Midterms

Question 1

1. When few property and equipment transactions occur during the year, the continuing auditor usually obtains an understanding of internal control and performs
   a. Tests of controls.
   b. Analytical procedures to verify current year additions to property and equipment.
   c. A thorough examination of the balances at the beginning of the year.
   d. Extensive tests of current year property and equipment transactions

Answer 1

d. Extensive tests of current year property and equipment transactions

Question 2

2. Which is the best audit procedure to obtain evidence to support the legal ownership of real property?
   a. Examination of corporate minutes and board resolutions with regard to approvals to acquire real property.
   b. Examination of closing documents, deeds and ownership documents registered and on file at the register of deeds.
   c. Discussion with corporate legal counsel concerning the acquisition of a specific piece of property
   d. Confirmation with the title company that handled the escrow account and disbursement of proceeds for the closing of the property.

Answer 2

b. Examination of closing documents, deeds and ownership documents registered and on file at the register of deeds.

Question 3

3. An auditor is verifying a company’s ownership of equipment. What is the best evidence of ownership?
   a. An interview with the equipment custodian verifying company ownership
   b. The presence of the equipment on the company’s statement of financial position
   c. The current year’s depreciation expense journal entry
   d. A cancelled check written to acquire the equipment

Answer 3

d. A cancelled check written to acquire the equipment

Question 4

In auditing plant assets and accumulated depreciation for proper valuation, the auditor should do all except the following:
a. Physically inspect major plant assets additions
b. Recalculate depreciation expense on a test basis
c. Vouch repairs and maintenance expense on a test basis
d. Vouch major additions by reference to underlying documentation

Answer 4

a. Physically inspect major plant assets additions

Question 5

Which of the following combination of procedures would an auditor most likely perform to obtain evidence about fixed asset additions?
a. Recomputing calculations and obtaining written management representations
b. Observing operating activities and comparing balances to prior period balances
c. Confirming ownership and corroborating transactions through inquiries of client personnel
d. Inspecting documents and physically examining assets

Answer 5

d. Inspecting documents and physically examining assets

Question 6

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management’s financial statement assertion of
a. Valuation
b. Existence
c. Completeness
d. Rights and obligations

Answer 6

a. Valuation

Question 7

The most effective means for the auditor to determine whether a recorded intangible asset possesses the characteristics of an asset is
a. Vouch the purchase by reference to underlying documentation.
b. Inquire as to the status of patent application.
c. Evaluate the future revenue-producing capacity of the intangible asset.
d. Analyze the research and development expenditures to determine that only those expenditures possessing future economic benefit have been capitalized.

Answer 7

c. Evaluate the future revenue-producing capacity of the intangible asset.

Question 8

In verifying the amount of goodwill recorded by a client, the most convincing evidence which an auditor can obtain is by comparing the recorded value of assets acquired with the
a. Assessed value as evidence by tax bills
b. Appraised value as evidenced by independent appraisals
c. Seller’s book value as evidenced by financial statements
d. Insured value as evidence by insurance companies

Answer 8

b. Appraised value as evidenced by independent appraisals

Question 9

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management’s financial statement assertion of
a. Completeness
b. Valuation and allocation
c. Existence or occurrence
d. Rights and obligations

Answer 9

b. Valuation and allocation

Question 10

An auditor has set an audit objective of determining whether research and development projects were properly authorized. Which of the following audit techniques will best meet this objective?
a. Inquiry
b. Observation
c. Analytical review
d. Inspection of documents

Answer 10

d. Inspection of documents

Question 11

An auditor is most likely to verify the interest earned on bond investment by
a. Verifying the receipt and deposit of interest checks.
b. Confirming the bond interest rate with the issuer of the bonds.
c. Recomputing the interest earned on the basis of face amount, interest rate, and period held.
d. Testing controls relevant to cash receipts.

Answer 11

c. Recomputing the interest earned on the basis of face amount, interest rate, and period held.

Question 12

Which statement is incorrect regarding valuation and disclosure of long-term investments?
a. When long-term investments are material to the financial statements, the auditor should obtain sufficient appropriate evidence regarding their valuation and disclosure
b. Audit procedures regarding long-term investments ordinarily include considering evidence as to whether the entity has the ability to continue to hold the investments on a long-term basis
c. If there is an uncertainty as to whether the carrying amount will be recovered, the auditor would consider whether appropriate adjustments and/or disclosures have been made
d. If market quotations exceed the carrying amounts, the auditor would consider whether a write-down is required

Answer 12

d. If market quotations exceed the carrying amounts, the auditor would consider whether a write-down is required

Question 13

Which the following statements is the least - accepted reason/ purpose for acquiring long-term investments:
a. To yield a relatively permanent other income.
b. To generate cash for operating purposes.
c. To establish business relationships.
d. To create specific funds.

Answer 13

b. To generate cash for operating purposes.

Question 14

The auditor should insist that a representative of the client be present during the physical examination of securities in order to
a. Lend authority to the auditor’ s directives
b. Acknowledge the receipt of securities returned
c. Detect forged securities.
d. Coordinate the return of all securities to proper locations

Answer 14

b. Acknowledge the receipt of securities returned

Question 15

. In auditing investments or proper valuation, the auditor should do all but the following:
a. Vouch purchases and sales of securities by tracing to brokers advices and canceled checks,
b. Compare cost and market by reference to year end market values for selected securities
c. Confirm securities held in safekeeping off the client’s premises.
d. Recalculate gain or loss on disposals.

Answer 15

c. Confirm securities held in safekeeping off the client’s premises.

Question 16

During an audit of an entity’s shareholders’ equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or law. This audit procedure most likely is intended to verify management’s assertion of
a. Completeness
b. Existence
c. Presentation and disclosure
d. Valuation

Answer 16

c. Presentation and disclosure

Question 17

Which of the following information is most important when auditing shareholders’ equity?
a. Entries in the share capital account can be traced to a resolution in the minutes of the board of directors’ meetings
b. Share of dividends and/or share splits during the year were approved by the shareholders
c. Share dividends are capitalized at par or stated value on the dividend declaration date
d. Changes in the share capital account are verified by an independent stock transfer agent

Answer 17

a. Entries in the share capital account can be traced to a resolution in the minutes of the board of directors’ meetings

Question 18

When a corporate client maintains its own stock records, the auditor primarily will rely upon
a. Confirmation with the company secretary of shares outstanding at yearend
b. Review of the corporate minutes for data as to shares outstanding
c. Confirmation of the number of shares outstanding at year-end with the appropriate state official
d. Inspection of the stock book at year-end and accounting for all certificate numbers

Answer 18

d. Inspection of the stock book at year-end and accounting for all certificate numbers

Question 19

Auditor confirmation of accounts payable balances at the end of the reporting period may be unnecessary because
a. There is likely to be other reliable external evidence to support the balances
b. This is a duplication of cutoff tests
c. Accounts payable balances at the end of the reporting period may not be paid before the audit is completed
d. Correspondence with the audit client’s attorney will reveal all legal action by vendors for nonpayment

Answer 19

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

Question 20

When an auditor selects a sample of items from the vouchers payable register for the last month of the period under audit and traces these items to underlying documents, the auditor is gathering evidence primarily in support of the assertion that
a. Recorded obligations were paid.
b. Incurred obligations were recorded in the correct period
c. Recorded obligations were valid.
d. Cash disbursements were recorded as incurred obligations

Answer 20

c. Recorded obligations were valid.

Question 21

Which of the following is a substantive test that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable?
a. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
b. Confirming accounts payable balances with known suppliers who have zero balances.
c. Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for.
d. Receiving the client’s mail, unopened, for a reasonable period of time after the year-end to search unrecorded vendor’s invoices

Answer 21

a. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.

Question 22

In performing tests concerning the granting of stock options, an auditor should
a. Confirm the transaction with the Securities and Exchange Commission.
b. Verify the existence of option holders in the entity’s payroll records or stock ledgers.
c. Determine that sufficient treasury stock is available to cover any new stock issued.
d. Trace the authorization for the transaction to a vote of the board of directors.

Answer 22

d. Trace the authorization for the transaction to a vote of the board of directors.

Question 23

When a client company does not maintain its own stock records, the auditor most likely will
a. Obtain written confirmation from the transfer agent and registrar concerning the number of shares issued and outstanding
b. Inspect the stock book at year-end and accounting for all certificate numbers
c. Review of the corporate minutes for information as to shares outstanding
d. Confirm the number of shares outstanding at year-end with the appropriate state official

Answer 23

a. Obtain written confirmation from the transfer agent and registrar concerning the number of shares issued and outstanding

Question 24

An auditor usually obtains evidence of shareholders’ equity transactions by reviewing the entity’s
a. Cancelled stock certificates
b. Transfer agent’s records
c. Treasury stock certificate book
d. Minutes of board of directors’ meetings

Answer 24

d. Minutes of board of directors’ meetings

Question 25

The board of directors of Mega Supermarkets declared a 20% cash dividend at its meeting on March 12, 2020 payable on May 15, 2010 to shareholders on record as of April 15, 2010. The dividend declaration should be taken up in the company’s financial statements on
a. March 12, 2010
b. May 15, 2010
c. December 31, 2010
d. April 15, 2010

Answer 25

a. March 12, 2010

Question 26

. During an audit of an entity’s shareholders’ equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or law. This audit procedure most likely is intended to verify management’s assertion of
a. Completeness
b. Existence
c. Presentation and disclosure
d. Valuation

Answer 26

c. Presentation and disclosure

Question 27

Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the client’s employees?
a. Test footings in the accounts payable ledger.
b. Reconcile unpaid invoices to vendors’ statements.
c. Prepare a schedule of accounts payable.
d. Mail confirmations for selected account balances.

Answer 27

c. Prepare a schedule of accounts payable.

Question 28

An audit assistant found a purchase order for a regular supplier in the amount of P5,500. The purchase order was dated after receipt of goods. The purchasing agent had forgotten to issue the purchase order. Also, a disbursement of P450 for materials did not have a receiving report. The assistant wanted to select additional purchase orders for investigation but was unconcerned about lack of receiving report. The audit director should
a. Agree with the assistant because the amount of the purchase order exception was considerably larger than the receiving report exception.
b. Agree with the assistant because the cash disbursement clerk had been assured by the receiving clerk that the failure to fill out a report didn’t happen very often.
c. Disagree with the assistant because two problems have an equal risk of loss associated with them.
d. Disagree with the assistant because the lack of a receiving report has a
greater risk of loss associated with it.

Answer 28

d. Disagree with the assistant because the lack of a receiving report has a
greater risk of loss associated with it.

Question 29

A CPA analyzes the accrued interest payable accounts for the year, recomputes the amounts of payments and beginning and ending balances and reconciles to the interest expense account. Which error or questionable practice below has the best chance of being detected by this specific audit procedure?
a. Interest paid on an open account was charged to the purchase account
b. Interest revenue of P120 on a note receivable was credited against miscellaneous expense
c. A note payable had not been recorded. Interest of P300 on the note was properly paid and charged to the interest expense account
d. There was a violation of a term in the client’s loan agreement prohibiting dividends on common stocks unless net income available for interest and dividends is at least three times interest requirement

Answer 29

c. A note payable had not been recorded. Interest of P300 on the note was properly paid and charged to the interest expense account

Question 30

An auditor’s purpose in reviewing the renewal of a note payable shortly after the end of the reporting period most likely is to obtain evidence concerning management’s assertion about
a. Existence
b. Completeness
c. Presentation and disclosure
d. Valuation and allocation

Answer 30

c. Presentation and disclosure

Question 31

When an auditor selects a sample of items from the vouchers payable register for the last month of the period under audit and traces these items to underlying documents, the auditor is gathering evidence primarily in support of the assertion that
a. Recorded obligations were paid
b. Incurred obligations were recorded in the correct period
c. Recorded obligations were valid
d. Cash disbursements were recorded as incurred obligations

Answer 31

c. Recorded obligations were valid

Question 32

Which of the following information is most important when auditing shareholders’ equity?
a. Entries in the share capital account can be traced to a resolution in the minutes of the board of directors’ meetings
b. Share dividends and/or share splits during the year were approved by the shareholders
c. Share dividends are capitalized at par or stated value on the dividend declaration date
d. Changes in the share capital account are verified by an independent stock transfer agent

Answer 32

a. Entries in the share capital account can be traced to a resolution in the minutes of the board of directors’ meetings

Question 33

A client company declared and paid a stock dividend. Its independent external auditor should determine that
a. Shareholders received their additional shares by confirming year-end holdings with them.
b. The stock dividend was properly recorded by means of a memorandum entry only.
c. The officers authorized the issuance of the stock dividend.
d. Appropriate amounts were transferred from retained earnings to share capital and share premium.

Answer 33

d. Appropriate amounts were transferred from retained earnings to share capital and share premium.

Question 34

The primary responsibility of a bank acting as registrar of capital stock is to
a. Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation
b. Act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury stock
c. Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation
d. Account for stock certificates by comparing the total shares outstanding to the total in the shareholders’ subsidiary ledger

Answer 34

a. Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation

Question 35

Tracing receiving reports for purchases of merchandise to the accounts payable voucher and the voucher register supports the audit objective of:
a. Determining whether recorded purchases represent valid transactions which is consistent with auditing the existence/occurrence of payables and purchases.
b. Determining whether goods received for valid purchases were eventually recorded which is consistent with auditing the existence/occurrence of payables and purchases.
c. Determining whether recorded purchases are in fact for goods actually received consistent with auditing the completeness of payables and purchases.
d. Determining whether goods received for valid purchases were eventually recorded which is consistent with auditing completeness of payables and purchases.

Answer 35

d. Determining whether goods received for valid purchases were eventually recorded which is consistent with auditing completeness of payables and purchases.

Question 36

In auditing accounts payable, an auditor’s procedures most likely will focus primarily on management’s assertion of
a. Existence
b. Presentation and disclosure
c. Completeness
d. Valuation and allocation

Answer 36

c. Completeness

Question 37

Which of the following is not used to test overstatements and understatements of accounts payable?
a. Unmatched receiving reports
b. Cancelled voucher packages
c. Cash receipts records
d. Cash disbursement records

Answer 37

c. Cash receipts records