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
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
Price tests
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
Examining file of unpaid bills and tracing it in the general journal
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
Trace from inventory tags to the inventory listing schedule and make sure the inventory tag is included
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
Examination of income statement accounts concurrently with the related balance sheet accounts.
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
Job time tickets
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
Whether recorded inventory was properly valued by the client
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
Entries in the capital stock account can be traced to resolution in the minutes of meeting of the board of directors
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
Shipments to customers were invoiced
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
Overstated by P500
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
Inventory received before year end was recorded before year end.
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
Confirm securities held by others
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.
Leave both working capital and the current ratio unchanged at December 31.
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
Sale in the current period.
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
Completeness
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
Completeness
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
Tracing entries in the sales journal to the related sales invoices and shipping documents
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
There are significant unexplained variances between standard labor cost and actual labor cost
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
Tracing recorded cash receipts to bank deposits on the bank statement of a different period.
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
Test of transactions for shipments made but not recorded
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
Substitution of securities already counted for other securities which should be on hand but are not
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
Tracing vendor invoices to recorded amounts in the accounts payable account
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
Compare accounts receivable totals as a percentage of total assets with previous years
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
Completeness
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
Apply analytical procedures
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
Establish the basis for depreciable assets and verify the depreciation expense.
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
Accounting records to the supporting evidence
