Final Exam

Question 1

Which of the following actions would best conceal the theft of cash collections from sales on account?

Answer 1

Understating the sales journal amounts.

Question 2

Which of the following is not a factor that an auditor would consider when assessing the inherent risk associated with client sales transactions?

Answer 2

The nature of the credit authorization process.
WOULD consider:
-Billings are made using the percentage-of-completion method of revenue recognition.
-Each sales transaction is individually negotiated with the customer.
-The conditions of the sale allow for a right of return or the right to modify the purchase agreement.

Question 3

Customers are more likely to complain to the client if which of the following assertions for cash receipts is violated?

Answer 3

Completeness.

Question 4

Which of the following would not be considered a test in the area of accounts receivable that relates to the existence assertion?

Answer 4

Trace the record of shipping to inclusion in the accounts receivable subsidiary ledger.
WOULD be tests:
-Evaluate proper segregation of duties.
-Confirm accounts receivable directly with customers.
-Review receipt of cash from customers in the period subsequent to the balance sheet date.

Question 5

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

Answer 5

Inspect related shipping records and sales invoices documenting the merchandise sold to customers.
NOT
Intensify the study of internal control concerning the revenue and collection cycle.

Question 6

If tolerable misstatement for the accounts receivable balance is $75,000 and the aggregate known misstatement found by the auditor is $82,000, the auditor is most likely to

Answer 6

Request that the client adjust its accounts receivable balance by $82,000.

Question 7

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

Answer 7

Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the period before the balance sheet date and whether it was recorded.

Question 8

Accounts payable (A/P) confirmations are generally used less frequently than accounts receivable confirmations since

Answer 8

Other procedures such as the search for unrecorded liabilities are generally very effective.

Question 9

Which of the following does not represent a major accounting transaction type processed in the purchasing cycle?

Answer 9

Requisition of goods.

Question 10

All of the following are inherent risk factors for the purchasing process except:

Answer 10

A new IT system placed in operation during the year.

Question 11

Which of the following best represents a situation in which an auditor would use a tax specialist for the audit of the tax provision?

Answer 11

The company does business overseas.

Question 12

Which of the following is not one of the major steps in setting control risk for the purchasing process?

Answer 12

Plan and perform analytical procedures on accounts used in the purchasing process.

Question 13

Fleming, the purchasing manager at Sparks Hardware Wholesalers, has a relative named Patterson who owns a retail hardware store. Fleming arranged for hardware to be delivered by manufacturers directly to the retail store on a C.O.D. (cash-on-delivery) basis to enable Patterson to buy at lower wholesale prices. Fleming was most likely able to do this because of Sparks’ poor internal control regarding

Answer 13

Processing of purchase orders.

Question 14

Key segregations of duties in the inventory management process include separation of all of the following except:

Answer 14

Cost accounting from review of variance reports.

Question 15

A decrease in inventory turnover that is not consistent with the change in sales may signal to the auditor

Answer 15

An overstatement of ending inventory.

Question 16

Which of the following is not one of the auditor’s objectives relating to the examination of inventories in a financial statement audit?

Answer 16

Verifying that all inventory owned by the client is on hand at the main warehousing location for the physical count.

Question 17

Which of the following is not a typical document included in the Inventory Management Process?

Answer 17

Purchase order.

Question 18

Which of the following is not a major function in the inventory management process?

Answer 18

Receiving.

Question 19

In performing a search for unrecorded retirements of plant assets, an auditor most likely would

Answer 19

Inspect the client’s plant asset ledger along with insurance and tax records, and then tour the facilities.

Question 20

Information regarding which of the following would normally not be included in a client’s financial statement disclosures related to plant assets?

Answer 20

Depreciation expenses for tax purposes.

Question 21

An example of a deferred charge is

Answer 21

Trademarks.

Question 22

Vouching significant PP&E additions and dispositions to vendor invoices or other supporting documentation is used to test

Answer 22

Occurrence.

Question 23

Tracing a sample of purchase requisitions to receiving reports and to the PP&E records is used to test

Answer 23

Completeness.

Question 24

Tracing a sample of entries in the cash receipts journal to daily deposit slips tests which of the following assertions for cash?

Answer 24

Occurrence.

Question 25

When may a check disbursement and receipt indicate kiting?

Answer 25

When it was recorded as received before it was recorded as disbursed.

Question 26

Which of the following statements is false regarding a four-column bank reconciliation or “proof of cash”?

Answer 26

It can be effective in detecting unrecorded checks that have not yet cleared the bank since cash disbursements per book and bank will not equal.

Question 27

Key segregations of duties for investments include all of the following except:

Answer 27

Whoever is responsible for investment activities should not also ensure that all dividend and interest income was received.

Question 28

The auditor typically uses the following procedures to detect fraud in the cash accounts:

Answer 28

Bank transfer schedule.

Question 29

Which of the following is an example of a subsequent event that requires disclosure in the notes to the financial statements (but not adjustments to the financial statements)?

Answer 29

A chemical explosion at a customer’s warehouse causes all accounts receivable from that customer to be uncollectible.

Question 30

A lawyer’s response to an auditor’s inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client’s financial statements. Which parties should reach an understanding on the limits of materiality for this purpose?

Answer 30

The lawyer and the auditor.