Audit Final Exam May 2010

53 Questions  I  By Beowolfagate1
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  • 1. 
    The audit step most likely to reveal the existence of contingent liabilities is?
    • A. 

      A review of vouchers paid during the month following the year end

    • B. 

      An inquiry directed to legal counsel

    • C. 

      Accounts payable confirmation

    • D. 

      Mortgage note confirmation


  • 2. 
    When obtaining evidence regarding litigation against a client, the CPA will be least interested in determining?
    • A. 

      The period in which the underlying cause of the litigation occured

    • B. 

      The probability of an unfavorable outcome

    • C. 

      An estimate of when the matter will be resolved

    • D. 

      An estimate of the potential loss


  • 3. 
    When a contingency is resolved subsequent to the issuance of audited financial statements, which correctly contained disclosure of the contingency in the footnotes based on information available at the date of issuance, the auditor should?
    • A. 

      Take no action regarding the event

    • B. 

      Insist that the client issue revised financial statements

    • C. 

      Inform the audit committee that the report cannot be relied on

    • D. 

      Inform the appropriate authorities that the report cannot be relied on


  • 4. 
    A principal purpose of a letter of representation from management is to?
    • A. 

      Serve as an introduction to company personnel and an authorization to examine the records

    • B. 

      Discharge the auditor from legal liability for the audit

    • C. 

      Confirm in writing managements approval of limitations on the scope of the audit

    • D. 

      Remind management of its primary responsibility for financial statements


  • 5. 
    The date of the management representation letter should coincide with the?
    • A. 

      Balance sheet date

    • B. 

      Date of the auditors report

    • C. 

      Date of the latest subsequent event referred to in the notes to the financial statements

    • D. 

      Date of the engagement agreement


  • 6. 
    Management's refusal to furnish a written representation on a matter that the auditor considers essential constitutes?
    • A. 

      Prima facie evidence that the financial statements are not presented fairly

    • B. 

      A violation of the foreign corrupt practices act

    • C. 

      An uncertainty sufficient to preclude an unqualified opinion

    • D. 

      A scope limitation sufficient to preclude an unqualified opinion


  • 7. 
    Subsequent events for reporting purposes are defined as events that occur subsequent to the?
    • A. 

      Balance sheet date

    • B. 

      Date of the auditors report

    • C. 

      Balance sheet date but before the date of the auditor's report

    • D. 

      Date of the auditor's report and concern contingencies that are not reflected in the financial statements


  • 8. 
    Ana example of an event occurring in the period of the auditors field work subsequent to the end of the year being audited that normally will not require disclosure in the financial statements or auditor's report is?
    • A. 

      Serious damage to the company's plant from a widespread flood

    • B. 

      Issuance of a widely advertised capital stock issue with restrictive covenants

    • C. 

      Settlement of a large liability for considerably less than the amount recorded

    • D. 

      Decreased sales volume resulting from a general business recession


  • 9. 
    Karr has audited the F/S of Lurch corporation for the year ended Dec. 31, 2009. Karr's field work was completed on Feb. 27 2010, Karrs auditor's report was dated Feb. 28 2010 and was received by the management of Lurch on March 5, 2010. On April 4, 2010, the management of Lurch asked that Karr approve inclusion of this report in their annual report to stockholders, which will include unaudited financial statements for the first quarter ended March31, 2010. Karr approved the inclusion of the auditor's report in the annual report to stockholders. Under the circumstances, Karr is responsible for inquiring as to the subsequent events occurring through?
    • A. 

      Feb. 27, 2010

    • B. 

      Feb. 28, 2010

    • C. 

      March 31, 2010

    • D. 

      April 4, 2010


  • 10. 
    Which of the following best describes the auditors reporting responsibility concerning information accompanying the basic financial statements in an auditor submitted document?
    • A. 

      The auditor has no reporting responsibility concerning info accompanying the basic financial statements

    • B. 

      The auditor should report on the info accompanying the basic financial statements only if the auditor participated in its preparation

    • C. 

      The auditor should report on the information accompanying the basic f/s only if the auditor did not participate in its preparation

    • D. 

      The auditor should report on all the information included in the document


  • 11. 
    Ansman, CPA, has been requested by a client, Rainco Corp., to prepare info in addition to the basic F/S for this years audit. which of the following is the best reason for Rainco's requesting the additional info?
    • A. 

      To provide an opinion about the supplemental info when certain items are not in accordance with GAAP

    • B. 

      To provide Rainco's creditors a greater degree of assurance as to the financial soundness of the company

    • C. 

      To provide Rainco's management with info to supplement and analyze the basic F/S

    • D. 

      To provide the documentation required by the SEC in anticipation of a public offering of Raincos stock


  • 12. 
    Ansman, CPA, has been requested by a client, Rainco corp, to prepare additional info accompanying the basic F/S for this years audit. In issuing the additional info, Ansman must be certain to?
    • A. 

      Issue a standard short-form report on the same audit

    • B. 

      Include a description of the scope of the audit in more detail than the description in the usual short-form report

    • C. 

      State the source of any statistical data and that such data have not been subjected to the same auditing procedures as the basic F/S

    • D. 

      Maintain a clear cut distinction between management's representations and the auditor's representations


  • 13. 
    In a company with materials and supplies that include a great number of items, a fundamental deficiency in control requirements would be indicated if?
    • A. 

      The cycle basis for physical inventory taking was to be used

    • B. 

      Minor supply items were to be expensed when acquired

    • C. 

      A perpetual inventory master file is not maintained for items of smaller value

    • D. 

      The storekeeping function were to be combined with production and record keeping


  • 14. 
    For control purposed, the quantities of materials ordered may be omitted from the copy of the purchase order that is?
    • A. 

      Returned to the requisitioner

    • B. 

      Forwarded to the receiving department

    • C. 

      Forwarded to the accounting department

    • D. 

      Retained in the purchasing departments files


  • 15. 
    Which of the following procedures will best 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 master file of only the more valuable items with frequent periodic verification of the validity of the perpetuals

    • B. 

      Have an independent CPA firm prepare an internal control report on the effectiveness of the administrative and accounting controls over inventory

    • C. 

      Have separate warehouse space for the more valuable items with sequentially numbered tags

    • D. 

      Require an authorized officer's signature on all requisitions for the more valuable items


  • 16. 
    When an auditor tests a client's cost accounting records, the auditors tests are primarily designed to determine that?
    • A. 

      Costs have been correctly assigned to finished goods, work in process, and cost of goods sold

    • B. 

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

    • C. 

      Physical inventories are in substantial agreement with book inventories

    • D. 

      The internal controls are in accordance with GAAP and are functioning as planned


  • 17. 
    The accuracy of perpetual inventory master files may be established, in part, by comparing perpetual inventory records with?
    • A. 

      Purchase requisitions

    • B. 

      Receiving reports

    • C. 

      Purchase orders

    • D. 

      Vendor payments


  • 18. 
    When evaluating inventory controls with respect to segregation of duties, a CPA will be least likely to?
    • A. 

      Make inquiries

    • B. 

      Inspect documents

    • C. 

      Observe procedures

    • D. 

      Consider policy and procedure manuals


  • 19. 
    An auditor will be most likely to learn of slow moving inventory through?
    • A. 

      Inquiry of sales personnel

    • B. 

      Inquiry of store personnel

    • C. 

      Physical observation

    • D. 

      Review of perpetual inventory master files


  • 20. 
    An inventory turnover analysis is useful to the auditor because it may detect?
    • A. 

      Inadequacies in inventory pricing

    • B. 

      Methods of avoiding cyclical holding costs

    • C. 

      The existence of obsolete inventory

    • D. 

      Physical quantity of inventory items


  • 21. 
    A CPA auditing inventory may appropriately apply attributes sampling to estimate the?
    • A. 

      Average price of inventory items

    • B. 

      Percentage of slow moving items

    • C. 

      Dollar value of inventory

    • D. 

      Physical quantity of inventory items


  • 22. 
    Which of the following controls most likely will justify a reduced assessed level of control risk concerning plant and acquisitions?
    • A. 

      Periodic physical inspection of plant and equipment by the internal audit staff

    • B. 

      Comparison of current-year plant and equipment account balances with prior-year balances

    • C. 

      Review of prenumbered purchase orders to detect unrecorded trade-ins

    • D. 

      Approval of periodic depreciation entries by a supervisor independent of the accounting department


  • 23. 
    Which of the following is not an internal control deficiency related to factory equipment?
    • A. 

      Checks issued in payment of acquisitions of equipment are not signed by the controller

    • B. 

      All acquisitions of factory equipment are required to be made by the department in need of equipment

    • C. 

      Factory equipment replacements are generally made when estimated useful lives as indicated in depreciation schedules, have expired

    • D. 

      Proceeds from sales of fully depreciated equipment are credited to other income


  • 24. 
    With respect to an internal control measure that will ensure accountability for fixed asset retirements, management should implement controls that include?
    • A. 

      Continuous analysis of miscellaneous revenue to locate any cash proceeds from sale of plant assets

    • B. 

      Periodic inventory of plant executives by internal auditors as to whether any plant assets have been retired

    • C. 

      Continuous use of serially numbered retirement work orders

    • D. 

      Periodic observation of plant assets by the internal auditors


  • 25. 
    Which of the following comparisons will be most useful to an auditor in auditing an entity's income and expense accounts?
    • A. 

      Prior year accounts payable to current year accounts payable

    • B. 

      Prior year payroll expense to budgeted current year payroll expense

    • C. 

      Current year revenue to budgeted current year revenue

    • D. 

      Current year warranty expense to current year contingent liabilities


  • 26. 
    The controller of Excello Manufacturing Inc. wants to use analytical procedures to identify the possible existence of idle equipment or the possibility that equipment has been disposed of without having been written off. Which of the following ratios will best accomplish this objective?
    • A. 

      Depreciation expense/book value of manufacturing equipment

    • B. 

      Accumulated depreciation/book value of manufacturing equipment

    • C. 

      Repairs and maintenance costs/direct labor costs

    • D. 

      Gross manufacuring equipment cost/ units produced


  • 27. 
    Which of the following analytical procedures should be applied to the income statement?
    • A. 

      Select sales and expense items and trace amounts to related supporting documents

    • B. 

      Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement

    • C. 

      Obtain from the proper client representatives the beginning and ending inventory amounts that were used to determine costs of sales

    • D. 

      Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences


  • 28. 
    In testing for unrecorded retirements of equipment, an auditor will most likely...?
    • A. 

      Select items of equipment form 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 master file

    • D. 

      Scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance expense


  • 29. 
    Analysis of which account is least likely to reveal evidence related to unrecorded retirement of equipment?
    • A. 

      Accumulated depreciation

    • B. 

      Insurance expense

    • C. 

      Property, plant and equipment

    • D. 

      Purchase returns and allowances


  • 30. 
    As a result o analytical procedures, the auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year.  The auditor should
    • A. 

      Express a qualified opinion due to inability of the client company to continue as going concern.

    • B. 

      Evaluate management’s performance in causing this decline

    • C. 

      Required footnote disclosure.

    • D. 

      Consider the possibility of a misstatement in the financial statements.


  • 31. 
    After a CPA has determined that accounts receivable have increased as a result of slow collections in “tight money” environment, the CPA will be likely to
    • A. 

      Increase the balance in the allowance for bad debt account.

    • B. 

      Review the going concern ramifications.

    • C. 

      Review the credit and collection policy

    • D. 

      Expand tests of collectability


  • 32. 
    In connection with his review of key ratios, the CPA notes that Pyzi had accounts receivable equal to 30 days’ sales at December 31, 2008, and to 45 days’ sales at conditions, clientele, or sales mix, this change most likely will indicate
    • A. 

      A steady increase in sales in 2009

    • B. 

      An easing of credit policies in 2009

    • C. 

      A decrease in account receivable relative to sales in 2009

    • D. 

      A steady decrease in sales in 2009


  • 33. 
    The negative form of accounts receivable confirmation request is useful except when
    • A. 

      Internal control surrounding accounts receivable is considered to be effective

    • B. 

      A large number of small balances are involved

    • C. 

      The auditor has reason to believe the persons receiving the request are likely to give them consideration

    • D. 

      Individual account balances are relatively large


  • 34. 
    The return of a positive confirmation of account receivable without an exception attests to the
    • A. 

      Collectability of the receivable balance

    • B. 

      Accuracy of the receivable balance

    • C. 

      Accuracy of the aging of accounts receivable

    • D. 

      Accuracy of the allowance for uncollectible accounts


  • 35. 
    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 responses.  These differences, which were not misstatements, required substantial time to resolve.  In defining thee sampling unit for the current year’s audit, the auditor will most likely choose
    • A. 

      Individual overdue balances

    • B. 

      Individual invoices

    • C. 

      Small account balances

    • D. 

      Large account balances


  • 36. 
    When evaluating the adequacy of the allowance for uncollectible accounts, an auditor reviews the entity aging of receivables to support management’s balance-related aeration of
    • A. 

      Existence

    • B. 

      Completeness

    • C. 

      Valuation and allocation

    • D. 

      Rights and obligations


  • 37. 
    Which of the following audit procedures will best uncover an understatement of sales and accounts receivable?
    • A. 

      Test a sample of sales transactions, selecting the sample from prenumbered shipping documents

    • B. 

      Test a sample of sales transactions, selecting the sample from sales invoices recorded in the sales journal

    • C. 

      Confirm account receivable

    • D. 

      Review the aged accounts receivable trial balance.


  • 38. 
    Mr. Murray decides to use stratified sampling. The reason for using stratified sampling rather than unrestricted random sampling is to
    • A. 

      Reduce as much as possible the degree of variability in the overall population.

    • B. 

      Give every element in the population an equal chance of being included in the sample

    • C. 

      Allow the person selecting the sample to use personal judgment in deciding which elements should be included in the sample

    • D. 

      Allow the auditor to emphasize larger items from the population


  • 39. 
    In an audit of financial statements, a CPA will generally find stratified sampling techniques to be most applicable to
    • A. 

      Recomputing net wage and salary payments to employees.

    • B. 

      Tracing hours worked from the payroll summary back to the individual time cards.

    • C. 

      Confirming accounts receivable for residential customers at a large electric utility

    • D. 

      Reviewing supporting documentation for additions to plant and equipment


  • 40. 
    From prior experience, a CPA is aware that the accounts receivable trial balance contains a few unusually large balances.  The using sampling, the CPA’s best course of action is to
    • A. 

      Eliminate any unusually large blackness that appears in the sample

    • B. 

      Continue to draw new samples until no unusually large balances appear in the sample

    • C. 

      Stratify the accounts receivable population so that the unusually large balances are reviewed separately

    • D. 

      Increase the sample size to lessen the effect of the unusually large balances


  • 41. 
    A number of tractors influence the sample size for a substantive test of details of an account balance.  All other things being equal, which of the following would lead to a larger sample size?                                            
    • A. 

      Greater reliance on internal control

    • B. 

      Greater reliance on analytical procedures

    • C. 

      Smaller expected frequency of errors

    • D. 

      Smaller measure of tolerable misstatement


  • 42. 
    An auditor uses audit sampling to perform tests of controls in the acquisition and payment cycle.  Those tests indicate that the related controls are operating effective.  The auditor plans to use audit sampling to perform tests of details of balances for accounts payable  the auditor’s acceptable risk of incorrect acceptance (ARIA) for the tests of detail’s of balances for accounts payable will most likely to be                                                
    • A. 

      The same as the ARACR for test of controls

    • B. 

      Greater than the ARACR for test of controls

    • C. 

      Less than the ARACR for test of controls

    • D. 

      Totally independent form the ARACER used for tests of controls


  • 43. 
    Which of the following sample planning factors will influence the sample size for a test of details of balances for a specific account?  Expected Amount of Misstatement                        Measure of tolerable misstatement                                                                                                                                                               
    • A. 

      No No

    • B. 

      Yes Yes

    • C. 

      No Yes

    • D. 

      Yes No


  • 44. 
    A client erroneously recorded a large purchase twice.  Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner?                                                              
    • A. 

      Footing the purchases journal

    • B. 

      Reconciling vendors’ monthly statements with subsidiary payable ledger accounts

    • C. 

      Tracing totals form the purchases journal to the ledger accounts.

    • D. 

      Sending written quarterly confirmations to all vendors


  • 45. 
    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 COD basis, thereby enabling his relative to buy a Lake’s wholesale prices.  Budd was probably able to accomplish this because of Lake’s poor internal control over                                                               
    • A. 

      Purchase requisitions

    • B. 

      Purchase orders

    • C. 

      Cash receipts

    • D. 

      Perpetual inventory records


  • 46. 
    Which of the following is an internal control that will prevent paid cash disbursement documents from being presented for payment a second time?                               
    • A. 

      The date on cash disbursement documents must be within a few days of the date that the document is presented for payment

    • B. 

      The official signing the check compares the check with the documents and should deface the documents.

    • C. 

      Unsigned checks are prepared by individuals who are responsible for signing checks

    • D. 

      Cash disbursement documents are approved by at least two responsible management officials.


  • 47. 
    In auditing accounts payable, an auditor’s procedures most likely will focus primarily on managements’ assertion of                                                            
    • A. 

      Existence

    • B. 

      Realizable value

    • C. 

      Completeness

    • D. 

      Valuation and allocation


  • 48. 
    Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
    • A. 

      Examining unusual relationships between monthly accounts payable balances and recorded cash payments.

    • B. 

      Reconciling vendors’ statements to the file of receiving reports to identify items received just prior to the balance sheet date.

    • C. 

      Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

    • D. 

      Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they supported by receiving reports


  • 49. 
    When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate populations most likely is...
    • A. 

      Vendors with whom the entity has previously done business

    • B. 

      Amounts recorded in the account payable subsidiary ledger

    • C. 

      Payees of checks drawn in the mount after year-end

    • D. 

      Invoices filed in the entity’s open invoice file


  • 50. 
    In connection with the audit of the prepaid insurance account, which of the following procedures is usually not performed by the auditor?                                                            
    • A. 

      Recomputed the portion of the premium that expired during the year

    • B. 

      Prepare excerpts of the insurance policies for audit documentation

    • C. 

      Confirm premium rates with an independent insurance broker

    • D. 

      Examine support for premium payments


  • 51. 
    Which of the following audit procedures is least likely to detect an unrecorded liability?                                                            
    • A. 

      Analysis and recomputation of interest expense

    • B. 

      Analysis and recomputation of depreciation expense

    • C. 

      Mailing of standard bank confirmations forms

    • D. 

      Reading of the minutes of meetings of the board of directors


  • 52. 
    Which of the following best describes the independent auditor’s approach to obtaining satisfaction concerning depreciation expense in the income statement?
    • A. 

      Verify the mathematical accuracy of the amounts charge to income as a result of depreciation expense

    • B. 

      Determine the method of computing depreciation expense and ascertain that it is in accordance with GAAP

    • C. 

      Reconcile the amount of depreciation expense to those amounts credited to accumulated depreciations accounts.

    • D. 

      Establish the basis for depreciable assets and verify the depreciation expense.


  • 53. 
    Before expressing an opinion concerning the audit of income and expenses, the auditor will best proceed with the audit of the income statement by                           
    • A. 

      Applying a rigid measurement standard designed to test for understatement of net income

    • B. 

      Analyzing the beginning and ending balance sheet inventory amounts

    • C. 

      Making net income comparisons to published industry trends and ratios.

    • D. 

      Auditing income statement accounts concurrently with the related balance sheet accounts.


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