Final Exam

Question 1

What event initiates a transaction in the sales and collection cycle?

a. receipt of cash
b. delivery of product to customer
c. identification of a new customer
d. customer request for goods or services

Answer 1

d. customer request for goods or services

Question 2

What critical event must take place before goods can be shipped in order to assure payment can be reasonable expected?

a. determination of correct delivery address
b. credit approval
c. matching of shipping document with sales invoice
d. receipt of sales order from the customer

Answer 2

b. credit approval

Question 3

One type of shipping document is the ___________, which is a written contract between the carrier and the seller of the receipt and shipment of goods.

a. sales order
b. bill of lading
c. sales invoice
d. customer order

Answer 3

b. bill of lading

Question 4

The document used to indicate to the customer the amount of a sale and payment due date is the

a. sales invoice
b. bill of lading
c. purchase order
d. sales order

Answer 4

a. sales invoice

Question 5

The total of the individual account balances in the accounts receivable master file should equal the

a. total sales for the period
b. balance of the sales account in the general ledger
c. total sales less the total cash received for the period
d. balance of the accounts receivable account in the general ledger

Answer 5

d. balance of the accounts receivable account in the general ledger

Question 6

A _________ indicates a reduction in the amount due from a customer because of returned goods or an allowance.

a. bill of lading
b. sales invoice
c. credit memo
d. monthly statement

Answer 6

c. credit memo

Question 7

Some companies have customers send payments directly to an address maintained by a bank. This is called a(n) _____________.

a. direct deposit
b. funds transfer
c. lockbox
d. interbank transfer

Answer 7

c. lockbox

Question 8

For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be recorded on which of the following documents?

a. sales order
b. sales invoice
c. customer order
d. remittance advice

Answer 8

a. sales order

Question 9

When designing audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion?

a. valuation
b. cutoff
c. completeness
d. classification

Answer 9

c. completeness

Question 10

When assessing risk control, the auditor must do all of the following except

a. assess control risk for each objective by evaluating the controls and deficiencies for each objective
b. perform the detailed test of balances
c. identify the key internal controls and deficiencies
d. associate the key controls and deficiencies with the objectives

Answer 10

b. perform the detailed test of balances

Question 11

Which of the following is an accurate statement relating to separation of duties?

a. Management should deny cash access to anyone responsible for entering sales and cash receipts transaction information into the computer.
b. All disagreements on the monthly statements should be directed to a designated person who has no responsibility for handling cash or recording sales or accounts receivable.
c. The credit granting function should be separate from the sales function.
d. All of the above are accurate statements.

Answer 11

d. All of the above are accurate statements.

Question 12

To test for recorded sales for which there were no actual shipments, the auditor vouches from the

a. bill of lading to the sales journal
b. sales journal to the shipping documents
c. sales journal to the accounts receivable subsidiary ledger
d. bill of lading to the supporting customer order and sales order

Answer 12

b. sales journal to the shipping documents

Question 13

To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with

a. the original invoice
b. an approved master price list
c. the amounts recorded in the sales journal for that transaction
d. the amounts posted to the customer’s account in the accounts receivable master file.

Answer 13

b. an approved master price list

Question 14

Smith Manufacturing Company’s accounts receivable clerk has a friend who is also a customer of Smith Manufacturing. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to

a. prenumber and account for all credit memorandums
b. require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved
c. have independent sales and accounts receivable departments
d. mail monthly statements to customers

Answer 14

b. require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved.

Question 15

When the auditor decides to select less than 100 percent of the population for testing, the auditor is said to use

a. audit sampling
b. representative sampling
c. poor judgment
d. estimation sampling

Answer 15

a. audit sampling

Question 16

Which of the following is the risk that an auditor will reach an incorrect conclusion because a sample is not representative of the population?

a. sampling risk
b. nonsampling risk
c. audit risk
d. detection risk

Answer 16

a. sampling risk

Question 17

Which of the following statements is most correct with respect to the evaluation of nonprobabilistic sample results?

a. It is acceptable to make nonprobabilistic evaluations only when probabilistic sample selection is used.
b. It is acceptable to make nonprobabilistic evaluations only if the auditor cannot quantify sampling risk.
c. It is never acceptable to evaluate a nonprobabilistic sample using statistical methods.
d. All of the above are correct.

Answer 17

c. It is never acceptable to evaluate a nonprobabilistic sample using statistical methods.

Question 18

A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a

a. random sample
b. statistical sample
c. judgment sample
d. representative sample

Answer 18

a. random sample

Question 19

The process which requires the calculation of an interval and then selects the items based on the size of the interval is

a. statistical sampling
b. random sample selection
c. systematic sample selection
d. computerized sample selection

Answer 19

c. systematic sample selection

Question 20

When a population is divided into subpopulations, usually by dollar size, and larger samples are taken from the subpopulation with the larger ones, _________ is being used.

a. sampling with probability proportional to size
b. stratified sampling
c. block sampling
d. haphazard sampling

Answer 20

b. stratified sampling

Question 21

Which of the following is most correct when using audit sampling for exception rates?

a. The auditor is concerned with the lowest rate
b. The auditor is concerned with the highest rate
c. The auditor is concerned with the average on previous audits.
d. The auditor is not concerned with the exception rate for audits of nonpublic companies.

Answer 21

b. The auditor is concerned with the highest rate

Question 22

If the auditor decides to assess control risk at the moderate level in a private company audit, when in previous years the auditor set control risk at the maximum level, then tests of controls for the current year would be

a. increased in number
b. reduced in number
c. not performed
d. unchanged from prior planned settings

Answer 22

a. increased in number

Question 23

Which of the following represents the best description of the tolerable exception rate?

a. the highest exception rate the auditor will permit in the control being tested and still conclude it is operating effectively.
b. the highest exception rate the auditor expects to find in the population
c. the number of exceptions found in the sample divided by the sample size
d. the highest estimated exception rate in a population at a given estimated population exception rate

Answer 23

a. the highest exception rate the auditor will permit in the control being tested and still conclude it is operating effectively.

Question 24

When selecting a sample size for substantive tests of balances which factor, other factors being equal, would result in a larger sample?

a. a decrease in the tolerable misstatement
b. small expected misstatements
c. an increase in the tolerable misstatement
d. an increase in the acceptable risk of incorrect acceptance

Answer 24

a. a decrease in the tolerable misstatement

Question 25

The auditor’s principal objective when using a sample of tests of details of balances is whether the

a. account balance being audited is fairly stated
b. transactions being audited are free of misstatements
c. controls being tested are operating effectively
d. transactions and account balances being audited dare fairly stated

Answer 25

a. account balance being audited is fairly stated

Question 26

Which of the following does not have to be considered in determining the initial sample size of a test of details?

a. tolerable misstatement
b. acceptable risk of incorrect rejection
c. estimate of misstatements in the population
d. inherent risk

Answer 26

b. acceptable risk of incorrect rejection

Question 27

When errors are found in a sample, auditors in practice generally make the assumption

a. that the population errors cannot be determined
b. that the population errors are larger than the sample errors
c. that the population errors are smaller than the sample errors
d. that the actual sample errors are representative of the population errors.

Answer 27

d. that the actual sample errors are representative of the population errors

Question 28

True or False. If a population is not considered acceptable, and the analysis indicates an individual error is unique or most of the misstatements are of a specific type, it may be appropriate to restrict the additional audit effort to the problem area.

Answer 28

True

Question 29

Which of the following accounts is not part of the acquisition and payment cycle?

a. prepaid expenses
b. accounts payable
c. sales returns and allowances
d. property, plant, and equipment

Answer 29

c. sales returns and allowances

Question 30

A document indicating a reduction in the amount owed to a vendor because of returned goods is

a. a debit memo
b. a credit memo
c. a receiving report
d. a contractual adjustment form

Answer 30

a. a debit memo

Question 31

The computer-generated file which records acquisitions, disbursements and allowances for each vendor is the

a. accounts payable master file
b. cash disbursements file
c. acquisitions transaction file
d. purchase approval file

Answer 31

a. accounts payable master file

Question 32

After a purchase requisition is approved, a ________ must be initiated to purchase the goods or services.

a. purchase order
b. vendor order
c. call order
d. vendor invoice

Answer 32

a. purchase order

Question 33

An auditor is gathering evidence on the completeness assertion. To do so, she performs a test to verify that all goods received by the company have been recorded properly. The document population for this test would consist of all

a. vendor invoices
b. purchase orders
c. receiving reports
d. cash disbursements for accounts payable

Answer 33

c. receiving reports

Question 34

The accounts payable department usually has responsibility for approving acquisitions for payment by comparing the details on the

a. vendor’s invoice and the receiving report
b. vendor’s invoice and the purchase requisition
c. purchase order, receiving report, and vendor’s invoice
d. purchase requisition, purchase order, and receiving report

Answer 34

c. purchase order, receiving report, and vendor’s invoice

Question 35

At what point do most companies recognize liabilities in the acquisition and payment cycle when the goods are shipped FOB destination?

a. when the purchase order is issued
b. when the vendor acknowledges receipt of the order
c. when the goods or services are received
d. when the vendor invoice is received

Answer 35

c. when the goods or services are received

Question 36

The extent of a search for unrecorded liabilities largely depends on

a. materiality and inherent risk
b. materiality and control risk
c. materiality only
d. inherent risk only

Answer 36

b. materiality and control risk

Question 37

In searching for unrecorded liabilities the purpose of the audit procedure to “examine underlying documentation for subsequent cash disbursements” is to

a. uncover liabilities on the balance sheet which should not have been recorded until a subsequent period
b. find the documentation relating to a cash disbursement
c. uncover payments made in a subsequent accounting period for liabilities that existed at the balance sheet date
d. uncover cash disbursements recorded in a subsequent accounting period which should be recorded in this period.

Answer 37

c. uncover payment made in a subsequent accounting period for liabilities that existed at the balance sheet date.

Question 38

The auditor is performing substantive tests of balances for accounts payable. What documentation would provide the best evidence for the ending balance?

a. vendors’ invoices
b. vendors’ statements
c. receiving reports
d. purchase orders

Answer 38

b. vendors’ statements

Question 39

Which of the following would generally not be a component of the audit of the acquisition and payment cycle?

a. adequacy of controls over acquisitions of long-lived assets
b. tracing disposals of long-lived assets to the fixed asset master file
c. determining the adequacy of the funds available for capital expenditures
d. reperformance of recorded depreciation expense

Answer 39

c. determining the adequacy of the funds available for capital expenditures

Question 40

Normally it may be unnecessary to examine supporting documentation for each addition to property, plant, and equipment, but it would be customary to verify

a. all large transactions
b. all unusual transactions
c. a representative sample of typical additions
d. all of the above

Answer 40

d. all of the above

Question 41

Which is not one of the tests that would be used in the audit of equipment, depreciation expense, and accumulated depreciation?

a. Verify the ending balance in the asset account
b. Send confirmations to the sales personnel who sold the equipment to the company
c. Perform substantive analytical procedures
d. Verify current year acquisitions

Answer 41

b. Send confirmations to the sales personnel who sold the equipment to the company

Question 42

The primary accounting record for manufacturing equipment and other fixed assets is the

a. depreciation ledger
b. fixed asset master file
c. asset inventory
d. equipment roster

Answer 42

b. fixed asset master file

Question 43

Which of the following audit procedures would be the most correct in deterring the audit objective of existence for the equipment account in the fixed asset master file?

a. Examine vendor invoices and receiving reports
b. Review transactions near the balance sheet date
c. Recalculate vendor invoices
d. Examine vendor invoices for correct accounting treatment

Answer 43

a. Examine vendor invoices and receiving reports

Question 44

The audit procedure that requires an auditor to “foot the acquisition schedule” relates to which balance-related audit objective?

a. classification
b. detail tie-in
c. existence
d. cut-off

Answer 44

b. detail tie-in

Question 45

The primary accounting record for manufacturing equipment and other fixed assets is the

a. depreciation ledger
b. fixed asset master file
c. asset inventory
d. equipment roster

Answer 45

b. fixed asset master file

Question 46

Which of the following audit procedures would be the most correct in determining the audit objective of existence for the equipment account in the fixed asset master file?

a. Examine vendor invoices and receiving reports
b. Review transactions near the balance sheet date.
c. Recalculate vendor invoices
d. Examine vendor invoices for correct accounting treatment

Answer 46

a. Examine vendor invoices and receiving reports

Question 47

In testing acquisitions the auditor needs to understand the appropriate accounting guidance related to acquisition accounting. Which of the following is not an accounting consideration for the auditor as regards to acquisition cost?

a. inclusion of material transportation and installation costs
b. recording of trade-in costs
c. allocating costs when building and equipment are purchased at one price
d. verifying that purchased equipment amounts correspond to the budgeted amount

Answer 47

d. verifying that purchased equipment amounts correspond to the budgeted amount

Question 48

The test of details of balances procedure to “examine vendors’ invoices of closely related accounts such as repairs to uncover items that should be property, plant, and equipment” satisfies the audit objective of

a. completeness
b. detail tie-in
c. cutoff
d. existence

Answer 48

a. completeness

Question 49

A major consideration in verifying the ending balance in fixed assets is the possibility of existing legal encumbrances. Tests to identify possible legal encumbrances would satisfy the audit objective of

a. existence
b. presentation and disclosure
c. detail tie-in
d. classification

Answer 49

b. presentation and disclosure

Question 50

The auditor needs to gain reasonable assurance that the equipment accounts in the fixed asset master file are not understated. Which of the following accounts would most likely be reviewed in making that determination?

a. depreciation expense
b. repairs and maintenance expense
c. gains/losses on sales and retirements
d. cash

Answer 50

b. repairs and maintenance expense

Question 51

Changing circumstances may require a change in the useful life of an asset. When this occurs, it involves a change in

a. accounting estimate rather than a change in accounting principle
b. accounting principle rather than a change in accounting estimate
c. both accounting principle and accounting estimate
d. neither accounting principle nor accounting estimate

Answer 51

a. accounting estimate rather than a change in accounting principle

Question 52

In connection with a review of the prepaid insurance account, which of the following audit procedures would you be least likely to use?

a. Recompute the portion of the premium that expired during the year
b. Prepare excerpts of insurance policies for audit working papers
c. Confirm premium rates with an independent insurance broker
d. Examine support for premium payments

Answer 52

c. Confirm premium rates with an independent insurance broker

Question 53

________ expense is rarely analyzed unless analytical procedures indicate high potential for material misstatement.

a. Repairs and maintenance
b. Legal
c. Utilities
d. Rent and lease

Answer 53

c. Utilities

Question 54

Which of the following departments is most likely responsible for pay rate changes and changes in deductible amounts for employees?

a. general accounting department
b. human resources department
c. treasurer
d. controller

Answer 54

b. human resources department

Question 55

The computer file used for recording payroll transactions for each employee and maintaining total wages paid for the year to date is the

a. payroll transaction file
b. payroll master file
c. payroll bank account reconciliation
d. payroll tax returns

Answer 55

b. payroll master file

Question 56

Which of the following best describes the systems of internal control for payroll for large companies?

a. loosely structured but well controlled
b. loosely structured and loosely controlled
c. highly structured and well controlled
d. highly structured but loosely controlled

Answer 56

c. highly structured and well controlled

Question 57

Which of the following audit procedures would be the most effective in testing for nonexistent employees?

a. Trace transactions recorded in the payroll journal to the human resources department to determine employment status
b. Examine cancelled checks for proper endorsement
c. Recalculate net pay
d. Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement.

Answer 57

a. Trace transactions recorded int he payroll journal to the human resources department to determine employment status.

Question 58

The auditor _________ rely on the internal controls of the payroll service organization if the service organization’s auditor issues a report on the service organization’s internal control.

a. must
b. cannot
c. can rarely
d. can often

Answer 58

d. can often

Question 59

The careful and timely preparation of all payroll tax returns is necessary to avoid penalties and criminal charges. The most important control in the timely preparation of these returns is

a. computerized preparation of tax returns
b. a well-defined set of policies that indicate when each form must be filed
c. independent verification of computer output by a competent individual
d. the use of an outside payroll service

Answer 59

b. a well-defined set of policies that indicate when each form must be filed

Question 60

The two types of services provided in connection with the Statements on Standards for Accounting and Review Services are:
A) audit and examination services.
B) compilation and review services.
C) examination and review services.
D) management advisory services and compilations.

Answer 60

B) compilation and review services.

Question 61

Compilation reports may be of all except which of the following types?
A) Compilation with limited independence
B) Compilation with full disclosure
C) Compilation without independence
D) Compilation that omits substantially all disclosures

Answer 61

A) Compilation with limited independence

Question 62

Which of the following would not be included in a CPA’s report based upon a review of the financial statements of a nonpublic entity?
A) A statement that the review was in accordance with generally accepted auditing standards
B) A statement that all information included in the financial statements is the representation of management
C) A statement describing the principal procedures performed
D) A statement describing the auditor’s conclusions based upon the results of the review

Answer 62

A) A statement that the review was in accordance with generally accepted auditing standards

Question 63

The statement that "We are not aware of any material modifications that should be made to the accompanying financial statements" expresses which of the following?
A) Disclaimer of an opinion
B) Negative assurance
C) Negative confirmation
D) Shared opinion

Answer 63

B) Negative assurance

Question 64

The highest level of assurance is provided for in which one of the following engagements?
A) Review
B) Compilation
C) Audit
D) None of the above

Answer 64

C) Audit

Question 65

You are preparing to issue a report on the compilation of financial statements for a nonpublic company. Prior to issuing the report you should:
A) read the financial statements to determine if they are free from obvious material errors.
B) perform analytical procedures to determine if they are free from material misstatements.
C) perform tests of balances on selected accounts to determine if they are free from material misstatements.
D) perform limited control tests to determine if there are any material misstatements.

Answer 65

A) read the financial statements to determine if they are free from obvious material errors.

Question 66

An accountant has accepted an engagement in which the audit procedures of inquiry and analytical procedures will be employed. These procedures will form the basis for issuance of:
A) a compilation report.
B) audit report on supplemental information issued by the client.
C) management advisory report requested by the audit committee.
D) review report on financial statements for a nonpublic company.

Answer 66

D) review report on financial statements for a nonpublic company.

Question 67

Each page of the financial statements reviewed for a nonpublic entity should include the reference:
A) “These financial statements are unaudited.”
B) “We express no assurance on these financial statements.”
C) “See independent accountant’s review report.”
D) “See the audit opinion for the review procedures performed.”

Answer 67

C) “See independent accountant’s review report.”

Question 68

An interim review of the financial information for public companies is performed following standards of the:
A) AICPA.
B) PCAOB.
C) SEC.
D) SSARS.

Answer 68

B) PCAOB.

Question 69

The Securities and Exchange Commission requires quarterly financial information as a part of the:
A) 10-K report.
B) 10-Q report.
C) 8-K report.
D) auditor's report.

Answer 69

B) 10-Q report.

Question 70

Reports on agreed-upon procedures are intended to be distributed:
A) to only the involved parties, who would have the requisite knowledge about those procedures and the level of assurance resulting from them.
B) to only the involved parties, who would have the requisite knowledge about those procedures but not the level of assurance resulting from them.
C) to any party to whom the client wishes.
D) only to the stockholders of the client.

Answer 70

A) to only the involved parties, who would have the requisite knowledge about those procedures and the level of assurance resulting from them.

Question 71

The service auditor’s Type 2 report contains:
A) an opinion on the reasonableness of the financial statements.
B) the two opinions about the description and suitability of the design of controls that are issued in a Type 1 report plus an additional opinion about the operating effectiveness of controls throughout the period.
C) contains an opinion only on the operating effectiveness of the controls.
D) an opinion on the service company’s website.

Answer 71

B) the two opinions about the description and suitability of the design of controls that are issued in a Type 1 report plus an additional opinion about the operating effectiveness of controls throughout the period.

Question 72

As a CPA you have been asked to examine an entity’s financial projections. Acceptance of the engagement would be appropriate if distribution is limited to:
A) stockholders of record as of the date of the report.
B) potential investors and creditors by posting on the company’s website.
C) general public by posting on the company’s website.
D) a financial institution for which the company is negotiating a loan.

Answer 72

D) a financial institution for which the company is negotiating a loan.

Question 73

A CPA who has been engaged to audit financial statements that were prepared on a cash basis:
A) must ascertain that there is proper disclosure of the fact that the cash basis has been used, the general nature of material items omitted, and the net effect of such omissions.
B) may not be associated with such statements which are not in accordance with generally accepted accounting principles.
C) must render a qualified report explaining the departure from generally accepted accounting principles in the opinion paragraph.
D) must restate the financial statements on an accrual basis and then render the standard (short-form) report.

Answer 73

A) must ascertain that there is proper disclosure of the fact that the cash basis has been used, the general nature of material items omitted, and the net effect of such omissions.

Question 74

Which of the following is not a similarity between external and internal auditors?
A) Both must be independent of the company.
B) Both must be competent.
C) Both follow a similar methodology in performing their audits.
D) Both consider risk and materiality deciding the extent of their tests and evaluating results.

Answer 74

A) Both must be independent of the company.

Question 75

The professional organization which is responsible for providing guidance for internal auditors is the:
A) APA.
B) IIA.
C) ABA.
D) AIA.

Answer 75

B) IIA.(Institute of Internal Auditors)

Question 76

The primary source of authoritative literature for doing government audits is the:
A) Purple Book.
B) Yellow Book.
C) Green Book.
D) Red Book.

Answer 76

B) Yellow Book.

Question 77

The Single Audit Act requires that an audit be conducted for recipients who receive total federal funds in any fiscal year of:
A) $1,000,000 or more.
B) $750,000 or more.
C) $500,000 or more.
D) $100,000 or more.

Answer 77

B) $750,000 or more.

Question 78

When performing an operational audit, the internal audit team must first determine that:
A) a financial audit has been performed by an independent auditor.
B) a financial audit has been performed by an internal auditor.
C) a review was performed by either an independent or an internal auditor.
D) specific criteria are developed to define effectiveness.

Answer 78

D) specific criteria are developed to define effectiveness.

Question 79

In a preparation service engagement,
A) the CPA’s responsibilities are similar to those performed during a review
B) the CPA does not provide any assurance of the financial statements
C) the CPA must issue a preparation service engagement report
D) the CPS must be independent

Answer 79

B) the CPA does not provide any assurance of the financial statements

Question 80

Which of the following is not an element of the examination of perspective financial statements?
A) evaluating the preparation of he perspective financial statements
B) understanding internal controls
C) evaluating the support underlying the assumptions
D) issuing an examination report

Answer 80

B) understanding internal controls

Question 81

Statements on Internal Auditing standards are issued by the 
A) AICPA
B) SEC
C) Internal Auditing Standards Board
D) Auditing Standards Board

Answer 81

C) Internal Auditing Standards Board

Question 82

Internal auditors are responsible to 
A) the board of directors 
B) management 
C) both A and B
D) neither A nor B

Answer 82

C) both A and B

Question 83

Practitioners who perform preparation, compilation, or review engagement are referred to in the Statements on Standards for Accounting and Review Services (SSARS) standards as
A) bookkeepers
B) accountants
C) auditors 
D) CPA's

Answer 83

B) accountants

Question 84

The standards for preparation, compilation, or review engagement of financial statements are the
A) AICPA’s Code of Professional Conduct
B) Statements on Auditing Standards (SAS’s)
C) Statements of Standards on Attestation Engagements (SSAE’s)
D) Statements on Standards for Accounting and Review Services (SSARS)

Answer 84

D) Statements on Standards for Accounting and Review Services (SSARS)

Question 85

An advantage of using statistical sampling techniques is that such techniques

a) quantify sampling risk
b) eliminate the need for judgmental decisions
c) define the values of precision and reliability required to provide audit satisfaction
d) have been established in the courts to be superior to judgmental sampling

Answer 85

a) quantify sampling risk

Question 86

True or False

For most audits, revenue recognition is considered to be a significant risk.

Answer 86

True

Question 87

Which of the following types of receivables would not deserve the special attention of the auditor?

a) accounts receivables with credit balances
b) accounts that have been outstanding for a long time
c) receivables from related parties
d) each of the above would receive special attention

Answer 87

d) each of the above would receive special attention

Question 88

Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally

a) reduce the extent of tests of details of balances
b) reduce the extent of tests of controls
c) reduce the tests of transactions
d) reduce all of the other tests

Answer 88

a) reduce the extent of tests of details of balances

Question 89

Which of the following is a correct statement regarding analytical procedures?

a) If an auditor identifies a possible misstatement in sales using analytical procedures, accounts payable will be the likely offsetting misstatement
b) Auditors should also compare the results of their analytical procedures to budgets and industry trends
c. If sales are overstated, the income statement will be incorrect, but the balance sheet will be correct.
d) If an analytical procedure uncovers an unusual fluctuation, the auditor must assume fraud is involved.

Answer 89

b. Auditors should also compare the results of their analytical procedures to budgets and industry trends.

Question 90

True or False.

A high inherent risk increases planned detection risk and decreases planned substantive tests.

Answer 90

False

Question 91

The understatement of sales and accounts receivable is best uncovered by

a) testing internal controls
b) testing the aged accounts receivable trial balance
c) substantive tests of transactions for shipments made but not recorded
d) substantive tests of transactions for bad debts

Answer 91

c) substantive tests of transactions for shipments made but not recorded

Question 92

Tests of which balance-related audit objective are normally performed first in an audit of the sales and collection cycle?

a) accuracy
b) completeness
c) rights
d) detail tie-in

Answer 92

d) detail tie-in

Question 93

An auditor is performing a credit analysis of customers with balances over 60 days due. She is most likely obtaining evidence for which audit related objective?

a) realizable value
b) existence
c) completeness
d) occurrence

Answer 93

a) realizable value

Question 94

The most important test of details of balances to determine the existence of recorded accounts receivable is

a) tracing details of sales invoices to shipping documents
b) tracing the credits in accounts receivable to bank deposits
c) tracing sales returns entries to credit memos issued and receiving room reports
d) the confirmation of customers’ balances

Answer 94

d) the confirmation of customers’ balances

Question 95

Most tests of accounts receivable are based on what schedule, file, or listing?

a) sales master file
b) aged accounts receivable trial balance
c) accounts receivable master file
d) accounts receivable general ledger account

Answer 95

b) aged accounts receivable trial balance

Question 96

If material, all of the following are required to be separately disclosed in the financial statements except for

a) accounts receivable from officers
b) accounts receivable from affiliates
c) sales and assets for different business segments
d) sales for the last ten days of the fiscal year

Answer 96

d) sales for the last ten days of the fiscal year

Question 97

When designing tests of details of balances, an important point to remember is

a) auditors emphasize income statement accounts
b) the audit procedures selected depends heavily on whether detection risk for a given objective is low, medium, or high
c) if accounts receivable are overstated, then sales will be understated
d) sales cutoff is the most important test of details of accounts receivable

Answer 97

b) the audit procedures selected depends heavily on whether detection risk for a given objective is low, medium, or high

Question 98

The net realizable value of accounts receivable is equal to

a) gross accounts receivable less allowance for uncollectible accounts
b) gross accounts receivable less bad debt expense
c) gross accounts receivable less returns and allowances
d) gross accounts receivable less sales discounts

Answer 98

a) gross accounts receivable less allowance for uncollectible accounts

Question 99

When should auditors not perform alternative procedures in testing the accounts receivable balance?

a) when customers do not return positive confirmation requests
b) when customers do not return negative confirmation requests
c) when confirmations are deemed to be ineffective as an audit procedure
d) when confirmations are too costly to use

Answer 99

b) when customers do not return negative confirmation requests

Question 100

When positive confirmations are used, auditing standards require alternative procedures for confirmations not returned by the customer. Which of the following would not be considered an alternative procedure?

a) Send a second confirmation request
b) Examine subsequent cash receipts to determine if the receivable has been paid.
c) Examine shipping documents to verify that the merchandise was shipped.
d) Examine sales invoice to verify the actual issuance of a sales invoice and the actual date of the billing.

Answer 100

a) Send a second confirmation request

Question 101

The positive (as opposed to the negative) form of receivables confirmation may be preferred when

a) internal control surrounding accounts receivable is considered to be effective.
b) there is reason to believe that a substantial number of accounts may be in dispute
c) a large number small balances are involved
d) the auditor believes that the recipients of the confirmations will give the requests adequate consideration

Answer 101

b) there is reason to believe that a substantial number of accounts may be in dispute

Question 102

When determining the timing of the accounts receivable confirmation,

a) the receivables cannot be confirmed at an interim date.
b) if accounts receivable are confirmed before year-end, the auditor typically prepares a roll-forward schedule.
c) if the receivables are confirmed at an interim date, they must also be confirmed at year-end.
d) if internal controls are adequate, the accounts receivable must be confirmed at year-end.

Answer 102

b) if accounts receivable are confirmed before year-end, the auditor typically prepares a roll-forward schedule.

Question 103

True or False.

Negative confirmations normally require a larger sample size than positive confirmations.

Answer 103

True

Question 104

True or False.
When sending confirmations during most audits of accounts receivable, the emphasis is often on confirming larger and older accounts.

Answer 104

True

Question 105

True or False.

Auditors must maintain control of confirmations until they are returned from the customer.

Answer 105

True

Question 106

True or False.
Each client misstatement in accounts receivable must be analyzed to determine whether it was consistent with the original assessed level of control risk.

Answer 106

True

Question 107

Which of the following would lead to a larger sample size?

a) low inherent risk
b) low control risk
c) larger tolerable misstatement
d) unsatisfactory results in other related substantive procedures

Answer 107

d) unsatisfactory results in other related substantive procedures

Question 108

An auditor using non statistical sampling cannot formally measure sampling error.

Answer 108

True

Question 109

As part of the auditor’s responsibility for ________, the auditor should review the preparation of at least one of each type of payroll tax form the client is responsible for filing.

a) fraud awareness
b) doing tests of balances
c) doing tests of transactions
d) understanding the client’s internal controls

Answer 109

d) understanding the client’s internal controls

Question 110

When labor is a material factor in inventory valuation, the auditor should place special emphasis on testing the internal controls concerning

a) fictitious employees
b) authorization of wage rates
c) proper classification of payroll transactions
d) completeness of recorded transactions

Answer 110

c) proper classification of payroll transactions

Question 111

Verification of the legitimacy of year-end unpaid bonuses to officers and employees can be accomplished by comparing the recorded accrual to the amount.

a) in the expense account
b) used in the prior period
c) authorized in the minutes of the board
d) paid in the subsequent period

Answer 111

c) authorized in the minutes of the board

Question 112

If a potential loss on a contingent liability is remote, the liability usually is

a) disclosed in footnotes, but not accrued
b) neither accrued nor disclosed in footnotes
c) accrued and indicated in the body of the financial statements
d) disclosed in the auditor’s report but not disclosed on the financial statements

Answer 112

b) neither accrued nor disclosed in footnotes

Question 113

A commitment is best described as

a) an agreement to commit the firm to a set of fixed conditions in the future
b) an agreement to commit the firm to a set of fixed conditions in the future that depends on company profitability
c) an agreement to commit the firm to a set of fixed conditions in the future that depends on current market conditions
d) a potential future obligation to an outside part for an as yet to be determined amount

Answer 113

a) an agreement to commit the firm to a set of fixed conditions in the future

Question 114

When using the probability threshold for contingencies, the likelihood of the occurrence of the event is classified as

a) not likely, likely, or highly likely
b) remote, reasonably possible, or probable
c) slight, moderate, great
d) remote, likely, possible

Answer 114

b) remote, reasonable possible, or probable

Question 115

Auditors will generally send a standard inquiry to

a) only those attorneys who have devoted substantial time to client matters during the year
b) every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion.
c) every attorney whose legal fees for the year exceed a materiality threshold
d) only the attorney who represents the client in proceeding where the client is defendant.

Answer 115

b) every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion

Question 116

The standard inquiry to the client’s attorney would be prepared on

a) plain paper (no letterhead) and be unsigned
b) lawyer’s stationery and signed by the lawyer
c) auditor’s stationery and signed by an audit partner
d) client’s letterhead and signed by a company official

Answer 116

d) client’s letterhead and signed by a company official

Question 117

The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the statements being audited. The procedures required to verify these transactions are commonly referred to as the review for

a) contingent liabilities
b) subsequent year’s transactions
c) late unusual occurrences
d) subsequent events

Answer 117

d) subsequent events

Question 118

An auditor has the responsibility to actively search for subsequent events that occur subsequent to the

a) balance sheet date
b) date of the auditor’s report
c) balance sheet date, but prior to the audit report
d) date of the management representation letter

Answer 118

c) balance sheet date, but prior to the audit report

Question 119

After the balance sheet date, but prior to the issuance of the audit report, the client suffers an uninsured loss of their inventory as a result of a fire. The amount of the loss is material. The auditor should

a) adjust the financial statements for the year under audit.
b) add a paragraph to the audit report.
c) advise the client to disclose the event in the notes to the financial statements.
d) advise the client to delay issuing the financial statements until the economic loss can be determined.

Answer 119

c) advise the client to disclose the event in the notes to the financial statements.

Question 120

Which of the following would be a subsequent discovery of facts which would not require a response by the auditor?

a) discovery of the inclusion of material nonexistent sales
b) discovery of the failure to write off material obsolete inventory
c) discovery of the omission of a material footnote
d) discovery of management’s intent to increase selling prices in the future

Answer 120

d) discovery of management’s intent to increase selling prices in the future

Question 121

Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?

a) loss of a plant as a result of a flood
b) sale of long-term debt or capital stock
c) settlement of litigation in excess of the recorded liability
d) major purchase of a business that is expected to double the sales volume

Answer 121

c) settlement of litigation in excess of the recorded liability

Question 122

A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events might result in adjustment of the December 31 financial statements?

a) sale of a major subsidiary
b) adoption of accelerated depreciation methods
c) write-off of a substantial portion of inventory as obsolete
d) collection of 90% of the accounts receivable existing at December 31

Answer 122

c) write-off of a substantial portion of inventory as obsolete

Question 123

The date of the management representation letter received from the client should

a) be the date of latest subsequent event disclosed in the notes to the financial statements
b) be dated no earlier than the date of the audit report.
c) have the same date as the date of the balance sheet
d) have the same date as the date of the engagement letter

Answer 123

b) be dated no earlier than the date of the audit report

Question 124

Auditing standards require that the auditor evaluate whether there is a substantial doubt about a client’s ability to continue as a going concern for at least

a) one quarter beyond the balance sheet date
b) one quarter beyond the date of the auditor’s report
c) one year beyond the balance sheet date
d) one year beyond the date of the auditor’s report

Answer 124

c) one year beyond the balance sheet date

Question 125

Which of the following statements regarding the letter of representation is not correct?

a) It is prepared on the client’s letterhead
b) It is addressed to the CPA firm
c) It is signed by high-level corporate officials, usually the president and chief financial officer
d) It is optional, not required, that the auditor obtain such a letter from management

Answer 125

d) It is optional, not required, that the auditor obtain such a letter from management

Question 126

Auditing standards require the auditor to ________ other information included in annual reports pertaining directly to the financial statements.

a) audit
b) express an opinion on
c) read
d) analyze

Answer 126

c) read

Question 127

When reviewing the summary of misstatements found in the audit

a) an adjusting entry must be made by the auditor for all material misstatements
b) auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material.
c) the auditor is not required to consider the impact on the current financial statements of misstatements in the prior year that were not corrected.
d) auditors only need to consider the misstatements that impact the income statement.

Answer 127

b) auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material.

Question 128

The auditor is responsible for communicating significant internal control deficiencies to the audit committee, or those charged with governance. This communication

a) may be oral or written
b) must be oral
c) must be written
d) must be oral via direct communication

Answer 128

c) must be written

Question 129

While there is no professional requirement to do so on audit engagements, CPAs frequently issue a formal “management” letter to clients. The primary purpose of this letter is to provide

a) evidence indicating whether the auditor is reasonably certain that internal accounting control is operating as prescribed.
b) a permanent record of the internal accounting control work performed by the auditor during the course of the engagement.
c) the client with the CPA’s recommendations for improving any part of the client’s business.
d) a summary of the auditor’s observations that resulted from the auditor’s special study of internal control.

Answer 129

c) the client with the CPA’s recommendations for improving any part of the client’s business

Question 130

Auditing standards require the auditor to communicate all management frauds and illegal acts to the audit committee

a) only if the act is immaterial
b) only if the act is material
c) only if the act is highly material
d) regardless of materiality

Answer 130

d) regardless of materiality

Question 131

Which of the following is a correct statement regarding review, compilation, and preparation services?

a) A written engagement letter is not needed for a review, compilation or preparation service.
b) The Statements on Standards for Accounting and Review Services (SSARS) clarity project used international standards as the base standard when revising the SSARS.
c) CPAs must be independent of the client in a review service engagement and for an audit engagement.
d) The amount of evidence accumulated in a review is minimal.

Answer 131

c) CPAs must be independent of the client in a review service engagement and for an audit engagements.

Question 132

In a preparation service engagement,

a) the CPA’s responsibilities are similar to those performed during a review
b) the CPA does not provide any assurance of the financial statements
c) the CPA must issue a preparation service engagement report
d) the CPA must be independent

Answer 132

b) the CPA does not provide any assurance of the financial statements