Advanced Audit, Final Exam T/F and MC Questions

False

1) Separate perpetual records are likely to be kept only for raw materials inventory.

False

2) In process cost systems, costs are accumulated by individual jobs.

True

3) The inventory and warehousing cycle ends with the sale of goods in the sales and collection cycle.

False

4) The physical observation of the inventory and the acquisition of raw materials are part of the inventory and warehousing cycle.

True

5) Auditors should design appropriate tests of internal controls over cost accounting records based upon their understanding of those records and the extent they will be relied upon for reducing substantive tests.

False

6) Internal controls over cost accounting records are very similar among companies.

False

7) In the audit of inventory, the auditor and client are jointly responsible for making and recording the count of physical inventory, while the auditor is responsible for drawing conclusions about the adequacy of the physical inventory.

True

8) When part of the client’s inventory is in a public warehouse or in the possession of other outside custodians, the auditor does not need to observe a physical count of the inventory if a written confirmation is obtained directly from the inventory custodians.

True

9) One unique characteristic of the capital acquisition and repayment cycle is that relatively few transactions affect the account balances, but each transaction is often highly material in amount.

False

10) The dollar amount of bond issues are normally large, making it difficult for auditors to verify each transaction in this account.

False

11) The three most important balance-related audit objectives for notes payable are existence, realizable value, and accuracy.

False

12) Accounts including preferred stock, additional paid-in capital, and treasury stock are not included in the capital acquisition and repayment cycle.

False

13) Because the accounts in the capital acquisition and repayment cycle contain fewer transactions, control risk and the results of substantive transactions are normally more important for designing tests of details of balances in these accounts.

True

14) Auditors often set performance materiality at a low level for accounts in the capital acquisition and repayment cycle because it is usually possible to completely audit the account balance and each of the transactions in these accounts.

False

15) Independent registrars commonly disburse cash dividends to shareholders.

True

16) Auditors can test whether dividend payments have been made to shareholders by selecting a sample of recorded dividend payments and agreeing payee information to the records produced by the stock transfer agent.

True

17) Cash is the only account included in every cycle except inventory and warehousing.

False

18) The general cash account will not be audited if the ending balance is immaterial.

False

19) The three most important audit objectives for cash are accuracy, existence, and classification.

False

20) To tests the client’s list of outstanding checks on the bank reconciliation for completeness, the auditor should trace from the list to the checks included with the cutoff bank statement.

False

21) A monthly bank reconciliation of the general bank account on a timely basis by someone involved in either the handling or the recording of cash receipts and disbursements is an essential control over the ending cash balance.

True

22) The transfer of money from one bank account to another and improperly recording the transfer so that the amount as an asset in both banks is referred to as kiting.

True

23) The auditor must extend the auditor procedures in the audit of year-end cash when there are inadequate internal controls.

False

24) The majority of financial statements are valued at the lower of cost or market.

True

25) As part of phase IV of the audit, auditors evaluate evidence they obtained during the first three phases of the audit to determine whether they should perform additional procedures for presentation and disclosure-related objectives.

False

26) The probability threshold for dealing with uncertainty in loss contingencies uses the terms likely and unlikely.

False

27) A lawsuit has been filed but not yet resolved against an audit client. This lawsuit does not meet the conditions required for a contingent liability.

True

28) If an attorney refuses to provide the auditor with information abut material existing lawsuits or unasserted claims, current professional standards require that the auditor consider the refusal as a scope limitation.

False

29) The auditor’s responsibility for reviewing subsequent events is normally limited to thirty days after the balance sheet date.

False

30) The letter of representation is prepared on the CPA firm’s letterhead, addressed to the client’s chief executive officer, and signed by the audit engagement partner.

False

31) Auditors are required to communicate either orally or in writing with the audit committee about internal control weaknesses.

True

32) If an auditor discovers that previously issued financial statements are misleading, the most desirable approach to follow is to request that the client issue an immediate revision of the financial statements containing an explanation of the reasons for the revision.

D) acquisition of raw materials for production.

1) In most manufacturing companies, the inventory and warehousing cycle begins with the:

A) receipt of a customer’s order.
B) completion of production of a customer’s order.
C) initiation of production of a customer’s order.
D) acquisition of raw materials for production.

C) cost accounting records.

2) Master files, spreadsheets, and reports that accumulate material, labor, and overhead as the costs are incurred are:

A) accounting systems.
B) storeroom documents.
C) cost accounting records.
D) finished goods inventory records.

B) one accumulates costs by individual jobs and the other by particular processes.

3) The main difference between job order and process costing systems is that:

A) one accumulates costs by materials issued and the other by labor incurred.
B) one accumulates costs by individual jobs and the other by particular processes.

C) one emphasizes costs accumulated in completed products and the other emphasizes costs associated with work-in-process.
D) one emphasizes costs adding value to the product and the other emphasizes costs incurred because of waste, scrap, and obsolescence.

D) process invoices for shipped goods.

4) Which of the following is not a function within the inventory and warehousing cycle?

A) process the goods.

B) store raw materials.

C) ship finished goods.
D) process invoices for shipped goods.

C) management typically allocates overhead using total direct labor dollars as the basis allocation.

5) When auditing manufacturing overhead costs assigned to inventory, auditors should keep in mind that:

A) GAAP has strict procedures that must be followed when assigning overhead to work-in-process inventory.
B) overhead costs must be allocated to raw materials, work-in-process, and finished goods inventory.
C) management typically allocates overhead using total direct labor dollars as the basis allocation.
D) determining the reasonableness of the allocation method is relatively simple for work-in-process inventory.

C) Auditors test perpetual inventory master files by examining documentation that supports additions and reductions of inventory amounts in the master files.

6) Which of the following statements is correct regarding the audit of inventory cost accounting?

A) Cost accounting systems and controls are the same for all manufacturing companies.
B) All companies that have work-in-process must use a perpetual inventory system.
C) Auditors test perpetual inventory master files by examining documentation that supports additions and reductions of inventory amounts in the master files.

D) Manufacturing companies keep their cost accounting records separate from the production and other accounting records.

A) interim dates, and on a cycle basis during the year.

7) The physical counting of inventory may be performed at which of the following times?

A) interim dates, and on a cycle basis during the year.
B) neither.
C) interim dates.
D) on a cycle basis during the year.

A) Inventory with a high business risk includes products with potential obsolescence.

8) Which of the following is an accurate statement regarding inventory and risk?

A) Inventory with a high business risk includes products with potential obsolescence.

B) Auditors often have a greater concern for misstatements when inventory is stored in one warehouse.
C) Inherent risk is generally set at low for manufacturing companies.
D) Performance materiality for inventory is determined before assessing client business risk.

B) are adequately disclosed in the financial statements.

9) In the audit of transactions and amounts in the capital acquisition and repayment cycle, the auditor must take great care in making sure that the significant legal requirements affecting the financial statements have been properly fulfilled and:

A) any violations are reported to the SEC.
B) are adequately disclosed in the financial statements.
C) must issue a disclaimer if they haven’t been fulfilled.
D) any departures from the agreements are made with management’s knowledge and consent.

D) notes payable.

10) Assessed control risk and the results of substantive tests of transactions are normally unimportant for designing tests of details of balances for which of the following accounts?
A) accounts receivable.
B) inventory.
C) accounts payable.
D) notes payable.

D) Review the bank reconciliation for new notes credited directly to the bank account by the bank.

11) The audit objective that requires that existing notes payable be included in the notes payable schedule is satisfied by performing which of the following audit procedures?
A) Confirm notes payable.
B) Trace the total of the notes payable schedule to the general ledger.
C) Review the notes payable schedule to determine whether there are any related parties.
D) Review the bank reconciliation for new notes credited directly to the bank account by the bank.

A) long-term debt is understated.

12) During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditor to suspect that:
A) long-term debt is understated.
B) discount on bonds payable is overstated.
C) long-term debt is overstated.
D) premium on bonds payable is understated.

D) payment of a dividend.

13) Which of the following would generally not need to be approved by the board of directors?
A) issuing capital stock.

B) repurchasing capital stock.
C) declaration of a dividend.
D) payment of a dividend.

C) independent registrar.

14) Any company with stock listed on a securities exchange is required to engage a(n):

A) equity analyst.

B) stock transfer agent.
C) independent registrar.
D) equity placement specialist.

A) shareholders’ capital stock master file.

15) When a dividend is declared by the board of directors, the source for determining who should receive dividend checks is the:
A) shareholders’ capital stock master file.
B) stock certificate books.
C) common stock account in the general ledger.
D) corporate directory.

D) a confirmation from the transfer agent is the simplest way to verify the number of shares outstanding at the balance sheet date.

16) When verifying if capital stock is accurately recorded:

A) the ending balance in the account does not need to verified.
B) the number of shares outstanding at the balance sheet date is verified by examining the corporate minutes.
C) the recorded par value can be determined by multiplying the number of shares by the market price of the stock.
D) a confirmation from the transfer agent is the simplest way to verify the number of shares outstanding at the balance sheet date.

D) is being replaced by pre-approved purchase cards in many companies.

17) An imprest petty cash fund:
A) is a bank account.
B) is used for large, unusual purchases.
C) is usually reimbursed at least once a week for good internal control.
D) is being replaced by pre-approved purchase cards in many companies.

D) All of the above are accurate statements.

18) Which of the following is an accurate statement regarding cash?
A) The amount of cash flowing into and out of the cash account is often larger than that for any other account in the financial statements.
B) The susceptibility of cash to embezzlement is greater than that for other types of assets.
C) Auditors must verify whether recorded cash in the general ledger correctly reflects all cash transactions that took place during the year.
D) All of the above are accurate statements.

D) occurrence.

19) The most important balance-related audit objectives in the audit of cash include all except which of the following?
A) existence.
B) accuracy.
C) completeness.

D) occurrence.

B) Checks are written by the client in the same month the checks clear the bank.

20) The auditors test the client’s monthly bank reconciliation to verify whether the client’s recorded bank balance is the same amount as the actual cash in the bank. Which of the following would not explain a difference between the company’s cash balance and the bank’s balance for the client?
A) deposits in transit.
B) Checks are written by the client in the same month the checks clear the bank.
C) other reconciling items.
D) outstanding checks.

A) if a business defers preparing bank reconciliations for long periods, the value of the control is reduced and may affect the auditor’s assessment of control risk for cash.

21) When assessing risks affecting cash:

A) if a business defers preparing bank reconciliations for long periods, the value of the control is reduced and may affect the auditor’s assessment of control risk for cash.
B) most companies are likely to have significant client business risks affecting their cash balances.
C) there is a low inherent risk for the existence and completeness objectives for cash.
D) all of the above are accurate statements.

A) Receipts on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as deposits in transit.

22) Which of the following should be audited on the interbank transfer schedule?
A) Receipts on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as deposits in transit.
B) Disbursements on the interbank transfer schedule must always be shown as outstanding checks.
C) The interbank transfers cannot be recorded in both the receiving and disbursing banks.
D) All transfers that occurred for the month before and the month after the year-end must be included on the interbank transfer schedule.

A) kiting.

23) Listing all bank transfers made a few days before and after the balance sheet date and tracing each to the accounting records for proper recording is a useful approach to test for:
A) kiting.
B) lapping.
C) income smoothing.
D) channel stuffing.

D) to confirm year-end holdings.

24) When auditing financial instruments, a confirmation is sent to the broker-dealer:
A) only if the client has poor internal controls.
B) to confirm interest and dividends.
C) to provide assurance on realizable value.
D) to confirm year-end holdings.

A) tests for transaction-related objectives, and tests for balance-related objectives.

25) Auditors often integrate procedures for presentation and disclosure objectives with:
A) tests for transaction-related objectives, and tests for balance-related objectives.
B) neither.
C) tests for transaction-related objectives.
D) tests for balance-related objectives.

B) disclose a liability and provide a range of outcomes.

26) You are auditing Rodgers and Company. You are aware of a potential loss due to noncompliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to:
A) accrue a $4 million liability.
B) disclose a liability and provide a range of outcomes.
C) since there is less than a 50% chance of occurrence, ignore.
D) since there is greater that a remote chance of occurrence, accrue the $10 million.

B) examine payroll reports.

27) Which of the following is not a common audit procedure used to search for contingent liabilities?
A) examine letters of credit.
B) examine payroll reports.
C) review internal revenue agent reports.
D) analyze legal expense.

B) obtain a professional opinion about the expected outcome of existing lawsuits and the likely amount of the liability, including court costs.

28) Auditors, as part of completing the audit, will request the client to send a standard inquiry to the client’s attorney letter to those attorneys the company has been consulting with during the year under audit regarding legal matters of concern to the company. The primary reason the auditor requests this information is to:
A) determine the range of probable loss for asserted claims.
B) obtain a professional opinion about the expected outcome of existing lawsuits and the likely amount of the liability, including court costs.
C) obtain an outside opinion of the probability of losses in determining accruals for contingencies.
D) obtain an outside opinion of the probability of losses in determining the proper footnote disclosure.

C) a significant decline in the market price of a corporation’s stock.

29) Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor’s report would not require disclosure in the financials statements?
A) sale of a bond or capital stock issue.
B) loss of plant or inventories as a result of fire or flood.
C) a significant decline in the market price of the corporation’s stock.
D) a merger or acquisition.

C) throughout the entire audit process.

30) When should auditors generally assess a client’s ability to continue as a going concern?
A) upon completion of the audit.
B) during the planning stages of the audit.
C) throughout the entire audit process.
D) during testing and completion phases of the audit.

C) must be written.

31) The auditor is responsible for communicating significant internal control deficiencies to the audit committee, or those charged with governance. This communication:
A) may be oral or written.
B) must be oral.

C) must be written.
D) must be oral via direct communication.

C) new information comes to the auditor’s attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion.

32) The audit firm issues an audit report for its client. The auditors have no obligation to make further inquiries with respect to the client’s audited financial statements unless:
A) a development occurs that may affect the company’s long-term viability as a company.
B) final resolution was made on disclosed contingency for which no liability needed to be accrued.
C) new information comes to the auditor’s attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion.
D) a lawsuit, in which the risk of loss was considered remote, was resolved in the company’s favor.