Module 4 - Responding to Risk Assessment: Evidence Accumulation and Evaluation [WILEY]

What of the following is not an assertion relating to classes of transactions?

a) Accuracy

b) Consistency

c) Cutoff

d) Occurrence

b) Consistency

Which of the following is a general principle relating to the reliability of audit evidence?

a) Audit evidence obtained from indirect sources rather than directly is more reliable than evidence obtained directly by the auditor

b) Audit evidence provided by copies is more reliable than that provided by facsimiles

c) Audit evidence obtained from knowledgeable independent sources outside the client company is more reliable than audit evidence obtained from nonindependent sources

d) Audit evidence provided by original documents is more reliable than audit evidence generated through a system of effective controls

c) Audit evidence obtained from knowledgeable independent sources outside the client company is more reliable than audit evidence obtained from nonindependent sources

Which of the following types of audit evidence is the most persuasive?

a) Prenumbered client purchase order forms

b) Client work sheets supporting cost allocations

c) Bank statements obtained from the client

d) Client representation letter

c) Bank statements obtained from the client

Which of the following presumptions is correct about the reliability of audit evidence?

a) Information obtained indirectly from outside sources is the most reliable audit evidence

b) To be reliable, audit evidence should be convincing rather than persuasive

c) Reliability of audit evidence refers to the amount of corroborative evidence obtained

d) Effective internal control provides more assurance about the reliability of audit evidence

d) Effective internal control provides more assurance about the reliability of audit evidence

Which of the following statements relating to the appropriateness of audit evidence is always true?

a) Audit evidence gathered by an auditor from outside an enterprise is reliable

b) Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions

c) Oral representations made by management are not valid evidence

d) Evidence gathered by auditors must be both valid and relevant to be considered appropriate

d) Evidence gathered by auditors must be both valid and relevant to be considered appropriate

Which of the following types of audit evidence is the least persuasive?

a) Prenumbered purchase order forms

b) Bank statements obtained from the client

c) Test counts of inventory performed by the auditor

d) Correspondence from the client's attorney about litigation

a) Prenumbered purchase order forms

In evaluating the reasonableness of an entity's accounting estimates, an auditor normally would be concerned about assumptions that are

a) Susceptible to bias

b) Consistent with prior periods

c) Insensitive to variations

d) Similar to industry guidelines

a) Susceptible to bias

Which of the following is not a basic procedure used in an audit?

a) Risk assessment procedures

b) Substantive procedures

c) Tests of controls

d) Tests of direct evidence

d) Tests of direct evidence

Which of the following procedures would an auditor ordinarily perform first in evaluating management's accounting estimates for reasonableness?

a) Develop independent expectations of management's estimates

b) Consider the appropriateness of the key factors or assumptions used in preparing the estimates

c) Test the calculations used by management in developing the estimates

d) Obtain an understanding of how management developed its estimates

d) Obtain an understanding of how management developed its estimates

In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumptions that are

a) Consistent with prior periods

b) Similar to industry guidelines

c) Objective and not susceptible to bias

d) Deviations from historical patterns

d) Deviations from historical patterns

In evaluating an entity's accounting estimates, one of an auditor's objectives is to determine whether the estimates are

a) Not subject to bias

b) Consistent with industry guidelines

c) Based on objective assumptions

d) Reasonable in the circumstances

d) Reasonable in the circumstances

In testing the existence assertion for an asset, an auditor ordinarily works from the

a) Financial statements to the potentially unrecorded items

b) Potentially unrecorded items to the financial statements

c) Accounting records to the supporting evidence

d) Supporting evidence to the accounting records

c) Accounting records to the supporting evidence

A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year-end, the auditor would be most concerned about

a) Suspense debits that management believes will benefit future operations

b) Suspense debits that the auditor verifies will have realizable value to the client

c) Suspense credits that management believes should be classified as "Current liability"

d) Suspense credits that the auditor determines to be customer deposits

a) Suspense debits that management believes will benefit future operations

Which of the following would not be considered an analytical procedure?

a) Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked

b) Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics

c) Computing accounts receivable turnover by dividing credit sales by the average net receivables

d) Developing the expected current year sales based on the sales trend of the prior five years

b) Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics

What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts when reviewing the financial statements of a nonpublic entity?

a) Trend analysis

b) Regression analysis

c) Ratio analysis

d) Risk analysis

c) Ratio analysis

An auditor may achieve audit objectives related to particular assertions by

a) Performing analytical procedures

b) Adhering to a system of quality control

c) Preparing auditor working papers

d) Increasing the level of detection risk

a) Performing analytical procedures

An entity's income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor most likely could have detected this fraudulent financial reporting by

a) Tracing a sample of journal entries to the general ledger

b) Evaluating the effectiveness of internal control

c) Investigating the reconciliations between controlling accounts and subsidiary records

d) Performing analytical procedures designed to disclose differences from expectations

d) Performing analytical procedures designed to disclose differences from expectations

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

a) Accounts receivable

b) Interest expense

c) Accounts payable

d) Travel and entertainment expense

b) Interest expense

Analytical procedures used in the overall review stage of an audit generally include

a) Gathering evidence concerning account balances that have not changed from the prior year

b) Retesting control procedures that appeared to be ineffective during the assessment of control risk

c) Considering unusual or unexpected account balances that were not previously identified

d) Performing tests of transactions to corroborate management's financial statement assertions

c) Considering unusual or unexpected account balances that were not previously identified

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive procedures?

a) Relationships involving balance sheet accounts

b) Transactions subject to management discretion

c) Relationships involving income statement accounts

d) Data subject to audit testing in the prior year

c) Relationships involving income statement accounts

A basic premise underlying the application of analytical procedures is that

a) The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations

b) Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements

c) Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary

d) These procedures cannot replace tests of balances and transactions

c) Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary

For all audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent

In the risk assessment stage, As a substantive procedure, Near-audit completion

a) Yes No Yes

b) No Yes No

c) No Yes Yes

d) Yes No No

a) Yes No Yes

An auditor's analytical procedures most likely would be facilitated if the entity

a) Segregates obsolete inventory before the physical inventory count

b) Uses a standard cost system that produces variance reports

c) Corrects material weaknesses in internal control before the beginning of the audit

d) Develops its data from sources solely within the entity

b) Uses a standard cost system that produces variance reports

Analytical procedures performed near the end of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that

a) Irregularities exist among the relevant account balances

b) Internal control activities are not operating effectively

c) Additional tests of details are required

d) The communication with the audit committee should be revised

c) Additional tests of details are required

Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?

a) The current year's accounts receivable with the prior year's accounts receivable

b) The current year's payroll expense with the prior year's payroll expense

c) The budgeted current year's sales with the prior year's sales

d) The budgeted current year's warranty expense with the current year's contingent liabilities

b) The current year's payroll expense with the prior year's payroll expense

To be effective, analytical procedures performed near the end of an audit engagement should be performed by

a) The staff accountant who performed the substantive auditing procedures

b) The managing partner who has responsibility for all audit engagements at that practice office

c) A manager or partner who has a comprehensive knowledge of the client's business and industry

d) The CPA firm's quality control manager or partner who has responsibility for the firm's peer review program

c) A manager or partner who has a comprehensive knowledge of the client's business and industry

Which of the following is the best example of a substantive procedure?

a) Examining a sample of cash disbursements to test whether expenses have been properly approved

b) Confirmation of balances of accounts receivable

c) Comparison of signatures on checks to a list of authorized signers

d) Flowcharting of the client's cash receipts system

b) Confirmation of balances of accounts receivable

The objective of tests of details of transactions performed as substantive procedures is to

a) Comply with generally accepted auditing standards

b) Attain assurance about the reliability of the accounting system

c) Detect material misstatements in the financial statements

d) Evaluate whether management's policies and procedures operated effectively

c) Detect material misstatements in the financial statements

In the context of an audit of financial statements, substantive procedures are audit procedures that

a) May be eliminated under certain conditions

b) Are designed to discover significant subsequent events

c) May be either tests of transactions, direct tests of financial balances, or analytical tests

d) Will increase proportionately with the auditor's reliance on internal control

c) May be either tests of transactions, direct tests of financial balances, or analytical tests

The auditor will most likely perform extensive tests for possible understatement of

a) Revenues

b) Assets

c) Liabilities

d) Capital

c) Liabilities

In determining whether transactions have been recorded, the direction of the audit testing should be from the

a) General ledger balances

b) Adjusted trial balance

c) Original source documents

d) General journal entries

c) Original source documents

Which statement is correct concerning the deletion of audit documentation?

a) Superseded audit documentation should always be deleted from the audit file

b) After the audit file has been completed, the auditor should not delete or discard audit documentation

c) Auditors should use professional skepticism in determining which audit documentation should be deleted

d) Audit documentation should never be deleted from the audit file

b) After the audit file has been completed, the auditor should not delete or discard audit documentation

Ignoring any particular legal or regulatory requirement, audit documentation should be retained

a) A minimum of five years

b) As long as lead schedules have relevance to forthcoming audits

c) Until three years after the client selects another auditor

d) Working papers must be maintained indefinitely

a) A minimum of five years

Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?

a) Notes receivable and interest income

b) Accrued interest receivable and accrued interest payable

c) Notes payable and notes receivable

d) Interest income and interest expense

a) Notes receivable and interest income

An auditor's working papers serve mainly to

a) Provide the principal support for the auditor's report

b) Satisfy the auditor's responsibilities concerning the Code of Professional Conduct

c) Monitor the effectiveness of the CPA firm's quality control procedures

d) Document the level of independence maintained by the auditor

a) Provide the principal support for the auditor's report

The permanent file of an auditor's working papers generally would not include

a) Bond indenture agreements

b) Lease agreements

c) Working trial balance

d) Flowchart of internal control

c) Working trial balance

An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for

a) Cash flow increases and decreases

b) Audit objectives and assertions

c) Reclassifications and adjustments

d) Reconciliations and tick marks

c) Reclassifications and adjustments

Which of the following is least likely to be a factor in the auditor's decision about the extent of the documentation of a particular audit area?

a) The risk of material misstatement

b) The extent of the judgment involved in performing the procedures

c) The nature and extent of exceptions identified

d) Whether or not the client has an internal audit function

d) Whether or not the client has an internal audit function

Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?

a) A flowchart or narrative of the accounting system describing the recording and classification of transactions for financial reporting

b) The overall audit strategy and audit plan

c) A memo summarizing all major stakeholder groups

d) An internal control questionnaire identifying controls that assure specific objectives will be achieved

b) The overall audit strategy and audit plan

Which of the following factors most likely would affect an auditor's judgment about the quantity, type, and content of the auditor's working papers?

a) The assessed level of control risk

b) The likelihood of a review by a concurring (second) partner

c) The number of personnel assigned to the audit

d) The content of the management representation letter

a) The assessed level of control risk

The audit working paper that reflects the major components of an amount reported in the financial statements is the

a) Interbank transfer schedule

b) Carryforward schedule

c) Supporting schedule

d) Lead schedule

d) Lead schedule

Which documentation is required for an audit in accordance with generally accepted auditing standards?

a) A flowchart or an internal control questionnaire that evaluates the effectiveness of the entity's controls

b) A client engagement letter that provides details of timing of each significant audit procedure and personnel performing that procedure

c) An indication in the working papers that the accounting records agree or reconcile with the financial statements

d) The basis for the auditor's conclusions when the assessed level of control risk is at the maximum level for all financial statement assertions

c) An indication in the working papers that the accounting records agree or reconcile with the financial statements

No deletions of audit documentation are allowed after the

a) Client's year-end

b) Documentation completion date

c) Last date of significant fieldwork

d) Report release date

b) Documentation completion date

Under the requirements of the PCAOB, audit documentation must contain sufficient information to allow what type of auditor to understand the nature, timing, extent, and results of procedures performed?

a) An experienced audit team member

b) An experienced auditor having no previous connection with the engagement

c) Any certified public accountant

d) An auditor qualified as a peer review specialist

b) An experienced auditor having no previous connection with the engagement

Audit documentation for audits performed under the requirements of the Public Company Accounting Oversight Board should be retained for

a) The shorter of five years, or the period required by law

b) Seven years

c) The longer of seven years, or the period required by law

d) Indefinitely

c) The longer of seven years, or the period required by law

Which of the following sets of information does an auditor usually confirm on one form?

a) Accounts payable and purchase commitments

b) Cash in bank and collateral for loans

c) Inventory on consignment and contingent liabilities

d) Accounts receivable and accrued interest receivable

b) Cash in bank and collateral for loans

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may

a) Not believe that the bank is obligated to verify confidential information to a third party

b) Sign and return the form without inspecting the accuracy of the client's bank reconciliation

c) Not have access to the client's cutoff bank statement

d) Be unaware of all the financial relationships that the bank has with the client

d) Be unaware of all the financial relationships that the bank has with the client

An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting

a) Opening and closing inventory balances

b) Cash receipts and accounts receivable

c) Shipping and receiving activities

d) Cutoffs of sales and purchases

b) Cash receipts and accounts receivable

An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period to detect whether

a) The cash receipts journal was held open for a few days after the year-end

b) The last checks recorded before the year-end were actually mailed by the year-end

c) Cash balances were overstated because of kiting

d) Any unusual payments to or receipts from related parties occurred

c) Cash balances were overstated because of kiting

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except

a) Cutoff bank statement

b) Year-end bank statement

c) Bank confirmation

d) General ledger

d) General ledger

A cash shortage may be concealed by transporting funds from one location to another or by converting negotiable assets to cash. Because of this, which of the following is vital?

a) Simultaneous confirmations

b) Simultaneous bank reconciliations

c) Simultaneous verification

d) Simultaneous surprise cash count

c) Simultaneous verification

The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to

a) Detect kiting activities that may otherwise not be discovered

b) Corroborate information regarding deposit and loan balances

c) Provide the data necessary to prepare a proof of cash

d) Request information about contingent liabilities and secured transactions

b) Corroborate information regarding deposit and loan balances

An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertion(s) of

Presentation and Disclosure, Existence or Occurrence

a) Yes Yes

b) Yes No

c) No Yes

d) No No

c) No Yes

Which of the following statements is correct concerning the use of negative confirmation requests?

a) Unreturned negative confirmation requests rarely provide significant explicit evidence

b) Negative confirmation requests are effective when detection risk is low

c) Unreturned negative confirmation requests indicate that alternative procedures are necessary

d) Negative confirmation requests are effective when understatements of account balances are suspected

a) Unreturned negative confirmation requests rarely provide significant explicit evidence

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would

a) Inspect the allowance account to verify whether the accounts were subsequently written off

b) Increase the assessed level of detection risk for the valuation and completeness assertions

c) Ask the client to contact the customers to request that the confirmations be returned

d) Increase the assessed level of inherent risk for the revenue cycle

c) Ask the client to contact the customers to request that the confirmations be returned

In confirming a client's accounts receivable in prior years, an auditor found that there were many differences between the recorded account balances and the confirmation replies. These differences, which were not misstatements, required substantial time to resolve. In defining the sampling unit for the current year's audit, the auditor most likely would choose

a) Individual overdue balances

b) Individual invoices

c) Small account balances

d) Large account balances

b) Individual invoices

Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables'

a) Valuation

b) Classification

c) Existence

d) Completeness

c) Existence

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when

a) No reply to a positive confirmation request is received

b) No reply to a negative confirmation request is received

c) Collectability of the receivables is in doubt

d) Pledging of the receivables is probable

a) No reply to a positive confirmation request is received

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

a) Review the cash receipts journal for the month prior to year-end

b) Intensify the study of internal control concerning the revenue cycle

c) Increase the assessed level of detection risk for the existence assertion

d) Inspect the shipping records documenting the merchandise sold to the debtors

d) Inspect the shipping records documenting the merchandise sold to the debtors

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

a) A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers

b) A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers

c) A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers

d) A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances

d) A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances

To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would

a) Request the senders to mail the original forms to the auditor

b) Examine subsequent cash receipts for the accounts in question

c) Consider the e-mail responses to the confirmations to be exceptions

d) Mail second requests to the e-mail respondents

a) Request the senders to mail the original forms to the auditor

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would

a) Examine the shipping documents that provide evidence for the existence assertion

b) Verify the sources and contents of the faxes in telephone calls to the senders

c) Consider the faxes to be nonresponses and evaluate them as unadjusted differences

d) Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted

b) Verify the sources and contents of the faxes in telephone calls to the senders

In auditing accounts receivable, the negative form of confirmation request most likely would be used when

a) The total recorded amount of accounts receivable is immaterial to the financial statements taken as a whole

b) Response rates in prior years to properly designed positive confirmation requests were inadequate

c) Recipients are likely to return positive confirmation requests without verifying the accuracy of the information

d) The combined assessed level of inherent risk and control risk relative to accounts receivable is low

d) The combined assessed level of inherent risk and control risk relative to accounts receivable is low

Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations?

a) The recipients are likely to sign the confirmations without devoting proper attention to them

b) Subsequent cash receipts are unusually difficult to verify

c) Analytical procedures indicate that few exceptions are expected

d) The combined assessed level of inherent risk and control risk is low

a) The recipients are likely to sign the confirmations without devoting proper attention to them

In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely would be included with the client's confirmation letter?

a) An auditor-prepared letter explaining that a nonresponse may cause an inference that the account balance is correct

b) A client-prepared letter reminding the customer that a nonresponse will cause a second request to be sent.

c) An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to the auditor

d) A client-prepared statement of account showing the details of the customer's account balance

d) A client-prepared statement of account showing the details of the customer's account balance

Which of the following statements would an auditor most likely add to the negative form of confirmations of accounts receivable to encourage timely consideration by the recipients?

a) "This is not a request for payment; remittances should not be sent to our auditors in the enclosed envelope"

b) "Report any differences on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your records"

c) "If you do not report any differences within fifteen days, it will be assumed that this statement is correct"

d) "The following invoices have been selected for confirmation and represent amounts that are overdue"

c) "If you do not report any differences within fifteen days, it will be assumed that this statement is correct"

Which of the following strategies most likely could improve the response rate of the confirmation of accounts receivable?

a) Including a list of items or invoices that constitute the account balance

b) Restricting the selection of accounts to be confirmed to those customers with relatively large balances

c) Requesting customers to respond to the confirmation requests directly to the auditor by fax or e-mail

d) Notifying the recipients that second requests will be mailed if they fail to respond in a timely manner

a) Including a list of items or invoices that constitute the account balance

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of

a) Valuation

b) Rights

c) Existence

d) Presentation

a) Valuation

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record

a) Purchase discounts

b) Purchase returns

c) Sales

d) Sales returns

d) Sales returns

To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace

a) Inventory tags noted during the auditor's observation to items listed in the inventory listing schedule

b) Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices

c) Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets

d) Items listed in receiving reports and vendors' invoices to the inventory listing schedule

c) Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets

To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into

a) Net sales

b) Cost of goods sold

c) Operating income

d) Gross sales

b) Cost of goods sold

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation?

a) Testing the entity's computation of standard overhead rates

b) Obtaining confirmation of inventories pledged under loan agreements

c) Reviewing shipping and receiving cutoff procedures for inventories

d) Tracing test counts to the entity's inventory listing

a) Testing the entity's computation of standard overhead rates

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

a) Increase the extent of tests of controls of the inventory cycle

b) Request the client to schedule the physical inventory count at the end of the year

c) Insist that the client perform physical counts of inventory items several times during the year

d) Apply gross profit tests to ascertain the reasonableness of the physical counts

b) Request the client to schedule the physical inventory count at the end of the year

An auditor concluded that no excessive costs for idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the financial statement assertions regarding inventory, including presentation and disclosure and

a) Valuation

b) Completeness

c) Existence

d) Rights

a) Valuation

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 assertion of

a) Rights

b) Completeness

c) Existence

d) Valuation

b) Completeness

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

a) Existence

b) Rights

c) Presentation

d) Valuation

d) Valuation

An auditor usually examines receiving reports to support entries in the

a) Voucher register and sales returns journal

b) Sales journal and sales returns journal

c) Voucher register and sales journal

d) Check register and sales journal

a) Voucher register and sales returns journal

When auditing inventories, an auditor would least likely verify that

a) The financial statement presentation of inventories is appropriate

b) Damaged goods and obsolete items have been properly accounted for

c) All inventory owned by the client is on hand at the time of the count

d) The client has used proper inventory pricing

c) All inventory owned by the client is on hand at the time of the count

An auditor who physically examines securities should insist that a client representative be present in order to

a. detect fraudulent securities

b. lend authority to the auditors directives

c. acknowledge the receipt of securities returned

d. coordinate the return of securities to the proper locations

c. acknowledge the receipt of securities returned

In establishing the existence and ownership of a long-term investment in the form of publicly traded stock, an auditor should inspect the securities or

a. Correspond with the investee company to verify the numbers of shares owned

b. inspect the audited financial statements of the investee company

c. confirm the number of shares owned that are held by an independent custodian

d. determine that the investment is carried at the lower of cost or market

c. confirm the number of shares owned that are held by an independent custodian

When an auditor is unable to inspect and count a client's investment securities until after the balance sheet date, the bank where the securities are held in a safe-deposit box should be asked to

a. verify any differences between the contents of the box and the balances in the clients subsidiary ledger

b. provide a list of securities added and removed from the box between the balance sheet date and the security-count date

c. confirm that there has been no access to the box between the balance sheet date and the security-count date

d. Count the securities in the box so the auditor will have an independent direct verification.

c. confirm that there has been no access to the box between the balance sheet date and the security-count date

In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the

a. completeness of recorded investment income

b. classification between current and noncurrent portfolios

c. valuation of marketable equity securities

d. existence of unrealized gains or losses in the portfolio

a. completeness of recorded investment income

Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment?

a. accumulated depreciation

b. insurance expense

c. property, plant, and equipment

d. purchase returns and allowances

d. purchase returns and allowances

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts?

a. the estimated remaining useful lives of plant assets were revised upward

b. plant assets were retired during the year

c. the prior years depreciation expense was erroneously understated

d. overhead allocations were revised at year-end

b. plant assets were retired during the year

In testing for unrecorded retirements of equipment, an auditor most likely would

a. select items of equipment from the accounting records and then locate them during the plant tour

b. compare depreciation journal entries with similar prior year entries in search of fully depreciated equipment

c. inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger

d. scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance expense

a. select items of equipment from the accounting records and then locate them during the plant tour

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all

a. noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period

b. expenditures for property and equipment have been recorded in the proper period

c. noncapitalizable expenditures for repairs and maintenance have been properly charged to expense

d. expenditures for property and equipment have not been charged to expense

d. expenditures for property and equipment have not been charged to expense

The auditor is most likely to seek information from the plant with respect to the

a. adequacy of the provision for uncollectible accounts

b. appropriateness of physical inventory observation procedures

c. existence of obsolete machinery

d. deferral of procurement of certain necessary insurance coverage

c. existence of obsolete machinery

Treetop corporation acquired a building and arranged mortgage financing during the year. Verification of the related mortgage acquisition costs would be least likely to include an examination of the related

a. deed

b. canceled checks

c. closing statement

d. interest expense

a. deed

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning managements assertions of

Existence or Occurrence, Presentation and Disclosure

a. yes yes

b. yes no

c. no yes

d. no no

b. yes no

In auditing intangible assets, an auditor most likely would review or recomputed amortization and determine whether the amortization period is reasonable in support of managements financial statement assertion of

a. valuation or allocation

b. existence or occurrence

c. completeness

d. rights and obligations

a. valuation or allocation

When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection. The policy's absence most likely indicates the possibility of a(n)

a. insurance premium due but not recorded

b. deficiency in the coinsurance provision

c. lien on the plant equipment

d. understatement of insurance expense

c. lien on the plant equipment

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?

a. Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file

b. Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance

c. Vouch a sample of cash disbursements reported just after year-end to receiving reports and vendor invoice

d. Scan the cash disbursements entries recorded just before year-end for indications of unusual transaction

c. Vouch a sample of cash disbursements reported just after year-end to receiving reports and vendor invoice

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be

a. Vendors with whom the entity has previously done business

b. Amounts recorded in the accounts payable subsidiary ledger

c. Payees of checks drawn in the month after the year-end

d. Invoices found in the entity's open invoice file

a. Vendors with whom the entity has previously done business

Auditor confirmation of accounts payable balance is at the balance sheet date may be unnecessary because

a. This is a duplication of cutoff tests

b. Accounts payable balance is at the balance sheet date may not be paid before the audit is completed

c. Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment

d. There is likely to be other reliable external evidence to support the balances

d. There is likely to be other reliable external evidence to support the balances

Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable?

a. Investigating the open purchase order file to ascertain that prenumbered purchase orders are used in accounted for

b. Receiving the client's mail, unopened, for a reasonable period of time after the year-end to search for unrecorded vendors' invoices

c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports

d. Confirming accounts payable balances with known suppliers who have zero balances

c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports

In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of

a. Existence

b. Presentation and disclosure

c. Completeness

d. Valuation

c. Completeness

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 may suspect that

a. Discount on the bonds payable is understated

b. Bonds payable are understated

c. Bonds payable are overstated

d. Premium on bonds payable is overstated

b. Bonds payable are understated

An auditor most likely would inspect loan agreement under which an entity's inventories are pledged to support management's financial statement assertion of

a. Presentation and disclosure

b. Valuation or allocation

c. Existence or occurrence

d. Completeness

a. Presentation and disclosure

In auditing long-term bonds payable, an auditor most likely would

a. Perform analytical procedures on the bond premium and discount accounts

b. Examine documentation of assets purchased with bond proceeds for liens

c. Compare interest expense with the bond payable amount for reasonableness

d. Confirm the existence of individual bond holders at year-end

c. Compare interest expense with the bond payable amount for reasonableness

The auditor can best verify a client's bond sinking fund transactions and year-end balance by

a. Confirmation with individual holders of retired bonds

b. Confirmation with the bond trustee

c. Recomputation of interest expense, interest payable, and amortization of bond discount or premium

d. Examination and count of the bonds retired during the year

b. Confirmation with the bond trustee