Auditing Exam 3

Revenues are normally considered to have been earned when

a. All possibility of return has expired.

b. The company has substantially accomplished what it must to be entitled to the benefits.

c. The cash is collected.

d. Goods have been shipped

B

Sales are normally recorded on the date of the

a. Customer purchase order.

b. Bill of lading.

c. Sales invoice.

d. Payment check

C

When auditing the revenue and collection cycle, auditors normally select balances to confirm from the

a. Sales journal.

b. Accounts receivable listing.

c. General ledger.

d. Cash receipts listing

B

Which of the following accounts is not normally part of the revenue and collection cycle?

a. Sales

b. Accounts Receivable

c. Cash

d. Purchases Returns and Allowances

D

The control procedure “credit sales approved by credit department” is directed toward which transaction assertion?

a. Occurrence

b. Completeness

c. Accuracy

d. Cutoff

C

Which of the following would be the best protection for a company that wishes to prevent the “lapping” of trade accounts receivable?

a. Separate duties so that the bookkeeper in charge of the general ledger has no access to

incoming mail.

b. Separate duties so that no employee has access to both checks from customers and currency from daily cash receipts.

c. Have customers send payments directly to the company’s depository bank.

d. Request that customer’s payment checks be made payable to the company and addressed to the treasurer.

C

Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable?

a. Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.

b. Write-offs must be supported by an aging schedule showing that only receivables over

due several months have been written off.

c. Write-offs must be approved by the cashier who is in a position to know whether the receivables have, in fact, been collected.

d. Write-offs must be authorized by company field sales employees who are in a position to determine customers’ financial standing

A

Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

a. Unrecorded purchases.

b. Unrecorded sales.

c. Merchandise purchases being charged to selling and general expense.

d. Fictitious sales

B

An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that

a. Sales invoices represent bona fide sales.

b. All sales have been recorded.

c. All sales invoices have been properly posted to customer accounts.

d. Entries in the accounts receivable subsidiary ledger were properly invoiced.

D

An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent.

Based on this information, the auditor is most likely concerned about

a. Unrecorded costs.

b. Improper credit approvals.

c. Improper sales cutoff.

d. Fictitious sales

D

An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent.

Based on this information, the auditor interviewed the sales manager, who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor test the sales manager’s representation?

a. Perform additional inquiries with sales personnel.

b. Obtain copies of all price lists in use during the year and vouch the prices to sales invoices.

c. Send confirmations asking customers about unit prices paid for product.

d. Vouch vender invoices to payments made after year-end

B

To conceal a theft involving receivables, a dishonest bookkeeper might charge which of the following accounts?

a. Miscellaneous income

b. Petty cash

c. Miscellaneous expense

d. Sales returns

D

Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern?

a. “This amount was paid on December 30.”

b. “We received this shipment on January 2.”

c. “These goods were returned for credit on November 15.”

d. “The balance does not reflect our sales discount for paying by January 5.

C

A client has a separate sales group for its largest “preferred” customers, a select group of customers who normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform?

a. Prepare a schedule of purchases and payments for these customers.

b. Send out negative confirmations on a large sample of these customers.

c. Inquire of the sales manager regarding the accounts receivable terms.

d. Send out positive confirmations on a large sample of these customers.

D

Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily to

a. Evaluate internal control over credit sales.

b. Test the accuracy of recorded charge sales.

c. Estimate credit losses.

d. Verify the existence of the recorded receivables.

C

Which of the following might be detected by auditors’ cutoff review and examination of sales journal entries for several days prior to the balance sheet date?

a. Lapping year-end accounts receivable.

b. Inflating sales for the year.

c. Kiting bank balances.

d. Misappropriating merchandise

B

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the

a. Collectability of the balances confirmed.

b. Ownership of the balances confirmed.

c. Existence of the balances confirmed.

d. Internal control over balances confirmed.

C

Which of the following is the best reason for prenumbering in numerical sequence documents such as sales orders, shipping documents, and sales invoices?

a. Enables company personnel to determine the accuracy of each document.

b. Enables personnel to determine the proper period recording of sales revenue and receivables.

c. Enables personnel to check the numerical sequence for missing documents and unrecorded transactions.

d. Enables personnel to determine the validity of recorded transactions

C

When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to

a. Sales invoices with shipping documents and customer sales invoices.

b. Records of accounts receivable write-offs.

c. Cash remittance lists and bank deposit slips.

d. Credit files and reports.

A

In the audit of accounts receivable, the most important emphasis should be on the

a. Completeness assertion.

b. Existence assertion.

c. Rights and obligations assertion.

d. Presentation and disclosure assertion

B

When accounts receivable are confirmed at an interim date, auditors need not be concerned with

a. Obtaining a summary of receivables transactions from the interim date to the year-end

date.

b. Obtaining a year-end trial balance of receivables, comparing it to the interim trial balance, and obtaining evidence and explanations for large variations.

c. Sending negative confirmations to all customers as of the year-end date.

d. Considering the necessity for some additional confirmations as of the balance sheet date if balances have increased materially

C

When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that

a. Shipments to customers were invoiced.

b. Shipments to customers were recorded as sales.

c. Recorded sales were shipped.

d. Invoiced sales were shipped.

A

Write-offs of doubtful accounts should be approved by

a. The salesperson.

b. The credit manager.

c. The treasurer.

d. The cashier.

C

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except

a. Send a second request.

b. Do nothing for immaterial balances.

c. Examine shipping documents.

d. Examine client correspondence files

B

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?

a. Understating the sales journal.

b. Overstating the accounts receivable control account.

c. Overstating the accounts receivable subsidiary ledger.

d. Understating the cash receipts journal.

A

Which of the following internal control activities most likely would deter lapping of collections from customers?

a. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries.

b. Authorization of write-offs of uncollectable accounts by a supervisor independent of credit approval.

c. Separation of duties between receiving cash and posting the accounts receivable ledger.

d. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries

C

The financial records of the Movitz Company show that R. Dennis owes $4,100 on an account receivable. An independent audit is being carried out, and the auditors send a positive confirmation to R. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here?

a. Control risk was particularly low for accounts receivable.

b. Inherent risk was particularly high for accounts receivable.

c. Dennis’s account was not yet due.

d. Dennis’s account was not with a related party.

B

An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?

a. The auditor should perform analytical procedures at an interim date and discuss any changes in the level of sales with senior management.

b. The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period.

c. The auditor should perform tests of controls at an interim date to obtain audit evidence about the operational effectiveness of internal controls over sales.

d. The auditor should review period-end compensation to determine whether bonuses were paid to meet earnings goals

B

An auditor is required to confirm accounts receivable if the accounts receivable balances are

a. Older than the prior year.

b. Material to the financial statements.

c. Smaller than expected.

d. Subject to valuation estimates.

B

During the confirmation of accounts receivable, an auditor receives a confirmation via the client’s fax machine. Which of the following actions should the auditor take?

a. Not accept the confirmation and select another customer’s balance to confirm.

b. Not accept the confirmation and treat it as an exception.

c. Accept the confirmation and file it in the working papers.

d. Accept the confirmation but verify the source and content through a telephone call to the respondent

D

Which of the following accounts does not appear in the acquisition and expenditure cycle?

a. Cash.

b. Purchases returns.

c. Sales returns.

d. Prepaid insurance

C

For which of the following accounts would the matching concept be the most appropriate?

a. Cost of goods sold.

b. Research and development.

c. Depreciation expense.

d. Sales

A

An audit team was testing source documents in the purchasing cycle and identified the following circumstances. Which of the following would be the most indicative of source document fraud?

a. The same purchase order number appears on two invoices from the same vendor.

b. The same item code appears on different invoices from the same vendor.

c. The same invoice number appears on different invoices from the same vendor.

d. The same invoice date appears on different invoices from the same vendor.

C

Which of the following would not overstate current-period net income?

a. Capitalizing an expenditure that should be expensed.

b. Failing to record a liability as an expense.

c. Failing to record a check paying an item in Vouchers Payable.

d. All of the above would overstate net income.

C

A client’s purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes the control objective that auditors are most interested in when performing tests of liabilities?

a. Accounts payable are not materially understated.

b. Authority to incur liabilities is restricted to one designated person.

c. Acquisition of materials is not made from one vendor or one group of vendors.

d. Commitments for all purchases are made only after established competitive bidding procedures are followed.

A

An audit firm is testing controls within the purchasing cycle. In which of the following procedures would the firm most likely apply sampling techniques?

a. Risk assessment procedures performed to obtain an understanding of internal control in the purchasing cycle.

b. Tests of automated application controls involving check amount limits when effective information technology general controls are present.

c. Analyses of controls to determine the appropriate segregation of duties in the purchasing cycle.

d. Testing of operating effectiveness of controls over authorization of purchase orders

D

Which of the following results of analytical procedures would most likely indicate possible unrecorded liabilities?

a. Current ratio of 3:1 as compared to 6:1 for the prior period.

b. Percentage of accounts payable to total liabilities 30% during the current year compared with 40% in the prior year.

c. Accounts payable turnover of 4, compared to 8 for the prior period.

d. Accounts payable balance increase greater than 10 percent over the prior period.

B

Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time?

a. Vouchers should be prepared by individuals who are responsible for signing disburse

ment checks.

b. Disbursement vouchers should be approved by at least two responsible management officials.

c. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.

d. The official who signs the check should compare the check with the voucher and should stamp “PAID” on the voucher documents

D

Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a cash-on-delivery (C.O.D.) basis, thereby enabling his relative to buy at Lake’s wholesale prices. Budd was probably able to accomplish this because of Lake’s poor internal control over

a. Purchase requisitions.

b. Cash receipts.

c. Perpetual inventory records.

d. Purchase orders

D

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?

a. Examine confirmation requests returned by creditors whose accounts are on a subsidiary trial balance of accounts payable.

b. Examine a sample of cash disbursements in the period subsequent to year-end.

c. Examine a sample of invoices a few days prior to and subsequent to the year-end to ascertain whether they have been properly recorded.

d. Examine unusual relationships between monthly accounts payable and recorded purchases

B

Which of the following procedures is least likely to be performed before the balance-sheet date?

a. Observation of inventory.

b. Review of internal control over cash disbursements.

c. Search for unrecorded liabilities.

d. Confirmation of receivables.

C

To determine whether accounts payable are complete, auditors perform a test to verify that all merchandise received has been recorded. The population for this test consists of all

a. Vendors’ invoices.

b. Purchase orders.

c. Receiving reports.

d. Canceled checks.

C

When verifying debits to the perpetual inventory records of a nonmanufacturing company, auditors would be most interested in examining a sample of purchase

a. Approvals.

b. Requisitions.

c. Invoices.

d. Orders

C

A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only 48 tables, but the receiving department at the furniture company accepted the tables. The invoice was eventually received but was for the original 84 tables. The furniture company paid the entire amount. Which of the following controls would have been least likely to have prevented this erroneous payment?

a. The copy of the purchase order sent to the furniture company’s receiving department should not have shown an expected quantity.

b. Personnel in the furniture company’s accounts payable department should compare the receiving report to the purchase invoice before creation of the voucher.

c. Personnel in the furniture company’s cash disbursements department should compare the check that is prepared to all of the backup documentation.

d. Personnel in the furniture company’s purchasing department should compare the purchase requisition with the purchase order.

D

Curtis, a maintenance supervisor, submitted maintenance invoices from a phony repair company and received the checks at a post office box. This should have been prevented by

a. Comparison of the company name to the approved vendor list by the check signer.

b. Recognition of the excess maintenance costs by Curtis’s supervisor.

c. Refusal by the purchasing department to approve the vendor.

d. All of the above

C

An audit team would most likely examine the detail support for charges to which of the following accounts?

a. Payroll expense.

b. Cost of goods sold.

c. Supplies expense.

d. Legal expense.

D

Which of the following accounts would most likely be audited in connection with a related balance-sheet account?

a. Property tax expense.

b. Payroll expense.

c. Research and development.

d. Legal expense.

A

When auditing account balances of liabilities, auditors are most concerned with management’s assertion about

a. Existence.

b. Rights and obligations.

c. Completeness.

d. Valuation and allocation.

C

In a test of controls, auditors may trace receiving reports to vouchers recorded in the voucher register. This is a test for

a. Occurrence.

b. Completeness.

c. Classification.

d. Cutoff.

B

Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?

a. Examining reported purchase returns that appear too low.

b. Examining vendor statements for amounts not reported as purchases.

c. Searching for customer-returned goods that were not reported as returns.

d. Reviewing bank transfers recorded as cash received from customers.

B

Which cycle is not directly linked to the production cycle?

a. Acquisition and expenditure cycle.

b. Payroll cycle.

c. Revenue and collection cycle.

d. Finance and investment cycle

D

To determine the client’s planned amount and timing of production of a product, the auditor reviews the

a. Sales forecast.

b. Inventory reports.

c. Production plan.

d. Purchases journal

C

An auditor reviews job cost sheets to test which transaction assertion?

a. Occurrence

b. Completeness

c. Accuracy

d. Classification

C

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?

a. Supplies of relatively little value are expensed when purchased.

b. The cycle basis is used for physical counts.

c. The warehouse manager is responsible for maintenance of perpetual inventory records.

d. Perpetual inventory records are maintained only for items of significant value.

C

To make a year-to-year comparison of inventory turnover most meaningful, the auditor performs the analysis

a. For the company as a whole.

b. By division.

c. By product.

d. All of the above.

C

Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?

a. Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the accuracy of the perpetual inventory record.

b. Have an independent accounting firm prepare an internal control report on the effectiveness of the controls over inventory.

c. Have separate warehouse space for the more valuable items with frequent periodic physical counts and comparison to perpetual inventory records.

d. Require a manager’s signature for the removal of any inventory item with a value of more than $50.

C

An auditor usually traces the details of the test counts made during the observation of physical inventory counts to a final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are

a. Owned by the client.

b. Not obsolete.

c. Physically present at the time of the preparation of the final inventory schedule.

d. Included in the final inventory schedule.

D

A retailer’s physical count of inventory was higher than that shown by the perpetual records. Which of the following could explain the difference?

a. Inventory items had been counted, but the tags placed on the items had not been taken off and added to the inventory accumulation sheets.

b. Credit memos for several items returned by customers had not been recorded.

c. No journal entry had been made on the retailer’s books for several items returned to its suppliers.

d. An item purchased FOB shipping point had not arrived at the date of the inventory count and had not been reflected in the perpetual records

B

From the auditors’ point of view, inventory counts are more acceptable prior to the year-end when

a. Internal control is weak.

b. Accurate perpetual inventory records are maintained.

c. Inventory is slow moving.

d. Significant amounts of inventory are held on a consignment basis.

B

Which of the following internal control activities most likely addresses the completeness assertion for inventory?

a. The work-in-process account is periodically reconciled with subsidiary inventory records.

b. Employees responsible for custody of finished goods do not perform the receiving function.

c. Receiving reports are prenumbered, and the numbering sequence is checked periodically.

d. There is a separation of duties between the payroll department and inventory accounting personnel.

C

When auditing inventories, an auditor would least likely verify that

a. All inventory owned by the client is on hand at the time of the count.

b. The client has used proper inventory pricing.

c. The financial statement presentation of inventories is appropriate.

d. Damaged goods and obsolete items have been properly accounted for

A

A client maintains perpetual inventory records in quantities and in dollars. If the assessed control risk is high, an auditor would probably

a. Apply gross profit tests to ascertain the reasonableness of the physical counts.

b. Increase the extent of tests of controls relevant to the inventory cycle.

c. Request the client to schedule the physical inventory count at the end of the year.

d. Insist that the client perform physical counts of inventory items several times during the year.

C

An auditor selected items for test counts while observing a client’s physical inventory. The auditor then traced the test counts to the client’s inventory listing. This procedure most likely obtained evidence concerning management’s balance assertion of

a. Rights and Obligations.

b. Completeness.

c. Existence.

d. Valuation

B

Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity’s assertion of rights and obligations related to inventories?

a. Trace test counts noted during the entity’s physical count to the entity’s summarization of quantities.

b. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.

c. Select the last few shipping documents used before the physical count and determine whether the shipments were recorded as sales.

d. Inspect the open purchase order file for significant commitments that should be considered for disclosure

B

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management’s balance assertions about

a. Existence.

b. Rights and obligations.

c. Completeness.

d. Valuation.

D

An auditor would vouch inventory on the inventory status report to the vendor’s invoice to obtain evidence concerning management’s balance assertions about

a. Existence.

b. Rights and Obligations.

c. Completeness.

d. Valuation.

D

When evaluating inventory controls, an auditor would be least likely to

a. Inspect documents.

b. Make inquiries.

c. Observe procedures.

d. Consider policy and procedure manuals.

D

When testing a company’s cost accounting system, the auditor uses procedures that are primarily designed to determine that

a. Quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand.

b. Physical inventories agree substantially with book inventories.

c. The system is in accordance with generally accepted accounting principles and is functioning as planned.

d. Costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.

D

The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to

a. Cost ledgers.

b. Perpetual inventory records.

c. Receiving reports.

d. Material requisitions.

D

Your client counts inventory three months before the end of the fiscal year because controls over inventory are excellent. Which procedure is not necessary for the roll-forward?

a. Check that shipping documents for the last three months agree with perpetual records.

b. Trace receiving reports for the last three months to perpetual records.

c. Compare gross margin percentages for the last three months.

d. Request the client to recount inventory at the end of the year.

A

An auditor is examining a nonissuer’s inventory procurement system and has decided to perform tests of controls. Under which of the following conditions do GAAS require tests of controls be performed by an auditor?

a. Significant weaknesses were found in the company’s internal control.

b. The auditor hopes to reduce the amount of work to be done in assessing inherent risk.

c. The auditor believes that testing the controls could lead to a reduction in overall audit time and cost.

d. Tests of controls are always performed when the auditor begins to assess control risk.

C

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance?

a. The entity has rights to the inventory.

b. Inventory is properly valued.

c. Inventory is properly presented in the financial statements.

d. Inventory is complete.

D

A portion of a client’s inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?

a. Observation.

b. Confirmation.

c. Calculation.

d. Inspection

B

The purpose of tracing a sample of inventory tags to a client’s computerized listing of inventory items is to determine whether the inventory items

a. Represented by tags were included on the listing.

b. Included on the listing were properly counted.

c. Represented by tags were reduced to the lower of cost or market.

d. Included in the listing were properly valued.

A

Which of the following results of analytical procedures would most likely indicate possible unrecorded inventory?

a. Current ratio of 3:1 as compared to 5:1 for the prior period.

b. Inventory turnover of 3.25 during the current year compared to 3.75 during the prior year.

c. Inventory balance increase of 10% during the current period.

d. Accounts payable turnover of 6 as compared with 8 for the prior period.

A

An auditor is testing internal controls in the manufacturing of a client’s inventory. Which of the following audit procedures, if used, should be combined with other audit procedures when testing the operating effectiveness of controls?

a. Observation.

b. Inspection of documents.

c. Inquiry.

d. Reperformance.

C