Module 3

Question 1

Auditors sometimes use comparisons of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?
*Fictitious sales
*Unrecorded purchases
*Merchandise purchases being charged to selling and general expenses
*Unrecorded sales

Answer 1

Unrecorded sales

Question 2

When conducting the audit of stockholders’ equity it is normal practice to verify all capital stock transactions:
*Regardless of the controls in existence, because of their materiality and permanence in the records
*That are in excess of a material amount
*if there aren’t very many during the year
*Only when the client is small.

Answer 2

Regardless of the controls in existence, because of their materiality and permanence in the records

Question 3

You are responsible for the audit of payroll. You have assessed control risk as low for the payroll transactions. Substantive tests of payroll would most likely be limited to analytical procedures and:
*Recomputing an entire payroll period and compare to the client’s records
*Recalculating payroll accruals
*Tracing amounts in the payroll transaction file to the payroll master file
*Tracing employee time records to the payroll transaction file accounts.

Answer 3

Recalculating payroll accruals

Question 4

The auditor is performing tests of transactions for individual accounts payable transactions with vendors. Which document provides more reliable information about individual transactions with vendors?
*Vendors’ invoices
*Receiving report
*Voucher
*Purchase order

Answer 4

Vendors’ invoices

Question 5

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity’s inventory valuation?
*Obtaining confirmation of inventories pledged under loan agreements
*Tracing test counts to entity’s inventory listing
*Reviewing shipping and receiving cut-off procedures for inventories
*Testing the entity’s computation of standard overhead rates

Answer 5

Testing the entity’s computation of standard overhead rates

Question 6

Cut-off tests designed to detect credit sales made after the year-end that have been recorded in the current year, provide assurance about management’s assertion of
*Presentation
*Occurrence
*Completeness
*Classification

Answer 6

Occurrence

Question 7

Auditors test the quantity of materials charged to work-in-process by tracing these quantities to:
*Material requisitions
*Cost ledgers
*Perpetual inventory records
*Receiving reports

Answer 7

Material requisitions

Question 8

If the perpetual inventory master files show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded:
*Purchase returns
*Purchases
*Sales
*Sales discounts

Answer 8

Purchases

Question 9

An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the
*Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded
*Daily cash summaries with the sums of the cash receipts journal entries
*Individual bank deposit slips with the details of the monthly bank statements
*Details of bank deposit slips with details of credits to customer accounts

Answer 9

Details of bank deposit slips with details of credits to customer accounts

Question 10

An inventory acquisition is received late in the afternoon of December 31 after the physical inventory is completed. If the acquisition is included in accounts payable and purchases, but excluded from inventory, the result:
*Is an overstatement of working capital
*Is an overstatement of owner’s equity
*Is an understatement of net earnings
*Is an overstatement of net earnings.

Answer 10

Is an understatement of net earnings

Question 11

Which of the following statements is correct?
*The overhead charged to inventory at the balance sheet date can be understated if the salaries of administrative personnel are inadvertently or intentionally charged to indirect manufacturing overhead
*Payroll is a significant portion of inventory for retail and service industry companies
*The valuation of inventory is affected if the direct labor cost of individual employees is improperly charged to the wrong job or process
*When jobs are billed on a cost-plus basis, revenue and total expenses are both affected by charging labor to incorrect jobs

Answer 11

The valuation of inventory is affected if the direct labor cost of individual employees is improperly charged to the wrong job or process

Question 12

Debbie Co.’s physical count of inventories was lower than the inventory quantities shown in its perpetual records. This situation could be the result of the failure to record:
*Sales
*Purchase discounts
*Purchases
*Sales returns

Answer 12

Sales

Question 13

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client’s ending inventory?
*Compare the physical quantities of slow-moving items with corresponding quantities of the prior year.
*Test overall fairness of inventory values by comparing the company’s turnover ratio with the industry average.
*Review the management’s inventory representation letter for accuracy.
*Observe merchandise and raw materials during the client’s physical inventory count.

Answer 13

Observe merchandise and raw materials during the client’s physical inventory count.

Question 14

When a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the bonds payable account, the CPA might suspect that:
*Discount on bonds payable is understated
*Bonds payable are overstated
*Bonds payable are understated
*Premium on bonds payable is overstated

Answer 14

Bonds payable are understated

Question 15

In determining whether transactions have been recorded, the direction of the audit testing start from the:
*General ledger balance
*Adjusted trial balance
*General journal entries
*Original source documents

Answer 15

Original source documents

Question 16

You are auditing the inventory account and are concerned about the possibility of an inventory overstatement. What is the best audit procedure to detect damaged inventory?
*Compare the condition of inventory from the previous year’s count to the current year
*Compare inventory turnover from the previous year’s inventory to the current year’s inventory
*Reconcile the inventory counts to the cost accounting records
*Observe the condition of inventory during the client’s physical count

Answer 16

Observe the condition of inventory during the client’s physical count

Question 17

To test the credits to accounts receivable, an auditors perform procedures to validate the cash receipt. Which of the following procedures will not be appropriate for this verification?
*Trace from the entry in the accounts receivable ledger to a cash receipts listing.
*For a sample of entries in the cash receipts journal, trace to remittance advices.
*Examine the bank statement for the period in audit
*Reconcile accounts receivable subsidiary ledger with accounts receivable ledger account.

Answer 17

Trace from the entry in the accounts receivable ledger to a cash receipts listing.

Question 18

Which of the following is not a procedure that can be performed on canceled checks in an effort to detect defalcations?
*Examine voided checks to be sure they haven’t been used
*Scan endorsements for unusual or recurring second endorsements
*Examine the payroll records in subsequent periods to determine that terminated employees are no longer being paid
*Compare the endorsements on checks with authorized signatures

Answer 18

Examine the payroll records in subsequent periods to determine that terminated employees are no longer being paid

Question 19

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all:
*Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period
*Capitalizable expenditures for property and equipment have not been charged to expense
*Expenditures for property and equipment have been recorded in the proper period
*Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense

Answer 19

Capitalizable expenditures for property and equipment have not been charged to expense

Question 20

It is frequently possible to test the physical inventory prior to the balance sheet date when:
*Year-end sales are small
*The client counts inventory at interim dates
*There are accurate perpetual inventory master files
*The internal control system is no better at year-end than at an earlier point in time

Answer 20

There are accurate perpetual inventory master files

Question 21

A company issued long-term notes payable for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditor’s best course of action is to:
*Trace the cash received from the issuance to the accounting records
*Verify that the new cash received is credited to an account entitled “Bonds Payable”
*Confirm the results of the issuance with the underwriter or investment banker
*Request a statement from the bond trustee as to the amount of bonds issued and outstanding

Answer 21

Trace the cash received from the issuance to the accounting records

Question 22

The audit objective to determine that notes payable in the schedule actually exist is verified by the test of details of balances procedure to:
*Recalculate interest expense
*Foot the notes payable list
*Examine the balance sheet for proper disclosure of noncurrent portions
*Confirm notes payable

Answer 22

Confirm notes payable

Question 23

Which of the following is a substantive test of transactions?
*Examine printouts of transactions rejected by the computer as having invalid employee IDs.
*Review personnel policies
*Account for a sequence of payroll checks
*Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement

Answer 23

Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement

Question 24

A major difficulty in the verification of inventory cost records for the purpose of inventory valuation is in determining the reasonableness of:
*Direct labor’s hourly rate
*Number of direct labor hours applied
*Raw materials per unit cost
*Cost allocations

Answer 24

Cost allocations

Question 25

If an auditor were concerned with obtaining evidence about the appropriateness of the value of inventory, which of the following tests would be most appropriate?
*Compilation tests
*Price tests
*Physical examination of the inventory
*Confirmation of inventory held by outside parties

Answer 25

Price tests

Question 26

Which of the following procedures is most effective in detecting understatement of cost and expenses?
*Reviewing cash disbursements recorded before and subsequent to the reporting date.
*Examining unusual relationships between monthly accounts payable balances and recorded cash payments
*Footing the list of liabilities
*Examining file of unpaid bills and tracing it in the general journal

Answer 26

Examining file of unpaid bills and tracing it in the general journal

Question 27

You are gathering evidence for the audit objective that existing inventory items are included in the inventory listing schedule. The audit procedure that would provide you with the best evidence to confirm this objective is:
*Trace from inventory tags to the inventory listing schedule and make sure the inventory tag is included
*Trace the inventory totals to the general ledger
*Perform tests of lower of cost and net realizable value.
*Account for unused tags shown in the auditor’s documentation to make sure no tags have been added

Answer 27

Trace from inventory tags to the inventory listing schedule and make sure the inventory tag is included

Question 28

The most effective and efficient audit approach in the examination of the income statement would be which of the following?
*Compare company’s components of net income to the previous two years
*Examination of income statement accounts concurrently with the related balance sheet accounts.
*Examine changes in all balance sheet accounts.
*Compare company’s components of net income to other businesses in the same industry

Answer 28

Examination of income statement accounts concurrently with the related balance sheet accounts.

Question 29

To check the accuracy of hours worked, an auditor would ordinarily compare clock cards with:
*Job time tickets
*Labor variance reports
*Personnel records
*Time recorded in the payroll register

Answer 29

Job time tickets

Question 30

The audit procedure “observe the client taking a physical inventory count and test the count” is sufficient to determine all of the following except:
*Whether recorded inventory was properly counted by the client
*Whether recorded inventory was properly valued by the client
*Whether recorded inventory actually exists
*Whether client inventory instruction had properly been followed

Answer 30

Whether recorded inventory was properly valued by the client

Question 31

Which of the following is the most important consideration of an auditor when examining the stockholders’ equity section of a client’s statement of financial position?
*Entries in the capital stock account can be traced to resolution in the minutes of meeting of the board of directors
*Stock dividends are capitalized at par or stated value on the dividend declaration date
*Stock dividends, and/or stock splits during the year under audit are approved by the stockholders
*Changes in the capital stock account are verified by an independent stock transfer agent

Answer 31

Entries in the capital stock account can be traced to resolution in the minutes of meeting of the board of directors

Question 32

Tracing bills of lading to sales invoice provides evidence that:
*Shipments to customers were invoiced
*Invoiced sales were actually shipped
*Shipments to customers were recorded as sales
*Recorded sales were shipped

Answer 32

Shipments to customers were invoiced

Question 33

Assume that the client’s valuation of an inventory item is P10 per unit for 1,000 units, using FIFO. If the most recent acquisition of inventory was for 500 units at P10 per unit and the immediately preceding acquisition was for 700 units at P9 per unit, the inventory item is in error and it is:
*Understated by P500.
*Overstated by P500
*Understated by P700
*Overstated by P700

Answer 33

Overstated by P500

Question 34

Cutoff procedures for inventory purchased should be designed by companies to assure the company that:
*Inventory was correctly valued at year end
*Inventory included in the year end inventory count has been paid.
*Inventory received before year end was recorded before year end.
*Inventory owned by the company has been received

Answer 34

Inventory received before year end was recorded before year end.

Question 35

To determine that recorded investments and investment income exist, the auditor should:
*Confirm securities held by others
*Determine market value of securities at reporting date
*Evaluate the method of accounting for securities
*None of the choices

Answer 35

Confirm securities held by others

Question 36

An auditor learns that collections of accounts receivable during the first ten days of January were debited to cash and credited to accounts receivable as of December 31. The effect generally will be to:
*Leave both working capital and the current ratio unchanged at December 31.
*Overstate both working capital and the current ratio at December 31.
*Overstate working capital with no effect on the current ratio at December 31.
*Overstate the current ratio with no effect on working capital at December 31.

Answer 36

Leave both working capital and the current ratio unchanged at December 31.

Question 37

The audit of year-end physical inventories should include steps to verify that the client’s purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a:
*Purchase return in the subsequent period
*Sale in the current period.
*Sale in the subsequent period
*Purchase in the current period

Answer 37

Sale in the current period.

Question 38

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management’s assertion of:
*Occurrence
*Classification
*Completeness
*Presentation

Answer 38

Completeness

Question 39

The test of transactions which requires one to “reconcile recorded cash disbursements with the cash disbursements on the bank statement” satisfies the objective of:
*Posting and summarization
*Completeness
*Accuracy
*Occurrence

Answer 39

Completeness

Question 40

Which of the following procedures is the most effective in detecting overstatement of revenues?
*Inquiry with sales personnel and with personnel responsible for recording sales transactionsh
*Inspection of physical inventories in the shipping room
*Tracing entries in the sales journal to the related sales invoices and shipping documents
*Tracing sales invoices and shipping documents to the entries in the sales journal

Answer 40

Tracing entries in the sales journal to the related sales invoices and shipping documents

Question 41

Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme?
*A separate payroll bank account is maintained on an imprest basis.
*There are significant unexplained variances between standard labor cost and actual labor cost
*Employee time cards are approved by individual departmental supervisors
*Payroll checks are disbursed by the same employee each payday

Answer 41

There are significant unexplained variances between standard labor cost and actual labor cost

Question 42

A procedure to test for a cash receipts cutoff error is:
*Performing a four-column proof-of-cash
*Tracing recorded cash receipts to bank deposits on the bank statement of a different period.
*Reconciling the bank statement.
*Observing the counting of cash at the balance sheet date

Answer 42

Tracing recorded cash receipts to bank deposits on the bank statement of a different period.

Question 43

The understatement of sales and accounts receivable is best uncovered by:
*Reconciling the accounts receivable general ledger with the schedule of accounts receivable
*Test of transactions for shipments made but not recorded
*Confirming receivables
*Reviewing the aged trial balance

Answer 43

Test of transactions for shipments made but not recorded

Question 44

When large amounts of negotiable securities are held by the client, planning by the auditor is necessary to guard against:
*Unrecorded sale of securities after they are counted
*Unauthorized negotiation of the securities before they are counted
*Substitution of securities already counted for other securities which should be on hand but are not
*Substitution of authentic securities with counterfeit securities

Answer 44

Substitution of securities already counted for other securities which should be on hand but are not

Question 45

You are auditing the company’s purchasing process for goods and services. You are primarily concerned with the company not recording all purchase transactions. Which audit procedure below would be most effective in this case?
*Tracing vendor invoices to recorded amounts in the accounts payable account
*Confirming accounts payable recorded amounts
*Reconciling accounts payable subsidiary ledger with the accounts payable account
*Vouching from the accounts payable to the vendor invoices

Answer 45

Tracing vendor invoices to recorded amounts in the accounts payable account

Question 46

Below are listed possible misstatements that could occur in the sales and collections cycle. Which of the following analytical procedure would be least useful in detecting the possible misstatements?
a. Overstatement of sales and accounts receivable
b. Uncollectible accounts receivable that have not been provided for
c. Overstatement of sales returns and allowances

*Compare sales returns and allowances as a percentage of gross sales with previous years
*Compare bad debt expense as a percentage of sales from previous years
*Compare gross margin percentage with previous year by product line; compare sales by month, (by product line), over time
*Compare accounts receivable totals as a percentage of total assets with previous years

Answer 46

Compare accounts receivable totals as a percentage of total assets with previous years

Question 47

An auditor would most likely review a client’s periodic accounting for the numerical sequence of shipping documents and sales invoices to support management’s financial statement assertion of:
*Valuation and allocation
*Rights and obligations
*Completeness
*Existence

Answer 47

Completeness

Question 48

Which of the following procedures would meet the objective of determining that Investments and investment income are owned by the entity
*Determine market value of securities at reporting date.
*Inspect securities on hand and trace to list
*Examine remittance advices for dividends, interest and disposals of investments
*Apply analytical procedures

Answer 48

Apply analytical procedures

Question 49

Which of the following best describes the independent auditor’s approach to obtaining satisfaction concerning depreciation expense in the income statement?
*Determine the method of computing depreciation expense and ascertain that it is in accordance with PFRS
*Establish the basis for depreciable assets and verify the depreciation expense.
*Reconcile the amount of depreciation expense to those amounts credited to accumulated depreciation accounts
*Verify the mathematical accuracy of the amounts charged to income as a result of depreciation expense

Answer 49

Establish the basis for depreciable assets and verify the depreciation expense.

Question 50

In testing the existence assertion for an asset, the auditor ordinarily works from the
*Financial statements to the potentially unrecorded items
*Supporting evidence to the accounting records
*Potentially unrecorded items to the nancial statements
*Accounting records to the supporting evidence

Answer 50

Accounting records to the supporting evidence