Chapter 4 Set 2

Question 1

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

Answer 1

The auditor is able to detect liabilities not recorded at year-end by comparing cash payments made after the balance sheet date to the related receiving reports and vendor invoices; any payments made on transactions dated before year-end reflect a liability that should have been recorded.

Question 2

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to?

Answer 2

In general, an audit procedure can be restated as the question to be answered. In this case, tracing a sample of purchase orders and related receiving reports to the purchases journal and the cash disbursements journal seeks to answer the question, “Were all purchases properly recorded?” (the completeness assertion).

Question 3

Which of the following internal control activities is not usually performed in the vouchers payable department?

Answer 3

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.

Question 4

Under properly designed internal control, the same employee most likely would match vendors’ invoices with receiving reports and also?

Answer 4

Matching vendor’s invoices with receiving reports provides authorization for payment and is generally performed in the accounts payable department. Recalculation of vendor invoices is compatible with this authorization function.

Question 5

The objective of auditing procedures applied to segment information is to provide the auditor with a reasonable basis for concluding whether?

Answer 5

The auditor’s objective is to provide a reasonable basis for concluding whether segment information is presented in conformity with GAAP.

Question 6

To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the:

Answer 6

Shipping documents provide evidence that 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 7

Which of the following events occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit?

Answer 7

Vouchers should be approved before payment occurs. Overriding this control to expedite payment may result in unauthorized payments being made. The auditor would need to consider this change in evaluating current controls and determining the nature, timing, and extent of testing.

Question 8

Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that:

Answer 8

Tracing from invoices to shipping documents would provide evidence that sales billed to customers were actually shipped. An invoice for which the corresponding shipping documents could not be located might be indicative of fictitious sales (i.e., sales that were recorded but never actually shipped).

Question 9

An auditor observes the mailing of monthly statements to a client’s customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management’s financial statement assertions of:

Answer 9

In testing the existence or occurrence assertion, the auditor is concerned that fictitious or overstated receivables may have been recorded. Observing the mailing of monthly statements and reviewing evidence of follow-up on errors reported by customers provides evidence that procedures are in place to identify and correct such errors.

Question 10

After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management’s financial statement assertion(s) of:

Answer 10

By ensuring that credit approval is obtained before goods are shipped to customers, the auditor is testing management’s assertion that accounts receivable are collectible (allocation and valuation). Ensuring that credit approval is obtained before goods are shipped does not support the rights and obligations assertion.

Question 11

An auditor’s tests of controls for completeness for the revenue cycle usually include determining whether:

Answer 11

The auditor often traces a sample of shipping documents to sales invoices to test completeness of sales.

Question 12

An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting?

Answer 12

Examination of accounts receivable and cash receipts provides the auditor with evidence with respect to both the completeness and the occurrence of sales transactions, thus limiting the need to test sales transactions.

Question 13

Who controls the mailing of independent confirmations?

Answer 13

The auditor should control the mailing of independent confirmations

Question 14

If the objective of an auditor’s test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the:

Answer 14

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 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 15

In performing a count of negotiable securities, an auditor records the details of the count on a security count worksheet. What other information is usually included on this worksheet?

Answer 15

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 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 16

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs:

Answer 16

Since control risk is assessed at a low level, tests of controls would be required to 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 17

In determining the effectiveness of an entity’s internal controls relating to the occurrence assertion for payroll transactions, an auditor most likely would inquire about and:

Answer 17

The occurrence assertion as it relates to payroll transactions would correspond to an audit objective to determine that 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 18

A weakness in internal control over recording retirements of equipment may cause an auditor to:

Answer 18

Testing to see whether equipment listed in the accounting records is physically present in the plant and still in service is an effective way to test whether unrecorded disposals occurred.

Question 19

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts?

Answer 19

A debit to accumulated depreciation decreases the balance in that account. The retirement of plant assets necessitates the removal (decrease) of accumulated depreciation related to the retired asset by debiting accumulated depreciation.

Question 20

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would:

Answer 20

When using positive confirmation requests, the auditor should generally follow up with a second and sometimes third request to those parties from whom replies have not been received. In addition, asking the client to contact its customers may encourage further responses.