Choose The Correct Answer For These Audits Terms Quiz

1. Why do auditors record their inventory test counts in the working papers?

To document compliance with generally accepted accounting principles.

For subsequent comparison with the completed inventory listing.

For use in subsequent audits.

To document every test count.

The reason auditors record their inventory test counts in the working papers is to have a reference for subsequent comparison with the completed inventory listing for accuracy and validation of the inventory count.

Explanation

The reason auditors record their inventory test counts in the working papers is to have a reference for subsequent comparison with the completed inventory listing for accuracy and validation of the inventory count.

2. A likely analytical procedure to test the accuracy of purchase discounts would be to compute the ratio of cash discounts earned to:

Sales discounts.

Purchases

Accounts payable.

Notes payable.

In order to accurately test purchase discounts, the ratio of cash discounts earned should be compared to the total purchases made, as this would give the most relevant information for analyzing the accuracy of purchase discounts.

Explanation

In order to accurately test purchase discounts, the ratio of cash discounts earned should be compared to the total purchases made, as this would give the most relevant information for analyzing the accuracy of purchase discounts.

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

Analysis and recomputation of interest expense.

Mailing of a cash confirmation form.

Analysis and recomputation of depreciation expense.

Reading of the minutes of meetings of the board of directors.

4. Which statement is correct with respect to accounts payable confirmations?

They are a required auditing procedure.

They are more frequently used in situations in which some vendors don't send monthly statements.

The negative form is used in most circumstances.

Accounts with new suppliers are always confirmed.

Accounts payable confirmations are typically used when vendors do not send monthly statements to ensure accurate reporting of financial transactions.

Explanation

Accounts payable confirmations are typically used when vendors do not send monthly statements to ensure accurate reporting of financial transactions.

5. The confirmation of accounts payable is most closely associated with:

Relative risk

Inherent risk

Detection risk.

Assertion risk

Confirmation of accounts payable involves external parties confirming that the amounts owed are accurate, which is closely related to detection risk - the risk that the auditor's procedures will not detect a misstatement.

Explanation

Confirmation of accounts payable involves external parties confirming that the amounts owed are accurate, which is closely related to detection risk - the risk that the auditor's procedures will not detect a misstatement.

6. Which of the following audit procedures most likely would provide assurance that a manufacturing entity's inventory valuation is proper?

Testing the entity's computation of standard overhead rates.

Obtaining confirmation of inventories pledged under loan agreements.

Tracing test counts to the entity's inventory listing.

Reviewing a cutoff procedure for inventories.

7. An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all:

Receiving reports

Vendor's invoices.

Canceled checks

Merchandise received

The auditor is testing the accuracy and completeness of the client's accounts payable records by comparing vendor's invoices to the merchandise received. This helps ensure that the client is only being billed for goods actually received.

Explanation

The auditor is testing the accuracy and completeness of the client's accounts payable records by comparing vendor's invoices to the merchandise received. This helps ensure that the client is only being billed for goods actually received.

8. Which of the following is the best control procedure to prevent the payment of an invoice twice?

Requiring dual signatures on checks.

Review of supporting documentation by the person signing the check.

Reconciliation of vendor statements to accounts payable.

Use of a check protector.

Reviewing supporting documentation ensures that the person signing the check verifies the legitimacy of the invoice before payment, reducing the risk of duplicate payments.

Explanation

Reviewing supporting documentation ensures that the person signing the check verifies the legitimacy of the invoice before payment, reducing the risk of duplicate payments.

9. An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?

Select and examine receiving reports and ascertain that the related canceled checks are dated no later than the receiving reports.

Select and examine canceled checks and ascertain that the related receiving reports are dated no earlier than the checks.

Select and examine receiving reports and ascertain that the related canceled checks are dated no earlier than the receiving reports.

Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.

The correct procedure is to verify that the canceled checks are dated no later than the receiving reports, as this ensures that the payment was made after the merchandise was received.

Explanation

The correct procedure is to verify that the canceled checks are dated no later than the receiving reports, as this ensures that the payment was made after the merchandise was received.

10. Purchase cutoff procedures should be designed to test whether all inventory:

Owned by the company is in the possession of the company.

On the year end balance sheet was carried at lower of cost or market.

Owned by the company was recorded.

On the year end balance sheet was paid for by the company.

Purchase cutoff procedures are used to ensure that all inventory owned by the company has been properly recorded in the financial statements. This helps in accurately reflecting the value of inventory and preventing misstatement of financial information.

Explanation

Purchase cutoff procedures are used to ensure that all inventory owned by the company has been properly recorded in the financial statements. This helps in accurately reflecting the value of inventory and preventing misstatement of financial information.

11. In verifying debits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the:

Purchase requisitions

Purchase orders

Purchases journal

Vendors' invoices.

Vendors' invoices provide the most direct and detailed information regarding the actual purchases made by the non-manufacturing firm, making them the primary focus for verifying debits to perpetual inventory records.

Explanation

Vendors' invoices provide the most direct and detailed information regarding the actual purchases made by the non-manufacturing firm, making them the primary focus for verifying debits to perpetual inventory records.

12. Effective internal control for purchases generally can be achieved in a well-planned organizational structure with a separate purchasing department that has?

A direct reporting responsibility to controller of the organization.

The authority to make purchases of requisitioned materials and services

The responsibility of reviewing purchase orders issued by user departments.

The ability to prepare payment vouchers based on the information on a vendor's invoice.

In a well-controlled purchasing department, the authority to make purchases of requisitioned materials and services is crucial to ensure proper oversight and approval of all procurement activities.

Explanation

In a well-controlled purchasing department, the authority to make purchases of requisitioned materials and services is crucial to ensure proper oversight and approval of all procurement activities.

13. Which of the following best describes the auditors' response to a client's use of statistical sampling techniques to estimate the inventory?

The auditors should increase the extent of their test counts to compensate for the use of a statistical technique.

The auditors should satisfy themselves as to the statistical validity of the technique, and the reasonableness of the allowance for sampling risk and sampling error used.

The auditors should withdraw from the engagement.

The auditors should qualify their opinion, because the client must perform a complete count of the inventory.

When a client uses statistical sampling techniques to estimate inventory, auditors should verify the validity of the method and ensure that the allowance for sampling risk and error is reasonable. This ensures the audit remains accurate and reliable.

Explanation

When a client uses statistical sampling techniques to estimate inventory, auditors should verify the validity of the method and ensure that the allowance for sampling risk and error is reasonable. This ensures the audit remains accurate and reliable.

14. The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with which of the following?

Purchase orders

Purchase requisitions

Receiving reports.

Vendor payments

15. When the auditors discover an understatement of liabilities, they would most likely also expect to find an:

Understatement of revenues.

Overstatement of expenses.

Understatement of owners' equity.

Understatement of assets.

When there is an understatement of liabilities, auditors would commonly expect to find an understatement of assets. This is because liabilities and assets are closely related on a company's balance sheet, and if one is misstated, the other might also be inaccurate.

Explanation

When there is an understatement of liabilities, auditors would commonly expect to find an understatement of assets. This is because liabilities and assets are closely related on a company's balance sheet, and if one is misstated, the other might also be inaccurate.

16. Which of the following best describes the reason for the auditors' review of the client's cost accounting system?

To obtain evidence about the valuation of work-in-process, finished goods, and cost of goods sold.

To obtain evidence about compliance with Cost Accounting Standards.

To obtain evidence regarding the quantities of goods described as work-in-process.

To obtain evidence about the profit margin on specific jobs.

The auditors review the client's cost accounting system to gather evidence about the valuation of work-in-process, finished goods, and cost of goods sold. This helps in assessing the accuracy and reliability of the financial statements related to inventory and cost of goods sold.

Explanation

The auditors review the client's cost accounting system to gather evidence about the valuation of work-in-process, finished goods, and cost of goods sold. This helps in assessing the accuracy and reliability of the financial statements related to inventory and cost of goods sold.

17. Which of the following is not a procedure that typically is used by the auditors in their examination of a client's goods held in the custody of a public warehouse?

Observation

Confirmation

Corresponding with the state agency regarding the authenticity of the public warehouse.

Obtaining reports on internal control at the warehouse

The correct procedure is not corresponding with the state agency regarding the authenticity of the public warehouse because auditors typically do not contact state agencies for verification during the examination process. Instead, they focus on other procedures such as confirmation, obtaining reports on internal control, and observation to ensure the accuracy and reliability of the client's goods held in the public warehouse.

Explanation

The correct procedure is not corresponding with the state agency regarding the authenticity of the public warehouse because auditors typically do not contact state agencies for verification during the examination process. Instead, they focus on other procedures such as confirmation, obtaining reports on internal control, and observation to ensure the accuracy and reliability of the client's goods held in the public warehouse.

18. Auditors may choose not to confirm accounts payable because:

The balances due will have changed between the year-end and the date of confirmation.

Confirmation obtains evidence identical to that obtained by cutoff tests.

Other reliable external evidence to support the balances is likely to be available.

A reading of the corporate minutes reveals that confirmation is unnecessary.

Auditors may choose not to confirm accounts payable if other reliable external evidence, such as invoices, purchase orders, and vendor statements, can be used to support the balances. This allows auditors to gather sufficient evidence without needing to confirm each individual account payable balance.

Explanation

Auditors may choose not to confirm accounts payable if other reliable external evidence, such as invoices, purchase orders, and vendor statements, can be used to support the balances. This allows auditors to gather sufficient evidence without needing to confirm each individual account payable balance.

19. Auditors should be aware that a voucher system may result in which of the following at year-end?

Overstatement of assets

Overstatement of expenses

Understatement of liabilities.

Understatement of owners' equity

A voucher system can lead to the understatement of liabilities because liabilities may not be properly recorded or recognized in the system, leading to a lower financial obligation than there actually is.

Explanation

A voucher system can lead to the understatement of liabilities because liabilities may not be properly recorded or recognized in the system, leading to a lower financial obligation than there actually is.

20. Which of the following is an example of an accrued liability?

Notes payable.

Prepaid insurance.

Product warranty liability.

Accounts payable.

An accrued liability represents an obligation that has been incurred but for which payment has not yet been made. Product warranty liability falls under this category as it represents the estimated future cost of honoring warranties on products sold.

Explanation

An accrued liability represents an obligation that has been incurred but for which payment has not yet been made. Product warranty liability falls under this category as it represents the estimated future cost of honoring warranties on products sold.

21. Which of the following procedures is least likely to be completed before the balance sheet date?

Confirmation of receivables.

Search for unrecorded liabilities.

Review of internal control over cash disbursements.

Observation of inventory.

Search for unrecorded liabilities is typically done after the balance sheet date to ensure all liabilities have been properly recorded.

Explanation

Search for unrecorded liabilities is typically done after the balance sheet date to ensure all liabilities have been properly recorded.

22. Which of the following best describes a voucher prepared under good internal control?

C) A document received by Purchasing, from a supplier, indicating quantity of goods purchased and amount due.

A document prepared by Accounts Payable authorizing a cash disbursement.

A) A document prepared by Stores that indicates amount to be purchased.

B) A document prepared by Receiving that indicates the quantity received and approves payment.

A voucher prepared by Accounts Payable authorizing a cash disbursement is a crucial step in ensuring proper internal control over payments. This document verifies the amount to be paid and authorizes the disbursement of funds, helping prevent errors or fraud in the payment process. Other options do not directly involve the authorization of cash disbursement and may not be as effective in maintaining internal control.

Explanation

A voucher prepared by Accounts Payable authorizing a cash disbursement is a crucial step in ensuring proper internal control over payments. This document verifies the amount to be paid and authorizes the disbursement of funds, helping prevent errors or fraud in the payment process. Other options do not directly involve the authorization of cash disbursement and may not be as effective in maintaining internal control.

23. Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received?

Vouchers are prepared by accounts payable department personnel only after they match item counts on the receiving report with the purchase order.

Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports.

Receiving department personnel are expected to match and reconcile the receiving report with the purchase order.

Quantities ordered are excluded from the receiving department copy of the purchase order.

Excluding quantities ordered from the receiving department copy of the purchase order ensures that the personnel will need to physically count and inspect the merchandise received to verify its accuracy. This control discourages relying solely on the purchase order information and encourages thorough verification.

Explanation

Excluding quantities ordered from the receiving department copy of the purchase order ensures that the personnel will need to physically count and inspect the merchandise received to verify its accuracy. This control discourages relying solely on the purchase order information and encourages thorough verification.

24. Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product?

Miscellaneous expense.

Sales expense.

Factory supervisor salary.

Indirect materials.

In calculating the overhead rate for a manufacturing company, sales expenses are not directly related to the production of the product and should not be included in the overhead costs. Factory supervisor salary, indirect materials, and miscellaneous expenses are more closely related to the production process and can be considered in overhead rate calculations.

Explanation

In calculating the overhead rate for a manufacturing company, sales expenses are not directly related to the production of the product and should not be included in the overhead costs. Factory supervisor salary, indirect materials, and miscellaneous expenses are more closely related to the production process and can be considered in overhead rate calculations.