Advanced Audit, Midterm Exam Test Bank

False

Tests of details of balances emphasize the overall reasonableness of transactions and the general ledger balances.

False

Tests of controls are performed to support a reduced assessment of detection risk.

True

The results of tests of controls and substantive tests of transactions affect the design of test of details of balances.

False

If internal controls are tested and considered effective, the auditor generally will increase both substantive tests of transactions and tests of details of balances.

False

A medium-sized, nonpublic company has few effective controls and significant inherent risks. The auditor in this situation should emphasize tests of details of balances and substantive tests of transactions; no substantive analytical procedures should be performed in this situation by the auditor.

True

The auditor performs tests of controls and substantive procedures to obtain assurance that all audit objectives are achieved for information and amounts included in those disclosures.

True

Subsequent events represent events that occasionally occur after the balance sheet date, but before the issuance of the financial statements and the auditor’s reports, that have an effect on the financial statements.

False

A bill of lading is a written contract between the seller and the buyer.

True

Sales transactions are the result of the following five functions in the sales and collection cycle: processing customer orders, granting credit, shipping goods, billing customers, and recording sales.

True

The extent of tests of controls in audits of nonpublic companies depends on the effectiveness of the controls and the extent to which the auditor believes they can be relied on to reduce control risk.

True

An effective procedure to test the occurrence/existence objective for sales is to vouch sales journal entries to copies of sales orders, shipping documents, and sales invoices.

False

Auditing standards indicate that if the auditor identifies a significant risk at the assertion level, the auditor is not required to perform substantive procedures.

False

When performing a proof of cash receipts, the auditor will test if the total cash receipts recorded in the cash receipts journal for a given period agree with the actual deposits made to the respective bank account for the same period. A difference found during this test generally signals to the auditor a potential weakness in internal controls.

True

At the completion of the tests of controls and substantive tests of transactions, auditors must analyze each exception to determine its cause and the implication of the exception on assessed control risk.

False

Auditors use the results of the substantive tests of transactions of sales and the collection cycle to determine the extent to which inherent risk is satisfied for each accounts receivable balance-related audit objective.

True

For most audits, revenue recognition is considered to be a significant risk.

True

When analytical procedures in the sales and collection cycle uncover unusual fluctuations, the auditor should make additional inquiries of management.

True

Auditors perform both planning and substantive analytical procedures for the entire sales and collection cycle, not just accounts receivable.

False

If sales are made FOB (free on board) shipping point or FOB destination at a period end, revenue does not need to be adjusted in either situation.

False

It is acceptable under generally accepted accounting principles for the client to include material related party receivables together with trade receivables on the balance sheet.

True

Significant credit balances in accounts receivable should be reclassified as accounts payable.

False

The acquisition and payments cycle ends with the receiving of goods and services.

True

Purchase returns and allowances and purchase discounts business functions are generally not significant in amount for most companies.

False

Failure to record the acquisition of goods and services received overstates both accounts payable and net income.

False

The controls over acquisitions included in the perpetual inventory records are normally tested as a part of the test of controls and substantive tests of transactions for the sales and collection cycle.

True

Auditors are normally more concerned about the violations of the completeness objective for acquisitions than about violations of the occurrence objective for acquisitions.

True

When auditing accounts payable, the auditor is more concerned about the possibility of understatements than overstatements.

True

The “rights” aspect of the “rights and obligations” objective is not applicable to liabilities.

False

Depreciation amounts are determined by exchange transactions with outside parties.

False

The transportation and installation costs for a piece of equipment should be charged to an expense account.

False

Equipment additions which are infrequent in occurrence and large in dollar amounts, which were included as part of the tests of the acquisition and payment cycle, allow the auditor to rely heavily on the results of such tests.

True

When auditing insurance expense, auditors normally rely on analytical procedures and limited testing of the debits to ensure that they arose from credits to prepaid insurance.

False

Auditors verify the accruals before they verify the current year property tax payments.

True

In the analysis of expense accounts, the auditor verifies transactions in specific accounts to determine whether the transactions are properly classified and accurately recorded.

True

Typically, analytical procedures are the primary means of verifying income statement accounts resulting from allocations.

A) determine the risk of material misstatement in the financial statements.

Risk assessment procedures are performed by auditors during an audit in order to:
A) determine the risk of material misstatement in the financial statements.
B) determine the amount of testing of internal control.
C) determine the extent of testing of details of balances.
D) determine the extent of testing of transactions.

D) tests of details of balances.

Which of the following is ordinarily designed to detect material dollar errors on the financial statements?

A) tests of controls.
B) analytical review procedures.
C) computer controls.
D) tests of details of balances.

D) tests of details of balances.

In order to promote audit efficiency, the auditor considers cost in selecting audit tests to perform. Which of the following audit tests would be the most costly?

A) substantive analytical procedures.
B) risk assessment procedures.
C) tests of controls.
D) tests of details of balances.

Decide to modify tests of details of balances.

(4) When an auditor believes that analytical procedures indicate a reasonable possibility of misstatement, the auditor usually would:

A) Perform additional tests of controls, and decide to modify tests of details of balances.
B) None.
C) Perform additional tests of controls.
D) Decide to modify tests of details of balances.

Extensive tests of details of balances will need to be performed.

(5) If the auditor finds extensive control test deviations and significant misstatements while performing significant tests of transactions and substantive analytical procedures:

A) The cost of the audit should decrease.
B) The auditor will conclude that internal controls are effective.
C) Extensive tests of details of balances will need to be performed.
D) All of the above.

D) all of the above.

There is a direct relationship between the _____ transaction-related audit objective and the _____ balance-related audit objective.

A) occurrence; existence.
B) timing; cutoff.
C) posting and summarization; detail tie-in.
D) all of the above.

D) tests of details of balances.

What type of test is used to obtain the most types of evidence?
A) substantive tests of transactions.
B) tests of controls.
C) risk assessment tests.

D) tests of details of balances.

C) Details of the journal are posted to the accounts receivable master file, and journal totals are posted to the general ledger.

When posting items sold on account from the sales journal:

A) Details of the journal are posted to the sales account, and journal totals are posted to the general ledger.
B) Details of the journal are posted to the sales account, and journal totals are posted to the accounts receivable subsidiary ledger.
C) Details of the journal are posted to the accounts receivable master file, and journal totals are posted to the general ledger.
D) Details of the journal are posted to the accounts receivable account in the general ledger, and journal totals are posted to the sales account in the general ledger.

A) sales order.

For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be recorded on which of the following documents?

A) sales order.
B) sales invoice.
C) customer order.
D) remittance advice.

A) making sure that all shipments have been billed.

Which one of the following procedures performed for the billing function provides evidence for the completeness assertion?

A) making sure that all shipments have been billed.
B) making sure that no shipment has been billed more than twice.
C) making sure that each shipment is billed at the correct amount.
D) making sure that each shipment is billed to the proper customer.

D) All of the above are accurate statements.

Which of the following is an accurate statement relating to the separation of duties?

A) Management should deny cash access to anyone responsible for entering sales and cash receipts transaction information into the computer.
B) All disagreements on the monthly statements should be directed to a designated person who has no responsibility for handling cash or recording sales or accounts receivable.
C) The credit granting function should be separate from the sales function.
D) All of the above are accurate statements.

A) some procedures are commonly employed on every audit regardless of the circumstances.

Which of the following statements is true? In deciding on substantive tests of transactions:

A) some procedures are commonly employed on every audit regardless of the circumstances.
B) all procedures are dependent on the adequacy of the controls and the results of the tests of controls.
C) results obtained in the prior year’s audit will not affect the procedures used this year.
D) the materiality of the item will not influence the choice of procedures used.

A) Observe whether monthly statements are met.

Which of the following tests of controls is useful to test the transaction-related audit objective of posting and summarization?

A) Observe whether monthly statements are met.
B) Observe unrecorded cash at a point in time.
C) Observe whether the accountant reconciles with the bank account.
D) Observe endorsement of incoming checks.

B) auditors use the same methodology for designing tests of controls and substantive tests of transactions for cash receipts as they use for sales.

When designing tests of controls and substantive tests of transactions for cash receipts, it is important to remember that:

A) the test of controls are designed to test for monetary misstatements.
B) auditors use the same methodology for designing tests of controls and substantive tests of transactions for cash receipts as they use for sales.
C) the tests of controls are not dependent on the controls the auditor verifies.
D) the tests of controls are not dependent on whether the company being audited is publicly traded.

A) existence.

For sales, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives?
A) existence.
B) completeness.
C) rights.
D) detail tie-in.

B) completeness.

For cash receipts, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives?

A) existence.
B) completeness.
C) rights.
D) detail tie-in.

D) Each of the above would receive special attention.

Which of the following types of receivables would not deserve the special attention of an auditor?

A) accounts receivables with credit balances.
B) accounts that have been outstanding for a long time.
C) receivables from related parties.

D) Each of the above would receive special attention.

C) overstatement or understatement of bad debt expense.

An auditor is comparing the write-off of uncollectible accounts as a percentage of total accounts receivable with previous years. A possible misstatement this procedure could uncover is:

A) overstatement or understatement of sales.
B) overstatement or understatement of accounts receivable.
C) overstatement or understatement of bad debt expense.
D) overstatement or understatement of sales returns and allowances.

A) realizable value.

An auditor is performing a credit analysis of customers with balances over 60 days due. She is most likely obtaining evidence for which audit related objective?

A) realizable value.
B) existence.
C) completeness.
D) occurrence.

D) the confirmation of customers’ balances.

The most important test of details of balances to determine the existence of recorded accounts receivable is:

A) tracing details of sales invoices to shipping documents.
B) tracing the credits in accounts receivable to bank deposits.
C) tracing sales returns entries to credit memos issued and receiving room reports.
D) the confirmation of customers’ balances.

C) confirmation of receivables.

Which of the following audit procedures would not likely detect a client’s decision to pledge or factor accounts receivable?

A) a review of the minutes of the board of directors’ meetings.
B) discussions with the client.
C) confirmation of receivables.
D) examination of correspondence files.

D) processing cash disbursements.

Which of the following business functions is not considered to be part of the acquisitions class of transactions?

A) processing purchase orders.
B) recognizing liabilities.
C) receiving goods and services.
D) processing cash disbursements.

D) when the company receives the goods or services from the vendor.

At what point in the acquisition and payment cycle do most companies first recognize the acquisition and related liability on their records?

A) when the purchase requisition is received by the accounting department.
B) when the purchase order is prepared.
C) when the company receives the invoice from the vendor.
D) when the company receives the goods or services from the vendor.

C) personnel who record the acquisitions should not have access to cash or other assets.

When reviewing the controls and procedures in the acquisition and payment cycle:

A) companies cannot record the liability for the acquisition until the invoice is received from the vendor.
B) the purchasing department has the responsibility for verifying the appropriateness of the acquisition.
C) personnel who record the acquisitions should not have access to cash or other assets.
D) the accounts payable department should account for all receivable reports to assure that the occurrence objective is satisfied.

C) completeness.

The internal control that requires that “checks are prenumbered and accounted for” satisfies the objective of:
A) accuracy.
B) existence.
C) completeness.
D) posting and summarization.

B) vendors’ invoices.

An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all:
A) merchandise received.
B) vendors’ invoices.
C) canceled checks.
D) receiving reports.

A) Examine cash disbursements for several weeks after the balance sheet date.

Peprah Company pays its accounts receivable 45 days after the receipt of the the goods or services. In this case, which audit procedure should be used to detect any unrecorded liabilities?
A) Examine cash disbursements for several weeks after the balance sheet date.
B) Reconcile purchase orders to requisition orders.
C) Reconcile purchase orders to receiving reports.
D) Reconcile purchase orders to vendor invoices.

A) Examine underlying documentation for cash disbursements made during the last month of the year.

Which of the following is not a typical audit procedure performed as part of the out-of-period liability tests?

A) Examine underlying documentation for cash disbursements made during the last month of the year.
B) Examine underlying documentation for bills not paid several years after the year-end.
C) Trace receiving reports issued before year-end to related vendors’ invoices.
D) All of the above are correct.

D) both the income statement and the balance sheet.

Failure to capitalize a fixed asset at the correct amount would impact which financial statements?
A) the balance sheet.
B) the income statement.
C) the cash flow statement only.

D) both the income statement and the balance sheet.

C) Test the valuation of fixed assets recorded in prior periods.

Because the failure to record disposals of property, plant, and equipment can significantly impact the financial statements, the search for unrecorded disposals is essential. Which of the following is not a procedure used to verify disposals?

A) Make inquiries of management and production personnel about the possibility of the disposal of assets.
B) Review whether newly acquired assets replace existing assets.
C) Test the valuation of fixed assets recorded in prior periods.
D) Review plant modifications and changes in product line, property taxes, or insurance coverage.

D) Current assets are subject to liens and encumbrances while equipment is not.

Which of the following is not one of the reasons auditors verify equipment differently from current asset accounts?
A) There are usually fewer current period acquisitions of equipment.
B) The amount of any given acquisition is often material.
C) The equipment is likely to be kept and maintained in the accounting records for several years.
D) Current assets are subject to liens and encumbrances while equipment is not.

D) realizable value.

Which balance-related audit objective is not relevant to an audit of prepaid expenses?

A) rights.
B) accuracy.
C) detail tie-in.

D) realizable value.

C) the auditor begins by obtaining a schedule of property tax payments from the client.

When auditing accrued property taxes:

A) the auditors will generally only verify the larger payments since there are usually many property tax payments.
B) property taxes should only be charged to one expense account.
C) the auditor begins by obtaining a schedule of property tax payments from the client.
D) the auditor must generally spend a considerable amount of time in this area.

B) tests of controls and substantive tests of transactions.

Which of the following audit tests both have the effect of simultaneously verifying balance sheet and income statement accounts?
A) analytical procedures and substantive tests of transactions.
B) tests of controls and substantive tests of transactions.
C) tests of details of balances and substantive tests of transactions.
D) test of controls and analytical procedures.

C) Utilities.

_____ expense is rarely analyzed unless analytical procedures indicate high potential for material misstatement.

A) Repairs and maintenance.
B) Legal.
C) Utilities.
D) Rent and lease.

Plan and Design an Audit Approach

The first phase of the audit process, where the auditor develops the overall audit strategy by understanding the client’s business, assessing risks of material misstatement, and determining the nature, timing, and extent of audit procedures.

Perform Tests of Controls and Substantive Tests of Procedures

The second phase of the audit process, where the auditor evaluates whether internal controls are operating effectively and test individual transactions to determine whether they are recorded properly.

Perform Analytical Procedures and Tests of Details of Balances

The third phase of the audit process, where the auditor examines account balances through analytical procedures and detailed testing to determine that the balances are fairly stated.

Complete the Audit and Issue the Audit Report

The final phase of the audit process, where the auditor evaluates all evidence obtained, reviews financial statement presentation and disclosures, and issues the final audit opinion.