Module 3 Flashcards
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
Unrecorded sales
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.
Regardless of the controls in existence, because of their materiality and permanence in the records
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.
Recalculating payroll accruals
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
Vendors’ invoices
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
Testing the entity’s computation of standard overhead rates
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
Occurrence
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
Material requisitions
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
Purchases
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
Details of bank deposit slips with details of credits to customer accounts
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.
Is an understatement of net earnings
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
The valuation of inventory is affected if the direct labor cost of individual employees is improperly charged to the wrong job or process
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
Sales
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.
Observe merchandise and raw materials during the client’s physical inventory count.
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
Bonds payable are understated
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
Original source documents
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
Observe the condition of inventory during the client’s physical count
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.
Trace from the entry in the accounts receivable ledger to a cash receipts listing.
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
Examine the payroll records in subsequent periods to determine that terminated employees are no longer being paid
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
Capitalizable expenditures for property and equipment have not been charged to expense
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
There are accurate perpetual inventory master files
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
Trace the cash received from the issuance to the accounting records
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
Confirm notes payable
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
Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement
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
Cost allocations
