MCQ 1 SU 12

Question 1

An auditor would be most likely to learn of slow-moving inventory through
Submit Inquiry of stores personnel.
Submit Inquiry of sales personnel.
Submit Review of perpetual inventory records.
Submit Physical observation of inventory.

Answer 1

Review of perpetual inventory records.

This answer is correct.
To identify slow-moving inventory, the auditor should review perpetual inventory records. In a perpetual system, receipts and issuances of goods are recorded as the transactions occur, both as to quantities and prices. By comparing the dates of receipt and issuance, the auditor is able to readily identify slow-moving and possibly obsolete inventory.

Question 2

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?
Submit Examining paid vendor invoices.
Submit Performing cutoff procedures for shipping and receiving.
Submit Tracing inventory items from the tag listing back to the physical inventory quantities.
Submit Scanning perpetual inventory, production, and purchasing records.

Answer 2

Performing cutoff procedures for shipping and receiving.

This answer is correct.
Testing the cutoff to consider the transfer of title of inventory in shipping and receiving is appropriate for testing the completeness assertion. The terms, FOB shipping point versus FOB destination, should be evaluated to assure that the goods were recorded in the proper period.

Question 3

Unrecorded liabilities are most likely to be found during the review of which of the following documents?
Submit	Shipping records.
Submit	Bills of lading.
Submit	Unmatched sales invoices.
Submit	Unpaid bills.

Answer 3

Unpaid bills.

This answer is correct.
The auditor examines the accounts payable vouchers prepared during the subsequent period to determine whether they were for amounts recorded as liabilities at year end. (S)he also examines unvouchered invoices (unpaid bills) because they could represent payables that should have been recorded prior to year end. This procedure should be performed through the date of the auditor’s report

Question 4

When auditing a public warehouse, which of the following is the most important audit procedure with respect to disclosing unrecorded liabilities?

1. Inspection of receiving and issuing procedures.
2. Review of outstanding receipts.
3. Observation of inventory.
4. Confirmation of negotiable receipts with holders.

Answer 4

Inspection of receiving and issuing procedures.

This answer is correct.
When auditing a public warehouse, the inspection of receiving and issuing procedures is the most important procedure for disclosing unrecorded liabilities. Shipping orders and receiving reports that are not reflected in the records suggest that transactions are not being properly recorded.

Question 5

Under which of the following circumstances would it be advisable for the auditor to confirm accounts payable with creditors?
Submit Confirmation response is expected to be favorable and accounts payable balances are immaterial in amount.
Submit Internal controls relating to accounts payable are effective and there is sufficient appropriate evidence on hand to minimize the risk of material misstatement.
Submit The majority of accounts payable balances are with associated companies.
Submit Creditor statements are not available and internal controls relating to accounts payable are unsatisfactory.

Answer 5

Creditor statements are not available and internal controls relating to accounts payable are unsatisfactory.

This answer is correct.
When the internal controls relevant to assertions about accounts payable are ineffective, the risk of material misstatement is increased. The greater the RMM, the greater the assurance required from substantive procedures related to an assertion. The auditor may need to change the nature, timing, or extent of substantive procedures and consider external confirmations. The auditor also should confirm accounts payable when (1) documentary evidence is lacking, (2) individual creditors have relatively large balances, (3) the client has made a major purchase from the creditor regardless of the size of the balance, (4) unusual transactions are involved, or (5) the account is secured.

Question 6

When an auditor tests a client’s cost accounting system, the auditor’s tests are primarily designed to determine that
Submit The system is in accordance with generally accepted accounting principles and is functioning as planned.
Submit Physical inventories are in substantial agreement with book inventories.
Submit Quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand.
Submit Costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.

Answer 6

Costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.

This answer is correct.
The cost accounting system must be tested if the risk of material misstatement is to be assessed at a low level for assertions about inventory and cost of goods sold. The elements of manufacturing costs, stated either in actual or standard amounts, are direct materials, direct labor, and manufacturing overhead. The purpose of the auditor’s tests of controls is to verify that these costs are appropriately assigned to finished goods, work-in-process, and cost of goods sold. The auditor’s procedures might include testing the calculation of overhead application rates, inspecting paid vendors’ invoices for materials, and reviewing labor rates.

Question 7

f the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded
A.	Sales.
B.	Sales discounts.
C.	Purchases.
D.     Purchase discounts.

Answer 7

Purchases.
Answer (C) is correct.
In a perpetual system, purchases are debited directly to inventory at the time of the transaction rather than to a purchases account. A sale requires an immediate credit to inventory. Thus, failure to record a purchase would understate inventory.

Question 8

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
A. Review the responses of accounts receivable confirmations for indications of disputes with customers.
B. Examine a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.
C. Reconcile receiving reports with related cash payments made just prior to the year end.
D. Compare cash payments made after the balance sheet date with the accounts payable trial balance.

Answer 8

Compare cash payments made after the balance sheet date with the accounts payable trial balance.
Answer (D) is correct.
Tracing subsequent payments to recorded payables is a primary procedure to match payments (checks issued) after year end with the related payables. Checks should be issued only for recorded payables. Any checks that cannot be matched are likely indications of unrecorded liabilities. Management may want to delay recording of liabilities to improve the current ratio. However, unrecorded accounts payable still must be paid, and financial statements that fail to report all liabilities at year end are misstated.

Question 9

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
A. Reconciling vendors’ statements to the file of receiving reports to identify items received just prior to the balance sheet date.
B. Examining unusual relationships between monthly accounts payable balances and recorded cash payments.
C. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports.
D. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

Answer 9

Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
Answer (D) is correct.
The greatest risk in the audit of payables is that unrecorded liabilities exist. Omission of an entry to record a payable is a misstatement that is more difficult to detect than an inaccurate or false entry. The search for unrecorded payables should (1) include examining cash disbursements made after the balance sheet date and comparing them with the accounts payable trial balance, (2) sending confirmations to vendors with small and zero balances, and (3) reconciling payable balances with vendors’ documentation.

Question 10

Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?
A. Searching for customer-returned goods that were not reported as returns.
B. Examining reported purchase returns that appear too low.
C. Reviewing bank transfers recorded as cash received from customers.
D. Examining vendor statements for amounts not reported as purchases.

Answer 10

D. Examining vendor statements for amounts not reported as purchases.
Answer (D) is correct.
Vendor statements should reflect currently recorded accounts payable. Examining statements at year end and matching line items to recorded payables will detect unrecorded payables.

Question 11

Which of the following ratios would an engagement partner most likely consider in forming an overall audit conclusion?
A.	Current assets/quick assets.
B.	Accounts receivable/inventory.
C.	Cost of goods sold/average inventory.
D.	Total liabilities/net sales.

Answer 11

C. Cost of goods sold/average inventory.
Answer (C) is correct.
Near the end of the audit, the auditor performs analytical procedures to assist in forming an overall conclusion about whether the statements are consistent with the auditor’s understanding of the entity (AU-C 520). The inventory turnover ratio is a good indicator of unusual or unexpected balances because this amount is usually very predictable.

Question 12

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
A. Reconcile receiving reports with related cash payments made just prior to year end.
B. Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.
C. Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.
D. Contrast the ratio of accounts payable to purchases with the prior year’s ratio.

Answer 12

Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.
Answer (B) is correct.
Observance of cutoff procedures helps ensure that liabilities were recorded in the appropriate period. Tracing cash disbursements made subsequent to year end to amounts recorded at year end may disclose liabilities that were unrecorded as a result of a failure to observe such procedures. Recomputation of interest, bank confirmations, and reading the minutes of directors’ meetings may also detect unrecorded liabilities.

Question 13

In an audit of a purchasing department, which of the following usually is considered a risk factor?
A. Purchases are made from parties related to buyers or other company officials.
B. Purchases are not rotated among suppliers included on an approved vendor list.
C. Purchases are made against blanket or open purchase orders for certain types of items.
D. Purchase specifications are developed by the department requesting the material

Answer 13

Purchases are made from parties related to buyers or other company officials.
Answer (A) is correct.
Purchasing from parties related to buyers or other entity officials is a risk factor because it suggests the possibility of fraud. Such conflicts of interest may result in transactions unfavorable to the company.

Question 14

The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to
A.	Cost ledgers.
B.	Perpetual inventory records.
C.	Materials requisitions.
D.	Receiving reports.

Answer 14

Materials requisitions.
Answer (C) is correct.
Vouching is the examination of documents to obtain audit evidence about recorded amounts or transactions. Thus, the direction of testing is from records to documents. Testing in the opposite direction (documents to records) is tracing. Materials requisitions are authorization documents used to release materials for use in production. The auditor vouches quantities recorded in work-in-process by examining the documents for materials requisitions.

Question 15

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors’ invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all
A.	Receiving reports.
B.	Approved vouchers.
C.	Cash disbursements.
D.	Vendors’ invoices.

Answer 15

C. Cash disbursements.
Answer (C) is correct.
The best procedure to test whether any checks have been issued without supporting vouchers, purchase orders, and receiving reports is to select an appropriate sample of canceled checks (cash disbursements) and trace them to the related supporting documentation.

Question 16

The Smith Corporation uses prenumbered receiving reports that are released in numerical order from a locked box. For 2 days before the physical count all receiving reports are stamped “before inventory,” and for 2 days after the physical count all receiving reports are stamped “after inventory.” The receiving department continues to receive goods after the cutoff time while the physical count is in process. The least effective method for checking the accuracy of the cutoff is to
A. List the number of the last receiving report for items included in the physical inventory count.
B. Observe that the receiving clerk is stamping the receiving reports properly.
C. Test trace receiving reports issued after the last receiving report to the physical items to see that they have not been included in the physical count.
D. Test trace receiving reports issued before the last receiving report to the physical items to see that they have been included in the physical count.

Answer 16

B. Observe that the receiving clerk is stamping the receiving reports properly.
Answer (B) is correct.
The least effective method of checking the accuracy of the cutoff of inventory is to observe that the receiving clerk is stamping the receiving reports properly. The auditor is primarily concerned with the dates on the receiving reports to verify that goods received or shipped near year end are accounted for in the proper reporting period.

Question 17

An entity’s internal control requires that an approved voucher, a prenumbered purchase order, and a prenumbered receiving report accompany every check request. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all
A.	Canceled checks.
B.	Receiving reports.
C.	Purchase orders.
D.	Approved vouchers.

Answer 17

A. Canceled checks.
Answer (A) is correct.
The best procedure is to test whether any checks have been issued without vouchers, purchase orders, and receiving reports. An appropriate sample of canceled checks should be traced to the related supporting documentation. The checks should not have been written before the dates on the receiving reports.

Question 18

Which of the following procedures is least likely to be performed before the balance sheet date?
A.	Testing internal control over cash.
B.	Search for unrecorded liabilities.
C.	Confirmation of receivables.
D.	Observation of inventory.

Answer 18

Search for unrecorded liabilities.
Answer (B) is correct.
A significant risk is that all payables may not be reflected in the year-end balance. The auditor will review cash disbursements made subsequent to year end to determine whether payments are for previously unrecorded liabilities. Other procedures that would not be performed prior to the balance sheet date include reviewing subsequent events, requesting the lawyer’s letter, and obtaining management representations.

Question 19

Under which of the following conditions may an auditor’s observation procedure for inventory be performed during or after the end of the period under audit?
A. When the auditor finds minimal variations in client records and test counts in prior periods.
B. When total inventory has not varied more than 5% in the last 5 years.
C. When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts.
D.When the client maintains periodic inventory records.

Answer 19

When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts.
Answer (C) is correct.
If the risk of material misstatement is acceptable and reliable perpetual inventory records are subject to effective internal control, the auditor’s observation procedures usually can be performed either during or after the end of the period under audit.

Question 20

The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because
A. Accrued liabilities at year end will become accounts payable during the following year.
B. Accrued liability balances are less material than accounts payable balances.
C. Evidence supporting accrued liabilities is nonexistent, whereas evidence supporting accounts payable is readily available.
D. Accrued liabilities usually pertain to services of a continuing nature whereas accounts payable are the result of completed transactions.

Answer 20

Accrued liabilities usually pertain to services of a continuing nature whereas accounts payable are the result of completed transactions.
Answer (D) is correct.
The procedures differ because the balances result from different transactional processes. Liabilities are accrued for such continuing transactions as rent, salaries, and interest. Accounts payable are short-term obligations arising from the purchase of goods and services in the ordinary course of business.

Question 21

When title to merchandise in transit has passed to the audit client, the auditor engaged in the performance of a purchase cutoff will encounter the greatest difficulty in gaining assurance with respect to the
A.	Price.
B.	Quantity.
C.	Quality.
D.	Terms.

Answer 21

Quality.
Answer (C) is correct.
The purpose of the cutoff is to ensure that the asset and related liability are recognized in the correct period. Accordingly, merchandise included in ending inventory but not yet arrived may not be available for inspection. The quality of such merchandise cannot be assured until the inspection has been conducted after the goods are received.

Question 22

The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference?
A. An item purchased “FOB shipping point” had not arrived at the date of the inventory count and had not been reflected in the perpetual records.
B. No journal entry had been made on the retailer’s books for several items returned to its suppliers.
C. Inventory items had been counted but the tags placed on the items had not been taken off the items and added to the inventory accumulation sheets.
D. Credit memos for several items returned by customers had not been recorded.

Answer 22

Credit memos for several items returned by customers had not been recorded.
Answer (D) is correct.
If credit memos for items returned by customers have not been prepared and recorded, the returned items will be reflected in the physical inventory but not in the perpetual records.