Answer 84

Rights and obligations (does the client have a right to the receivable) and existence (does the receivable really exist)

Question 85

Because of the significant discrepancies on past confirmations, the auditor would most likely choose to use

Answer 85

individual invoices there should be fewer discrepancies than confirmations sent out to customers in years past.

Question 86

The auditor should perform alternative procedures on the confirmation selected since the client has a valid reason for requesting that the confirmation not be confirmed. An acceptable alternative procedure for accounts receivable confirmations is

Answer 86

verifying account balance by inspecting the client’s bank statements and cash receipt records.

Question 87

The auditor would only increase detection risk in response to

Answer 87

a decrease in inherent and/or control risks, which is not the case here. Additionally, confirmation relates to the existence assertion, not the valuation assertion.

Question 88

Confirmation of accounts receivable confirm the existence of the receivable. A lower than expected response rate could be indicative

Answer 88

of fictitious customer accounts.

Question 89

Procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests

Answer 89

Inspect the shipping records documenting the merchandise sold to the debtors.

Question 90

When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the

Answer 90

Debit memo to ensure that the accounts payable balance is reduced appropriately.

Question 91

Controls should prevent an invoice for the purchase of merchandise from being paid twice

Answer 91

The check signer reviews and cancels the voucher packets.

Question 92

Clerk 3 posts entered vendor invoices to the accounts payable ledger for payment and mails checks.

Answer 92

This indicates a weakness in internal control as the accounts payable clerk has both the record keeping and custody functions. To mitigate this control weakness, clerk 3 can have responsibility for posting invoices to the ledger, but the Treasurer should be the person that mails the checks, which is part of the custody function.

Question 93

To provide assurance that each voucher is submitted and paid only once, an auditor should

Answer 93

verify that each voucher was stamped “paid” by the check signer.

Question 94

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because

Answer 94

There is likely to be other reliable external evidence available to support the balances.

Question 95

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

Answer 95

Completeness, 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 96

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables

Answer 96

compare cash payments occurring after the balance sheet date with the accounts payable trial balance to determine that disbursements that pertain to the prior year’s business (year under audit) have been properly accrued. This procedure is commonly known as an “out-of-period-search.”

Question 97

Performing a search for unrecorded payables, an auditor most likely would examine

Answer 97

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

Question 98

Procedures would an auditor most likely perform in searching for unrecorded payables

Answer 98

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

Question 99

Auditor most likely perform in searching for unrecorded liabilities

Answer 99

Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.

Question 100

When testing the completeness assertion for accounts payable, the appropriate population would be

Answer 100

a list of vendors with whom the entity has previously done business.

Question 101

Inventory is relatively

Answer 101

predictable with respect to amount, composition and relative significance.

Question 102

Accounts payable is relatively

Answer 102

difficult to predict because it may fluctuate at management’s discretion.

Question 103

During planning, the auditor is required to obtain an understanding of the entity and its environment, including

Answer 103

its internal control, and to assess risk. Such preliminary planning is often conducted prior to the balance sheet date.

Question 104

Audit testing at interim dates may permit early consideration of significant matters affecting the year-end financial statements

Answer 104

such as the identification of related parties.

Question 105

Procedures would best detect a liability omission by management

Answer 105

Review purchase contracts and other legal documents. (for example, an obligation to make a certain purchase, or a document evidencing a lawsuit).

Question 106

If employee is destroying the invoices and related vouchers, the most obvious documentation remaining would be

Answer 106

the file of all cash disbursements. The auditor would select items from this file and then attempt to trace from specific cash disbursements to the related invoices and approved vouchers. Missing documentation might be indicative of fraud.

Question 107

Internal control activities usually performed in the vouchers payable department

Answer 107

A. Matching the vendor’s invoice with the related receiving report.
B. Approving vouchers for payment by having an authorized employee sign the vouchers.
C. Indicating the asset and expense accounts to be debited.

Question 108

Mailing disbursement checks and remittance advices should be controlled by the employee who

Answer 108

Signs the checks last

Question 109

Approved purchase order

Answer 109

The authority to accept incoming goods in receiving should be based on

Question 110

The purchasing department is responsible for

Answer 110

preparing the purchase order, the accounts payable department is responsible for matching documents, and the treasurer is responsible for making payment.

Question 111

For effective internal accounting control, the accounts payable department should compare the information on each vendor’s invoice with

Answer 111

Receiving report and the purchase order

Question 112

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

Answer 112

is to match the purchase order, receiving report, and vendor’s invoice for each voucher in the accounts payable department.

Question 113

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

Answer 113

The auditor should obtain bank cutoff statements that include transactions for 10 to 15 days after year-end. The outstanding checks and deposits in transit at year-end on the bank reconciliation should agree with the information in the bank cutoff statement.

Question 114

Which characteristics most likely would be indicative of check kiting

Answer 114

Low average balance compared to high level of deposits.

Question 115

Kiting occurs when a

Answer 115

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.

Question 116

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

Answer 116

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

Question 117

The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to:

Answer 117

Corroborate information regarding deposit and loan balances.

Question 118

The standard confirmation request seeks

Answer 118

information on contingent liabilities and security agreements in addition to information related to deposit account balances.

Question 119

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may:

Answer 119

Be unaware of all the financial relationships that the bank has with the client.

Question 120

The ________ should control the mailing of independent confirmations.

Answer 120

auditor

Question 121

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

Answer 121

Bank reconciliations

Question 122

An auditor generally tests the segregation of duties related to inventory by:

Answer 122

Personal inquiry and observation are auditing procedures commonly used to test segregation of duties.

Question 123

The control objective of verification of the existence of inventory is achieved when

Answer 123

reviewing and testing control procedures over the physical inventory count. In a physical inventory count, the auditor inspects the inventory to verify its existence and condition.

Question 124

An auditor reviews the overhead allocation to determine that

Answer 124

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 125

When an auditor selects items for test counts and traces the test counts to the client’s inventory listing

Answer 125

the auditor has obtained evidence concerning management’s assertion of completeness (All inventory on hand has been properly included in the physical listing.)

Question 126

In order to determine whether the actual inventory on hand is reflected in the ending inventory balance by the client, the auditor would test the

Answer 126

completeness of inventory. This is done in conjunction with inventory observation, through testing the physical inventory report by tracing test counts to the report to verify that reported inventory is complete.

Question 127

Examining an analysis of inventory turnover helps identify

Answer 127

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.

Question 128

Failure to record sales returns would result in

Answer 128

actual inventory quantities being greater than those recorded in the perpetual inventory records.

Question 129

Testing the entity’s computation of standard overhead rates generally provides assurance about a

Answer 129

client’s inventory valuation.

Question 130

In order to maintain accurate perpetual inventory records

Answer 130

periodic inventory counts should be used to adjust perpetual records

Question 131

The auditor should observe the physical inventory count of goods held in public warehouses if the inventory held therein is

Answer 131

significant; otherwise, confirmation of such inventory is sufficient.

Question 132

The directional test of tracing is generally used to

Answer 132

test completeness. In this case, tracing the inventory tags to the computerized list of inventory items is a test of the completeness of the inventory list.

Question 133

Testing the computation of standard overhead rates relates to the

Answer 133

accumulation of costs during the manufacturing process, and not to whether the inventory is slow-moving, defective, or obsolete after manufacture.

Question 134

Segregation of duties between customer invoicing and inventory valuation would be an effective control for

Answer 134

detecting misstatements of inventory item pricing schedules.

Question 135

what is an effective control to detect misstatements of inventory item pricing schedules

Answer 135

1) Comparison of sales invoices to price lists effective internal control activity
2) Comparison of groups of items to sales reports and subsequent investigation of unusual variances

Question 136

Performing cutoff procedures provides assurance that

Answer 136

goods in transit (shipped or received) are appropriately included or excluded from inventory and this procedure is most appropriate for testing the completeness assertion.

Question 137

Tracing from the inventory listing to the inventory tags and the auditor’s recorded count sheets verifies the

Answer 137

validity (existence) of the items.

Question 138

In addressing the adequacy of presentation and disclosure for inventory, the auditor should determine that

Answer 138

inventory-related obligations, such as inventory pledged under loan agreements, have been properly disclosed.

Question 139

In testing long-term investments, an auditor ordinarily would use

Answer 139

analytical procedures 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 140

An independent person comparing the contents of the safety deposit box with the recorded balances in the investment subsidiary ledger is

Answer 140

an effective control for assuring that the proper custody of assets in the investing cycle is maintained.

Question 141

The control most likely to be used by an entity in safeguarding against the loss of marketable securities is that an independent trust company that has no direct contact with the employees who have recordkeeping responsibilities, has possession of the securities. For good internal control over the safeguarding of any asset,

Answer 141

the individual who has the recordkeeping responsibilities over that asset should never have access to it.

Question 142

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

Answer 142

satisfying the completeness assertion related to long-term investments.

Question 143

After performing a count of negotiable securities, the auditor would generally obtain an acknowledgment from the client that the securities were returned intact. This helps maintain

Answer 143

accountability for the securities, and reduces the likelihood of employee misappropriation (e.g., if a client employee were to steal a security and blame the auditor).

Question 144

A confirmation from an outside agent indicating that securities are being held in the client’s name provides evidence

Answer 144

both the existence assertion and the rights and obligations assertion.

Question 145

Dividend income from investments is tested by referring to the

Answer 145

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 146

Confirmations should be requested from the

Answer 146

custodian for securities that are in the possession of third parties.

Question 147

An auditor should verify the valuation of marketable securities at the balance sheet date by

Answer 147

comparing the prices of the securities with published closing prices at the balance sheet date.

Question 148

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

Answer 148

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

Question 149

Electronically accessing the details of dividend records on the Internet is an efficient means of

Answer 149

verifying dividend rates for multiple investments in a short amount of time.

Question 150

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 from the equity method investment if

Answer 150

amortization is calculated incorrectly (i.e., the amortization is too high), this could lower the return on the investment.

Question 151

If the quotation to support a fair value estimate is from the broker who initially sold the instrument, the evidence might be less objective and might need supplementation. The broker may be

Answer 151

biased because the broker sold it to the entity and may overstate the value of the instrument.)

Question 152

The best evidence of fair value pertaining to a client’s investments in derivative instruments that are listed on a national exchange and disclosed at fair value is

Answer 152

to verify the quoted market values on that exchange.

Question 153

The auditor would consider subsequent events and transactions occurring before

Answer 153

the completion of the audit, not after. The auditor is not responsible for predicting the future, and would not be expected to evaluate the effect of conditions arising subsequent to the audit, that, if known at the time of the audit, might have affected fair value measurements and disclosures.

Question 154

In auditing investments in securities and derivatives, the auditor must assess the

Answer 154

reasonableness and appropriateness of assumptions, market variables, and valuation models. In order to do this, the auditor must consider whether the substance of transactions or events differs materially from their form. Remember that generally accepted accounting principles require transactions and events to be reported in accordance with their economic substance, even if this differs from their form.

Question 155

Generally accepted accounting principles specify that, in order to qualify for hedge treatment, the entity must demonstrate and disclose

Answer 155

a number of transaction features including risk exposure. The auditor would therefore need to examine the contracts to evaluate the character of the hedge and the degree to which losses should be recognized in the determination of income, as well as the character of any disclosures.

Question 156

In a search for unrecorded disposals, the auditor would

Answer 156

vouch a sample of assets on the property ledger to those on hand in the client’s facility.

Question 157

Comparing interest expense with the bond payable amount for reasonableness provides evidence that

Answer 157

all interest expense was included and that the outstanding balance of the bonds payable is reasonable, as well as providing limited evidence concerning the amortization of bond discounts or premiums.

Question 158

Completeness is the assertion supported by the auditor tracing

Answer 158

the serial numbers on equipment (source) to a nonissuer’s sub-ledger (book).

Question 159

Since control risk is assessed at a low level, tests of controls would be required to

Answer 159

evaluate the effectiveness of the internal controls to support that assessed level. Assuming controls are operating effectively, only limited substantive testing would be performed.

Question 160

Questions relating to access controls for assets would not normally be a part of a

Answer 160

questionnaire related to controls over the initiation and execution of equipment purchases.

Question 161

Investigation of variances in a formal budget might show

Answer 161

maintenance costs over budget or acquisition costs under budget, either of which would trigger an investigation.

Question 162

Determining that proper amounts of depreciation are

Answer 162

expensed provides assurance with regard to valuation and allocation related to the asset, and accuracy in terms of financial statement presentation.

Question 163

Analysis of repairs and maintenance expense provides

Answer 163

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

Question 164

What is an example of obtaining evidence concerning management’s assertion of existence.

Answer 164

By examining the assets listed as new additions on an analysis of plant and equipment, an auditor

Question 165

The explanation that plant assets were retired during the year would most likely satisfy an auditor who questions management about

Answer 165

significant debits to accumulated depreciation accounts made during the year. The journal entry to retire an asset includes a debit to accumulated depreciation and a credit to the asset account.

Question 166

In order to obtain evidence about fixed asset additions, an auditor would most likely inspect

Answer 166

documents (e.g., purchase invoices) and physically examine the new assets.

Question 167

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

Answer 167

unrecorded retirements.

Question 168

If an auditor discovers that the original insurance policy on plant equipment is not available for inspection, this most likely indicates that there is

Answer 168

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

Question 169

The purpose of segregating the duties of hiring personnel (personnel department/human resources) and distributing payroll checks (treasurer’s department) is to separate

Answer 169

the authorization of transactions (hiring, pay rates, etc. are authorized by the personnel department/human resources) from the custody of related assets (cash or checks are held in the treasurer’s department)

Question 170

The occurrence assertion as it relates to payroll transactions would correspond to an audit objective to determine that

Answer 170

payroll transactions actually occurred (i.e., that all payroll checks were issued to valid employees for hours actually worked). Segregation of duties between personnel and payroll departments is an important control to ensure that only valid employees receive paychecks.

Question 171

The use of time tickets to record actual labor worked on production orders is the best way to

Answer 171

prevent direct labor from being charged to manufacturing overhead.

Question 172

A direct supervisor’s approval of the time cards most effectively ensures that payment is paid for

Answer 172

work performed as the supervisor observes the employees and determines whether employees are present and working.

Question 173

An auditor most likely would perform substantive tests of details on payroll transactions and balances

Answer 173

when analytical procedures indicate unusual fluctuations in recurring payroll entries.

Question 174

If the control risk is assessed as low

Answer 174

less substantive testing is necessary. In such an instance, substantive testing would normally be limited to analytical procedures and recalculating year-end accruals.

Question 175

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

Answer 175

trace the transactions to approval by the board of directors.

Question 176

An internal control questionnaire for notes payable would likely ask if

Answer 176

direct borrowings on notes payable are authorized by the board of directors.

Question 177

An auditor’s purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain

Answer 177

evidence concerning management’s assertions about understandability of presentation and classification (i.e., classification of the note as current or noncurrent).

Question 178

Examination of bond trust indentures should be included in audit program of

Answer 178

long-term debt to assure that the client was not in violation of any covenants in the indentures.

Question 179

The auditor should trace corporate stock issuances and treasury stock transactions to the

Answer 179

minutes of the board of directors to make sure they were authorized.

Question 180

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

Answer 180

shares authorized, issued, and outstanding, as well as to provide evidence of the individual transactions.

Question 181

Quantitative data is

Answer 181

numbers-based, countable, or measurable.

Question 182

Qualitative data is

Answer 182

interpretation-based, descriptive, and relating to language

Question 183

According to PCAOB standards which statement does not reflect a qualitative standard that should be considered when evaluating the MATERALITY of an uncorrected misstatement

Answer 183

The dollar amount of the error.

Question 184

The auditor should document the errors in the summary of

Answer 184

uncorrected errors, and document the conclusion that the errors do not cause the financial statements to be misstated.

Question 185

When determining whether uncorrected misstatements are material, individually or in the aggregate, an auditor of a nonissuer or issuer would consider each of the following

Answer 185

1) The particular circumstances of each misstatement.
2) The effect of uncorrected misstatements related to prior periods.
3) The size and nature of the misstatements.

Question 186

The misstatement of failing to disclose $45,000 of related party transactions is quantitatively immaterial because it is less than the overall materiality of $125,000. However, this misstatement is likely to be considered qualitatively material.

Answer 186

Related party transactions can occur at terms that are significantly different from those for transactions that occur at arm’s-length. Therefore, it is important that users of the financial statements be provided with information about related party transactions, even if the amount is less than materiality, as it helps represent the true picture of the company.

Question 187

The auditor prepares the summary of unadjusted differences. Management’s responses to inquiries cannot be verified by the auditor by merely taking their statements and filling out a summary sheet of misstatements.

Answer 187

Misstatements recorded on the summary should be supported by additional evidence (e.g., inspection of documents, observations). Inquiry alone is not sufficient.

Question 188

If liabilities are not recorded, then liabilities are

Answer 188

understated (i.e., the balance is not complete). The other side of the journal entry for accounts payable is typically expense. If expenses are not recorded, this means that income is overstated.

Question 189

Management should address written representations about a firm’s annual audit to

Answer 189

the auditor

Question 190

The date of the representation letter should typically be

Answer 190

the same as the audit report

Question 191

The auditor should consider the implications of an act of noncompliance with

Answer 191

laws and regulations in relation to other aspects of the audit, particularly the reliability of representations of management.

Question 192

The auditor might discuss with those charged with governance management’s

Answer 192

consultation with other accountants, but representations about such consultation are not required.

Question 193

“We disclosed to you all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements.” The foregoing passage is most likely from

Answer 193

information will be disclosed in a management (client) representation letter.

Question 194

Management acknowledges its responsibility for the

Answer 194

design of controls to detect and prevent fraud in its management representation letter.

Question 195

The representation letter should include

Answer 195

management’s belief that the effects of any uncorrected financial statement misstatements aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole.

Question 196

Specific written representations obtained by the auditor should include a statement that the

Answer 196

significant assumptions used by management in making accounting estimates are reasonable.

Question 197

The purpose of the management representation letter is to

Answer 197

confirm management’s oral evidence supplied during the engagement. Specific written representations obtained by the auditor might include acknowledgment that all compensating balances or other restrictions on cash have been disclosed.

Question 198

Conditions noted by the auditor that are significant deficiencies or material weaknesses should be reported in writing. Any report issued on such conditions should

Answer 198

(1) indicate that the purpose of the audit was to report on the financial statements and not to provide an opinion on internal control; (2) include the definition of a material weakness and, if applicable, significant deficiency; (3) include a restriction on use (i.e., the report is intended solely for the information and use of management, those charged with governance, etc.).

Question 199

If those charged with governance are not involved with managing the entity, the auditor should

Answer 199

communicate material, corrected misstatements brought to management’s attention as a result of the audit

Question 200

The auditor should communicate with

Answer 200

those charged with governance regarding the planned scope and timing of the audit.

Question 201

Deficiency in operation exists when

Answer 201

a properly designed control is either not executed as designed or the person performing the control does not have either the authority or the skill to perform the control. In this case, the clerk did not have the necessary authority to follow through on the control.

Question 202

If employees have the opportunity to change their time worked after their time cards are approved, this represents

Answer 202

a deficiency in the design of the control. The control design is deficient because it should not allow employees to change their time worked after their time cards have been approved.

Question 203

Because timely communication may be important, the auditor may choose to communicate

Answer 203

significant deficiencies during the course of the audit rather than after the audit is concluded.

Question 204

A material weakness is

Answer 204

a deficiency, or combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected/corrected.

Question 205

An auditor’s communication of internal control related matters noted in an audit usually should be addressed to

Answer 205

management and those charged with governance.

Question 206

A previously communicated significant deficiency that has not been corrected ordinarily should be communicated

Answer 206

again in writing, during the current audit

Question 207

The auditor is not required to

Answer 207

search for significant deficiencies (but any that are identified should be reported).

Question 208

The auditor may not report the absence

Answer 208

of significant deficiencies to those charged with governance or management.

Question 209

The report should state that the communication is

Answer 209

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

Question 210

The auditor should separately identify

Answer 210

significant deficiencies and material weaknesses

Question 211

A review of the interim financial information of a publicly held company is conducted in accordance

Answer 211

with РСАОВ standards

Question 212

The objective of a review of interim financial information is to provide the accountant, through

Answer 212

inquiries and analytical procedures, with a basis for reporting whether material modifications should be made to such information to conform with generally accepted accounting principles.

Question 213

Considering the results of audit procedures that have previously been performed and how they correspond to the current year’s financial statements is a step that may be performed during

Answer 213

the planning stage to update the accountant’s knowledge of the client.

Question 214

This statement would likely be found in an

Answer 214

engagement letter, not a management representation letter.

Question 215

Review requires inquiry of the client’s attorney regarding

Answer 215

litigation, claims, and assessments, although it may be appropriate in certain circumstances.

Question 216

A review report on the interim financial information of a publicly held company

Answer 216

does not provide an opinion on the financial statements.

Question 217

If the client refuses to accept the CPA’s suggestions, the CPA should

Answer 217

add a paragraph modifying the disclaimer to describe the nature and effect of the departure from GAAP.

Question 218

If a report on a review of interim financial information is presented in a registration statement, the prospectus should include a

Answer 218

statement that the report is not a “report” or “part” of the registration statement. The accountant should also read the other portions of the registration statement to ensure that his or her name is not used in a way that indicates greater responsibility than he or she intends.

Question 219

When an independent accountant’s report based on a review of interim financial information is presented in a registration statement, the prospectus should include a statement

Answer 219

clarifying that the accountant’s review report is not a “part” of the registration statement within the meaning of the Securities Act of 1933.

Question 220

An accountant may issue a review report on one financial statement, such as

Answer 220

a balance sheet, as long as the scope of the inquiry and analytical procedures has not been restricted.

Question 221

An accountant is not required to obtain an

Answer 221

understanding of internal control in a compilation and review engagement.