Auditing - Final - Multiple Choice

1. 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 MEASURE OF
OF MISSTATEMENTS TOLERABLE MISSTATEMENT

No, No

Yes, Yes

No, Yes

Yes, No

LO #17-1, #17-2

Explanation

LO #17-1, #17-2

2. An inventory turnover analysis is useful to the auditor because it may detect

Inadequacies in inventory pricing

Methods of avoiding cyclical holding costs

The existence of obsolete merchandise

The optimum automatic reorder points

LO #21-1 #21-4 #21-5 #21-6

Explanation

LO #21-1 #21-4 #21-5 #21-6

3. From prior experience, a CPA is aware that the accounts receivable trial balance contains a few unusually large balances. In using statistical sampling, the CPA's best course of action is to

Eliminate any unusually large balances that appear in the sample

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

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

Increase the sample size to lessen the effet of the unusually large balances.

LO #17-2

Explanation

LO #17-2

4. When an auditor tests a client's cost accounting reords, the auditor's tests are primarily designed to determine that

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

Quantities on hand have been computed based on acceptable cost account techniques that reasonable approximate actual quantities on hand

Physical inventories are in substantial agreement with book inventories

The internal controls are in accordance with generally accepted accounting principles and are functioning as planned

LO #21-1 #21-3

Explanation

LO #21-1 #21-3

5. The return of a positive confirmation of accounts receivable without an exception attests to the

Collectibility of the receivable balance

Accuracy of the receivable balance

Accuracy of the aging of accounts receivable

Accuracy of the allowance for uncollectible accounts

LO #16-4

Explanation

LO #16-4

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

Footing the purchases journal

Reconciling vendors' monthly statements with subsidiary payable ledger accounts

Tracing totals from the purchses journal to the ledger accounts

Sending written quarterly confirmations to all vendors

LO #18-3

Explanation

LO #18-3

7. When evaluating the adequay of the allowance for uncollectible accounts, an auditor recviews the entity's aging of receivables to support management's balance-related assertion of

Exisence

Completeness

Valuation and allocation

Rights and obligations

LO #16-3

Explanation

LO #16-3

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

Existence

Relizable value

Completeness

Valuation and allocation

LO #18-6 #18-7

Explanation

LO #18-6 #18-7

9. Which of the following analytical procedures should be applied to the income statement?

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

Ascertain that the new tincome amount in the statement of cash flows agrees with the net income amount in th eincome statement

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

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

LO #19-2 #19-5

Explanation

LO #19-2 #19-5

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

Take no action regarding the event

Insist that the client issue revised financial statements

Inform the audit committee that the report cannot be relied on

Inform the appropriate authorities that the report cannot be relied on

LO #24-2

Explanation

LO #24-2

11. A number of factors 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?

Greater reliance on internal control

Greater reliance on analytical procedures

Smaller expected frequency of errors

Smaller measure of tolerable misstatement

LO #17-1, #17-2

Explanation

LO #17-1, #17-2

12. Which of the following controls most likely will justify a reduced assessed level of control risk concerning plant and equipment acquisitions

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

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

Review of prenumbered purchase orders to detect unrecorded trade-ins

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

LO #19-2

Explanation

LO #19-2

13. The audit step mot likely to receal the existence of contingent liabilities is

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

An inquiry directed to legal counsel

Accounts payable confirmations

Mortgage-note confirmation

LO #24-2

Explanation

LO #24-2

14. The date of the management representation letter should coincide with the

Balance sheet date

Date of the auditor's report

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

Date of the engagement agreement

LO #24-5

Explanation

LO #24-5

15. As a result of 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:

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

Evaluate management's performance in causing this decline

Require footnote disclosure

Consider the possibility of a misstatement in the financial statements

LO #16-2

Explanation

LO #16-2

16. 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 at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over

Purchase requisitions

Purchase orders

Cash receipts

Perpetual inventory records

LO #18-3

Explanation

LO #18-3

17. In an audit of financial statements, a CPA wil generally find stratified sampling techniques to be most applicable to

Recomputing net wage and salary payments to employees

Tracing hours woked from the payroll summary back to the individual time cards

Confirming accounts recivable for residential customers at a large electric utility

Review supporting documentation for additions to plant and equipment

LO #17-2

Explanation

LO #17-2

18. Management's refusal to furnish a written representation on a matter that the auditor considers essential constitutes

Prima facie evidence that the financial statements are not present fairly

A violation of the Foreign Corrupt Practices Act

An uncertainty sufficient to preclude an unqualified opinion

A scope limitation sufficient to prelude an unqualified opinion

LO #24-5

Explanation

LO #24-5

19. Which of the following comparisons will be most useful to an auditor in aduting an entity's income and expense accounts?

Prior year accounts payable to current year accounts payable

Prior year payroll expense to budgeted current year payroll expense

Current year revenue to budgeted current year revenue

Current year warranty expense to current year contingent liabilities

LO #19-2 #19-5

Explanation

LO #19-2 #19-5

20. Before expresing an opinion concerning the audit of income and expenses, the auditor will best proceed with the audit of ithe income statement by

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

Analyzing the beginning and ending balance sheet inventory amounts

Making net income comparisons to published industry trends and ratios

Auditing income statement accounts concurrently with the related balance sheet accounts

LO #19-2, #19-4, #19-5

Explanation

LO #19-2, #19-4, #19-5

21. The accuracy of perpetual inventory master files may be established, in part, by comparing perpetual inventory records with

Purchase requisitions

Receiving reports

Purchase orders

Vendor payments

LO #21-1 #21-3

Explanation

LO #21-1 #21-3

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

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

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

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

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

LO #18-3

Explanation

LO #18-3

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

Accumulated depreciation

Insurance expense

Property, plant and equipment

Purchase returns and allowances

LO #19-2

Explanation

LO #19-2

24. Which of the follwoing 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?

Maintain a perpetual invenotry master file of only the more valuable items with frequent periodic verification of the validity of the perpetuals

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

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

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

LO #21-1

Explanation

LO #21-1

25. An auditor will be most likely to learn of slo-moving inventory through

Inquiry of sales personnel

Inquiry of store personnel

Physical observation of inventory

Review of perpetual inventory mater files

LO #21-1 #21-4 #21-5 #21-6

Explanation

LO #21-1 #21-4 #21-5 #21-6

26. A principal purpose of a letter of representation from management is to

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

Discharge the auditor from legal liability for the audit

Confirm in writing management's approval of limitations on the scope of the audit

Remind management of its primary repsonsibility for financial statements

LO #24-5

Explanation

LO #24-5

27. Subsequent events for reporting purposes are defined as events that occur subsequent to the

Balance sheet date

Date of the auditor's report

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

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

LO #24-4

Explanation

LO #24-4

28. When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely is

Vendors with whom the entity has previously done business

Amounts recorded in the accounts payable subsidiary ledger

Payees of checks drawn in th emonth after year-end

Invoices filed in the entity's open invoice file

LO #18-6 #18-7

Explanation

LO #18-6 #18-7

29. For control purposes, the quantities of materials ordered may be omitted from the copy of the purchse order that is

Returned to the requisitioner

Forwarded to the receiving department

Forwarded to the accounting department

Retained in the purchasing department's files

LO #21-1

Explanation

LO #21-1

30. An example of an event occurring in the period of the auditor's 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

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

Issuance of a widely advertisied capital stock issue with restrictive covenants

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

Decreased sales volume resulting from a general business recession

LO #24-4

Explanation

LO #24-4

31. A CPA auditing inventory may appropriately apply attributes sampling to estimate the

Average price of inventory items

Percentage of lsow-moving inventory items

Dollar value of inventory

Physical quantity of inventory items

LO #21-1 #21-4 #21-5 #21-6

Explanation

LO #21-1 #21-4 #21-5 #21-6

32. When obtaining evidence regarding litigation against a client, the CPA will be lest interested in determining

The period in which the underlying cause of the litigation occurred

The probability of an unfavorable outcome

An estimate of when the matter wil be resolved

An estimate of the potential loss

LO #24-2

Explanation

LO #24-2

33. In connection with the review of key ratios, the CPA notes that Pyzi had accounts receivable equal to 30 days' sales at December 31, 2008, and to 4 days' sales at December 31, 2009. Assuming that there have been no changes in economic conditions, clientele, or sales mix, this change most likely will indicate

A steady increase in sales in 2009

An easing of credit policies in 2009

A decrease in accounts receivable relative to sales in 2009

A steady decrease in sales 2009

LO #16-2

Explanation

LO #16-2

34. Which of the following audit procedures will best uncover an understatement of sales and accounts receivables?

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

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

Confirm accounts receivable

Review the aged receivable trial balance

LO #16-3

Explanation

LO #16-3

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

Recompute the portion of the premium that expired during the year

Prepare exerpts of the insurance policies for audit documentation

Confirm premium rates with an independent insurance broker

Examine support for premium payments

LO #19-2

Explanation

LO #19-2

36. Which of the follwing audit procedures is least likely to detect an unrecorded liability?

Analysis and recomputation of interest expense

Analysis and recomputation of depreciation expense

Mailing of standard bank confirmation forms

Reading of the minutes of meetings of the board of directors

LO #19-2, #19-4, #19-5

Explanation

LO #19-2, #19-4, #19-5

37. In a company with materials and supplies that include a great number of items, a fundamental deficiency in control requirements will be indicated if

The cycle basis for physical inventory taking was to be used

Minor supply items were to be expensed when acquired

A perpetual invenotry master file is not maintained for items of small value

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

LO #21-1

Explanation

LO #21-1

38. The negative form of accounts receivable confirmation request is useful except when

Internal control surrounding accounts receivable is considered to be effective

A large number of small balances are involved

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

Individual account balances are relatively large

LO #15-4

Explanation

LO #15-4

39. Which of the following best describes the auditor's reporting responsibility concerning information accompanying the basic financial statements in the auditor-submitted document?

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

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

The auditor should report on the information accompanying the basic financial statements only if the auditor did not participate in its preparation

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

LO #24-5

Explanation

LO #24-5

40. When evaluating inventory controls with respect to segregation of duties, a CPA wil be lest likely to

Make inquiries

Inspect documents

Observe procedures

Consider policy and procedure manuals

LO #21-1 #21-3

Explanation

LO #21-1 #21-3

41. In testing for unrecorded retirements of equipment, an auditor most likely will

Select items of equipment from the accounting records and then locate them during the plant tour

Compare depreciation journal entries with similar prior-year entries in search of fully depreciated equipment

Inspect items of equipment observed during the plant tour and then trace them to the equipment master file

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

LO #19-2

Explanation

LO #19-2

42. Kar has audited the financial statements of Lurch Corporation for the year ended December 31, 2009. Karr's field work was completed on February 27, 2010; Karr's auditor's report was dated February 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 anual report to stockholders, which will included unaudited financial statements for the first quarter ended March 31, 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 subsequent events occuring through

February 27, 2010

February 28, 2010

March 31, 2010

April 4, 2010

LO #24-4

Explanation

LO #24-4

43. After a CPA has determined that accounts receivable have increased as a result of slow collections in a "tight money" environment, the CPA will be likely to

Increase the balance in the allowance for bad debt account

Review the going concern ramifications

Reciew the credit and collection policy

Expand test of collectibility

LO #16-2

Explanation

LO #16-2

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

Individual overdue balances

Individual invoices

Small account balances

Large account balances

LO #16-4

Explanation

LO #16-4

45. Ansman, CPA, has been requested by a client, Rainco Corp., to prepare additional information accompanying the basic financial statements for this year's audit. In issuing the additional information, Ansman must be certain to

Issue a standard short-form report on the same audit

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

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

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

LO #24-5

Explanation

LO #24-5

46. 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 effectively. 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 test of details of balances for accounts payable will most likely be

The same as the ARACR for test of controls

Greater than the ARACR for tests of controls

Less than the ARACR for tests of controls

Totally independent from the ARACR used for test of controls

LO #17-1, #17-2

Explanation

LO #17-1, #17-2

47. Ansman, CPA, has been requested by a client, Rainco Corp., to prepare information in addition to the basic financial statements for this year's audit. Which of the following is the best reason for Rainco's requesting the additional information?

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

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

To provide Rainco's management with information to supplement and analyze the basic financial statements

To provide the documentation required by the SEC in anticipation of a public offering of Rainco's stock

LO #24-5

Explanation

LO #24-5

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

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

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

Factory equipment replacements are generaly made when estimated usefullives, as indicated in depreiation schedules, have expired

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

LO #19-2

Explanation

LO #19-2

49. With respect to an internal control measure that wil ensure accountability for fixed asset retirements, management should implement controls that include

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

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

Continuous use of serially numbered retirement work orders

Periodic observation of plant assets by the inernal auditors

LO #19-2

Explanation

LO #19-2

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

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

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

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

Allow the auditor to emphasize larger items from the population

LO #17-2

Explanation

LO #17-2

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

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

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

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

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

LO #18-6 #18-7

Explanation

LO #18-6 #18-7

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

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

Determine th emethod for computing depreciation expense and ascertain that it is in accordance with GAAP

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

Establish the basis for depreciable assets and verify the depreciation expense

LO #19-2, #19-4, #19-5

Explanation

LO #19-2, #19-4, #19-5

53. The controler 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?

Depreciation expense/book value of manufacturing equipment

Accumulated depreciation/book value of manufacturing equipment

Repairs and maintenance cost/direct labor costs

Gross manufacturing equpment cost/units produced

LO #19-2 #19-5

Explanation

LO #19-2 #19-5