1. Which of the following would be the best protection for a company that wishes to prevent the lapping of trade accounts receivable?
a. Have
customers send payments directly to the company's depository bank.
b. Segregate
duties so that the bookkeeper in charge of the general ledger has no access to
incoming mail.
c. Request that
customers' payment checks be made payable to the company and addressed to the
treasurer.
d. Segregate
duties so that no employee has access to both checks from customers and
currency from daily cash receipts.
2. Which of the following statements
regarding proper disclosure of accounts receivable is not correct?
a. Receivables
from officers must be segregated from accounts receivable from customers if the
amounts are material.
b. Under SEC
requirements, it is necessary to disclose sales and assets for different
business segments separately.
c. Proper
aggregation of general ledger balances in the financial statements also
requires combining account balances that are not relevant for external users.
d. All accounts
included in the general ledger must be disclosed separately on the financial
statements.
3. The primary purpose of accounts receivable confirmation is to satisfy the
a. existence
objective.
b. existence
and cutoff objectives.
c. accuracy and
cutoff objectives.
d. existence,
accuracy, and cutoff objectives.
4. The most reliable evidence from confirmations is obtained when they are sent
a. as close to
the balance sheet date as possible.
b. at various
times throughout the year to different sections of the sample, so that the
entire sample is representative of account balances scattered throughout the
year.
c. several
months before the year-end, so the auditor will have adequate time to perform
alternate procedures if they are required.
d. at various
times throughout the year to the same group in the sample, so that the sample
will not have a time bias.
5. Which of the following is not an important consideration in determining the sample size of confirmations?
a. Total annual
credit sales.
b. Tolerable
misstatement.
c. The types of
confirmations being sent; that is, positive or negative.
d. The results
of related analytical procedures.
6. The following statements relate to the process of selecting items to include in the confirmation sample. Which of the following is not a true statement?
a. With most
confirmations, some type of stratification is desirable.
b. In most
audits, the emphasis should be on sampling equally throughout the population.
c. It is
important that the auditor have complete independence in choosing the accounts
to be confirmed.
d. It is
important to sample some items from every material stratum of the population.
7. Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide evidence concerning the
a. collectibility
of the balances confirmed.
b. ownership of
the balances confirmed.
c. existence of
the balances confirmed.
d. internal
control over balances confirmed.
8. A positive confirmation is more reliable evidence than a negative confirmation because
a. fewer
confirmations can be sent out.
b. the auditor
has a document which can be used in court.
c. the debtor's
lack of response indicates agreement with the stated balance.
d. follow-up
procedures can be performed if a response is not received from the debtor.
9. The criterion used by most clients for determining when a sale takes place is when
a. title
passes.
b. the goods
are shipped.
c. cash is
exchanged.
d. the costs
are incurred.
10. Communication addressed to the debtor requesting him or her to confirm whether the balance as stated on the communication is correct or incorrect is a
a. dunning
letter.
b. negative
confirmation.
c. bank
confirmation.
d. positive
confirmation.
11. Generally accepted accounting principles require that material sales returns and allowances
a. be recorded
in the period when the merchandise is returned.
b. be recorded
in the period when the credit memo is issued.
c. be matched
with related sales.
d. be recorded
as a debit to the sales account.
12. If accounts receivable accounts with credit balances are significant, they should be
a. written off.
b. moved to the
debit side.
c. reclassified
as accounts payable.
d. corrected by
making adjusting entries.
13. An unqualified report may be issued even when accounts receivable have not been confirmed, provided that
a. accounts
receivable are immaterial.
b. the auditor
considers confirmations ineffective evidence because response rates will likely
be inadequate or unreliable.
c. the combined
level of inherent risk and control risk is low and other substantive evidence
can be accumulated to provide sufficient evidence.
d. any one of
the above three is present.
14. Kuttler, an independent auditor, was engaged to perform an examination of the financial statements of Whetten Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Kuttler, and accounts receivable were not confirmed by direct communication with creditors, Kuttler was able to gain satisfaction by applying alternative auditing procedures. Kuttler's audit report will probably contain
a. a qualified
opinion.
b. a standard
unqualified opinion.
c. either a
qualified opinion or a disclaimer of opinion.
d. an
unqualified opinion and an explanatory middle paragraph.
15. Cutoff misstatements occur when
a. the auditor
mistakenly asks the bank for the end-of-year bank statement instead of the
statement which would include the two succeeding weeks.
b. subsequent
period transactions are recorded in the current period.
c. current
period transactions are recorded in the subsequent period.
d. both b and c
above, but not a.
16. The most important test of details of balances to determine the existence of recorded accounts receivable is
a. tracing
sales entries to shipping documents.
b. tracing the
credits in accounts receivable to bank deposits.
c. tracing
sales returns entries to credit memos issued and receiving room reports.
d. the
confirmation of customers' balances.
17. Two major audit procedures which were formally required by the AICPA as a result of the McKesson & Robbins case are
a. reconciliation
of cash and confirmation of receivables.
b. reconciliation
of cash and physical examination of inventory.
c. confirmation
of receivables and physical examination of inventory.
d. confirmation
of receivables and communication with client's external lawyer.
18. 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. collectibility
of the receivables is in doubt.
d. pledging of the
receivables is probable.
19. The use of the positive (as opposed to the negative) form of receivables confirmation is preferred when
a. internal
control surrounding accounts receivable is considered to be effective.
b. there is
reason to believe that a substantial number of accounts may be in dispute.
c. a large
number of small balances are involved.
d. there is
reason to believe a significant portion of the requests will be made.
20. As part of the auditor's tests of the
presentation and disclosure objective, the auditor evaluates the adequacy of
the footnotes. This evaluation is
a. required by
GAAP.
b. required by
GAAS.
c. suggested by
the SEC.
d. suggested by
the AICPA.
21. Most tests of accounts receivable and the allowance for uncollectible accounts are based on
a. the general
ledger balance of each account.
b. the results
of analytical procedures.
c. the results
of confirmations.
d. the aged
trial balance.
22. When customers do not respond to confirmation requests, auditors
a. cannot
express an unqualified opinion.
b. must rely on
inquiry of client.
c. must examine
supporting documents.
d. cannot
complete the engagement and must issue a disclaimer.
23. Testing the information on the aged trial balance for detail tie-in is a necessary audit procedure, which would normally include
a. test footing
the total column and the columns depicting the aging.
b. comparing the
total of the trial balance with the general ledger accounts receivable account.
c. tracing a
sample of individual balances to supporting documents.
d. all of the
above.
24. The most important test of details of balances for accounts receivable is
a. confirmations.
b. recalculation
of the aged receivables and uncollectible accounts.
c. tracing
credit memos for returned merchandise to receiving room reports.
d. tracing from
shipping documents to journals to the accounts receivable ledger.
25. This year is the first time that, as a normal practice in client's business, accounts receivable may be pledged, assigned, factored, or sold at discount. The audit procedure which would not disclose these practices would be
a. a review of
the minutes of the board of directors' meetings.
b. discussions
with the client.
c. confirmation
of receivables.
d. examination
of correspondence files.
26. Which of the following most likely would be detected by an auditor's review of a client's sales cutoff?
a. Excessive
sales discounts.
b. Unrecorded
sales for the year.
c. Unauthorized
goods returned for credit.
d. Lapping of
year-end accounts receivable.
27. It is easy to test for a cash receipts cutoff error by
a. reconciling
the bank statement.
b. performing a
four-column proof-of-cash.
c. observing
the counting of cash at the balance sheet date.
d. tracing
recorded cash receipts to bank deposits on the bank statement of a different
period.
28. When positive confirmations have been used, it is normally desirable to account for unconfirmed balances with alternative procedures,
a. even if the
amounts are small.
b. only if the
amounts are large.
c. only if the
amounts are material.
d. if it does
not increase the audit firm's costs.
29. The client's estimate of the total amount of uncollectible receivables is represented by
a. the
allowance for uncollectible accounts.
b. footnote
disclosure in the financial statements.
c. the bad
debts expense account on the income statement.
d. the accounts
with credit balances in the accounts receivable subsidiary ledger.
30. Tests of details of balances are directed to
a. balance
sheet accounts for all cycles.
b. income
statement accounts for all cycles.
c. balance
sheet accounts for some cycles and income statement accounts for other cycles.
d. all general
ledger accounts for all cycles.
31. A listing of the balances in the accounts receivable master file at the balance sheet date, by total balance outstanding and by the time the component parts have been outstanding, is the
a. customer
list.
b. aged trial
balance.
c. accounts
receivable ledger.
d. schedule of
accounts receivable.
32. Which of the following types of receivables would not deserve the special attention of the auditor?
a. Accounts
with credit balances.
b. Accounts
that have been outstanding for a long time.
c. Receivables
from affiliated companies.
d. Accounts
where no reply was received to a negative confirmation request.
33. Analytical procedures are substantive
tests and, if the results of the analytical procedures are favorable, they will
a. reduce the extent
of tests of details of balances.
b. reduce the
extent of tests of controls.
c. reduce the
tests of transactions.
d. reduce all
of the other tests.
34. A customer mails and records a check to
a client for payment of an unpaid account on December 30. The client receives
and records the amount on January 2. The records of the two organizations will
be different on December 31.
a. This is a
cutoff misstatement.
b. This is a
timing difference.
c. Both a and
b.
d. Neither a
nor b.
35. When
positive confirmations are used, SAS No. 67 requires follow-up procedures for
confirmations not returned by the customer. In such a situation, which of the
following would not be classified as an alternative procedure?
a. Send a
second confirmation request.
b. Examine
subsequent cash receipts to determine if the receivable has been paid.
c. Examine
shipping documents to verify that the merchandise was shipped.
d. Examine customer's
purchase order and the duplicate sales invoice to determine that the
merchandise was ordered.
36. You are reviewing sales to discover
cutoff problems. If the client's policy is to record sales when title to the
merchandise passes to the buyer, then the books and records would contain
errors if the December 31 entries were for sales recorded
a. before the
merchandise was shipped.
b. at the time
the merchandise was shipped.
c. several days
subsequent to shipment.
d. at a time
other than the point at which title passed.
37. Which of the following internal control
procedures will most likely prevent the concealment of a cash shortage
resulting from the improper write-off of a trade account receivable?
a. Write-offs
must be approved by the cashier who is in a position to know if the receivables
have, in fact, been collected.
b. Write-offs
must be supported by an aging schedule showing that only receivables overdue
several months have been written off.
c. Write-offs
must be approved by a responsible officer after review of credit department
recommendations and supporting evidence.
d. Write-offs
must be authorized by company field sales employees who are in a position to
determine the financial standing of the customers.
38. The audit working papers often include a
client-prepared, aged trial balance of accounts receivable as of the balance
sheet date. This aging is best used by the auditor to
a. evaluate
internal control over credit sales.
b. test the
accuracy of recorded charge sales.
c. estimate
credit losses.
d. verify the
validity of the recorded receivables.
39. Returns of positive-confirmation
requests for accounts receivable were very poor. As an alternative procedure,
the auditor decided to check subsequent collections. The auditor had satisfied
himself that the client satisfactorily listed the customer name next to each
check listed on the deposit slip; hence, he decided that for each customer for
which a confirmation was not received that he would add all amounts shown for
that customer on each validated deposit slip for the two months following the
balance-sheet date. The major fallacy in the auditor's procedure is that
a. checking of
subsequent collections is not an accepted alternative auditing procedure for
confirmation of accounts receivable.
b. by looking
only at the deposit slip the auditor would not know if the payment was for the
receivable at the balance-sheet date or a subsequent transaction.
c. the deposit
slip would not be received directly by the auditor as a confirmation would be.
d. a customer
may not have made a payment during the two-month period.
40. For
effective internal control, employees maintaining the accounts receivable
subsidiary ledger should not also approve
a. employee
overtime wages.
b. credit
granted to customers.
c. write-offs
of customer accounts.
d. cash
disbursements.
41. The CPA learns that collections of
accounts receivable during the first ten days of January were entered as debits
to cash and credits to accounts receivable as of December 31. The effect
generally will be to
a. overstate
the current ratio with no effect on working capital at December 31.
b. overstate
both working capital and the current ratio at December 31.
c. overstate working
capital with no effect on the current ratio at December 31.
d. leave both
working capital and the current ratio unchanged at December 31.
42. Which of the following is not a primary
objective of the auditor in the examination of accounts receivable?
a. Determine
the approximate realizable value.
b. Determine
the adequacy of internal controls.
c. Establish
existence of the receivables.
d. Determine
the approximate time of collectibility of the receivables.
43. The advantage of using the negative form
of confirmations is that
a. larger
sample sizes can be used without increasing the costs above what would have
been required for positive confirmations.
b. customer's
silence proves that the balance is correct.
c. follow-up
procedures are scheduled automatically.
d. it is
appropriate in all circumstances.
44. When the client's internal control is
adequate, the cutoff objective can usually be tested by
a. client's
representation letter.
b. inquiries of
the controller.
c. obtaining
the last shipping document number of the year and comparing it with current and
subsequent period recorded sales.
d. confirmation
of the receivable for the last recorded sale.
45. Tests
of details of balances focus on
a. balance
sheet accounts.
b. income
statement accounts.
c. income and
cash flow statement accounts.
d. all of the
above.
46. A type of positive confirmation known as
a blank confirmation
a. requests the
recipient to fill in the amount of the balance.
b. is
considered more reliable than the regular positive confirmation.
c. does not
generate as high a response rate as the regular positive confirmation form.
d. has all of
the attributes of a, b, and c above.
47. The two primary classes of transactions in
the sales and collection cycle are
a. sales and
sales discounts.
b. sales and
cash receipts.
c. sales and
sales returns.
d. sales and
accounts receivable.
48. Which of the audit objectives is
performed first when doing the tests of details of balances for accounts
receivable?
a. Recorded
accounts receivable exist.
b. Accounts
receivable in the aged trial balance agree with related master file amounts,
and the total is correctly added and agrees with the general ledger.
c. Accounts
receivable are owned.
d. Existing
accounts receivable are included.
49. An auditor discovers that the client
records sales returns and allowances in the accounting period in which they
occur, under the assumption of approximately equal offsetting errors at the
beginning and end of each period.
a. This is
acceptable.
b. This is not
acceptable.
c. This is
acceptable as long as the amounts are not significant.
d. This is not
acceptable as long as the amounts are not significant.
50. Which
one of the following circumstances would indicate that negative confirmations
should not be used on this engagement?
a. A
significant portion of the total accounts receivable balance is represented by
a small number of accounts with large balances.
b. The internal
control over receivables is good.
c. The
recipients are mostly businesses rather than individuals.
d. The auditor
is unaware of disputed or inaccurate accounts.
51. The understatement of sales and accounts
receivable is best uncovered by
a. confirming
receivables.
b. reviewing
the aged trial balance.
c. test of
transactions for shipments made but not recorded.
d. reconciling
the accounts receivable general ledger account with the schedule of accounts
receivable.
52. Which of the following would not be a
part of the approach used in determining the reasonableness of cutoff?
a. Decide on
the appropriate criteria for cutoff.
b. Evaluate
whether the client has established adequate procedures to ensure a reasonable
cutoff.
c. Test whether
a reasonable cutoff was obtained.
d. Review
client's December 31 and January 2 entries for cutoff problems.
53. After items to be confirmed have been
selected, the auditor must maintain control of the confirmations until
a. the responses
are received by the auditor from the customer.
b. the
responses are received by the client with the return mail.
c. the names
are provided to the client's personnel to type the envelopes.
d. the sealed
envelopes are provided to client's personnel to be mailed.
54. If the client's internal control for
recording sales returns and allowances is evaluated as ineffective,
a. a larger
sample is needed to verify cutoff.
b. sampling is
not appropriate.
c. all sales
returns must be traced to supporting documentation.
d. all sales
returns must be confirmed with the customer.
55. In
the sales and collection cycle, the results of the tests of controls determine
a. if tests of
details of balances need to be performed.
b. whether
positive or negative confirmations should be used for this engagement.
c. whether
assessed control risk for sales and cash receipts needs to be revised.
d. the extent
to which planned detection risk is satisfied for each accounts receivable
objective.
56. Analytical procedures are often done
a. during the
planning phase.
b. when
performing detailed tests.
c. as a part of
completing the audit.
d. all of the
above.
57. When monetary-unit sampling has been
concluded and the population is not considered acceptable, which one of the
following courses of action would not be appropriate for the auditor?
a. Increase the
sample size to see if this may satisfy the auditor's tolerable misstatement
requirements.
b. Increase the
tolerable misstatement amounts so that the error bounds are acceptable.
c. Request the
client to correct the population.
d. Refuse to
give an unqualified opinion.
58. Which of the following is a disadvantage
of the monetary-unit sampling method?
a. It automatically
increases the likelihood of selecting high dollar items from the population
being audited.
b. It always
gives the statistical conclusion as a dollar amount.
c. Computer
assistance is needed to select monetary-unit samples from large populations.
d. If one large
item makes up 10% of the total recorded dollar value of the population and the
sample size is 100, approximately 10% of the sample items will come from that
one large population item.
59. When an auditor performs tests of
details of balances, the concern is determining
a. if the
exception rate in the population is sufficiently low to justify reducing
substantive testing.
b. both the
effectiveness of controls and the monetary correctness of the transactions.
c. whether the
monetary amount of an account balance is materially misstated.
d. all of the
above.
60. The
risk the auditor is willing to take of accepting a balance as correct when the
true error in the balance is greater than the tolerable misstatement is
a. the upper
bound.
b. the
tolerable risk.
c. the
acceptable risk of incorrect acceptance.
d. the lower
bound.
61. The most commonly used method of
statistical sampling for tests of details of balances is
a. attributes
sampling.
b. variables
sampling.
c. discovery
sampling.
d. monetary-unit
sampling.
62. In selecting the items to include in the
sample, the auditor must
a. use a method
that will guarantee that all items in the population are represented in the
sample.
b. have reasonable
assurance of obtaining a representative sample.
c. be assured
of the randomness of the population.
d. be assured
that each item chosen in the sample is a material amount.
63. The relationship between sample size and
the acceptable risk of incorrect acceptance is
a. inverse;
that is, larger = smaller.
b. direct; that
is, larger acceptable risk = larger sample size.
c. variable;
that is, sometimes larger = larger and sometimes not.
d. indeterminate.
64. In a probability-proportional-to-size
(PPS) sample, all population physical audit units with an amount equal to or
greater than the amount of the interval will automatically be included in the
sample if the auditor uses
a. random
selection.
b. systematic
selection.
c. block
selection.
d. stratified
selection.
65. When
errors are found, a common assumption in practice is to assume
a. a 100%
assumption for all errors.
b. that the
population errors are larger than the sample errors.
c. that the
population errors are smaller than the sample errors.
d. that the
actual sample errors are representative of the population errors.
66. As a result of tests of controls, an
auditor assessed control risk too low and decreased substantive testing. This occurred
because the true deviation rate in the population was
a. less than
the risk of assessing control risk too low based on the auditor's sample.
b. less than
the deviation rate in the auditor's sample.
c. more than
the risk of assessing control risk too low based on the auditor's sample.
d. more than
the deviation rate in the auditor's sample.
67. When using monetary-unit sampling,
evaluating the likelihood of unrecorded items in the population
a. is
unnecessary.
b. is
impossible.
c. is possible
but difficult.
d. is an
automatic outcome of the process.
68. An important statistic to consider when
using a statistical sampling audit plan is the population variability. The
population variability is measured by the
a. sample mean.
b. standard
deviation.
c. standard
error of the sample mean.
d. estimated
population total minus the actual population.
69. Because tables are used in the
calculation of misstatement bounds, the point estimate and sampling error are
not calculated. This is because
a. they are
extraneous and not needed.
b. this method
determines the amount of error exactly, and doesn't need to develop a range.
c. their
calculation is impossible with this method.
d. the tables
include both the point estimate and the sampling error to derive the upper
bound.
The following questions apply to an examination
by Roberts & Lambert, CPAs, of the financial statements of Rainbow
Manufacturing Corporation for the year ending Dec. 31, 2001.
Rainbow manufactures two products: Product A and Product
B. Product A requires raw materials that have a very low per-item cost, and
Product B requires raw materials that have a very high per-item cost. Raw
materials for both products are stored in a single warehouse. In 2000, Rainbow
established the total value of raw materials stored in the warehouse by
physically inventorying an unrestricted random sample of items selected without
replacement.
Lambert is evaluating the statistical validity of
alternative sampling plans Rainbow is considering for 2001. He knows the size
of the 2000 sample and that Rainbow did not use stratified sampling in 2000.
Assumptions about the population, variability, specified precision (confidence
interval), and specified reliability (confidence level) for a possible 2001
sample are given in each of the following five items. You are to indicate in
each case the effect upon the size of the 2001 sample as compared to the 2000
sample. Each of the five cases is independent of the other four and is to be
considered separately.
70. Rainbow
wants to use unrestricted random sampling without replacement in 2001. Compared
to 2000, the population size of the raw materials inventory is approximately
the same and the variability of the items in the inventory is approximately the
same. Rainbow specifies the same precision but desires to change the specified
reliability from 90% to 95%. Under these assumptions, the required sample size
for 2001 should be
a. smaller than
the 2000 sample size.
b. equal to the
2000 sample size.
c. larger than
the 2000 sample size.
d. of a size
that is indeterminate based upon the information given to you.
71. The method used to measure the estimated
total error amount in a population when there is both a recorded value and an
audited value for each item in the sample is
a. difference
estimation.
b. mean-per-unit
estimation.
c. ratio
estimation.
d. monetary-unit
sampling.
72. The auditor must deal with layers of the
computed upper deviation rate from the attributes table because there are
different error assumptions for each error. Assume a sample of 100 had found
one error, and the computed upper deviation rate is shown in the following
table:
Number Upper Precision
of Errors Limit from Table
0 .023
1 .038
The precision limit for
the layer with one error is
a. 2.3%.
b. 3.8%
c. 6.1%.
d. 1.5%.
73. While performing a substantive test of
details during an audit, the auditor determined that the sample results
supported the conclusion that the recorded account balance was materially
misstated. It was, in fact, not materially misstated. This situation
illustrates the risk of
a. incorrect
rejection.
b. incorrect
acceptance.
c. assessing
control risk too low.
d. assessing
control risk too high.
74. When monetary-unit sampling is used, a
typical estimated error rate would be
a. 0% or 1%.
b. 2% or 3%.
c. 4% or 5%.
d. 5% to 10%.
75. Which
of the following sampling plans would be designed to estimate a numerical
measurement of a population, such as a dollar value?
a. Numerical
sampling.
b. Discovery
sampling.
c. Sampling for
attributes.
d. Sampling for
variables.
The following
information relates to the next five questions:
An audit partner is developing an office-training
program to familiarize his professional staff with statistical decision models
applicable to the audit of dollar-value balances. He wishes to demonstrate the
relationship of sample sizes to population size and variability and the
auditor's specifications as to precision and confidence level. The partner
prepared the following table to show comparative population characteristics and
audit specifications of two populations.
Audit specifications of
Characteristics of a sample from population 1
population 1 relative relative to a sample
to population 2 from population 2
Specified
Specified confidence
Size Variability precision level
Case 1 Equal
Equal Equal Higher
Case 2 Equal
Larger
Tighter Equal
Case 3 Larger
Equal
Tighter Lower
Case 4 Smaller
Smaller Equal Lower
Case 5 Larger
Equal Equal Higher
76. Based on the information presented
above, you are to indicate for the specified case from the table the required
sample size to be selected from population 1 relative to the sample from
population 2. In case 1,
a. the required
sample from population 1 is larger than the required sample size from
population 2.
b. the required
sample from population 1 is equal to the required sample size from population
2.
c. the required
sample from population 1 is smaller than the required sample size from
population 2.
d. the sample
from population 1 is indeterminate relative to the required sample size from
population 2.
77. In an examination of financial
statements, a CPA generally will find stratified sampling techniques to be
least appropriate to
a. year-end
confirmation of bank balances.
b. tests of
transactions for compliance with internal control.
c. the
recalculation of a sample of factory workers' net pay.
d. examining
charges to the maintenance account during the audit year.
78. The document that indicates the
assignments or departments an employee worked for during a given time period is
the
a. rate
authorization form.
b. time card.
c. job time
ticket.
d. payroll
master file.
79. A form issued for each employee
summarizing the earnings record for the calendar year is the
a. rate
authorization form.
b. summary
payroll report.
c. payroll
master file.
d. W-2 form.
80. Most
systems of internal control for payroll are
a. loosely
structured but well controlled.
b. loosely
structured and loosely controlled.
c. highly
structured and well controlled.
d. highly
structured but loosely controlled.
81. Which of the following would not justify
an auditor's decision to spend very little time performing tests of
transactions in the payroll and personnel cycle?
a. The new
payroll bookkeeper has a much better educational background than the former
one.
b. Employees
will detect any underpayments.
c. Payroll
transactions are uniform and uncomplicated.
d. Payroll
transactions are extensively audited by government agencies.
82. Which of the following would not be a
source of information for the rate authorization form?
a. Labor
contracts.
b. Authorizations
by management.
c. Authorization
from the board of directors.
d. Internal
Revenue Service tables.
83. "Recorded
payroll payments are for work actually performed by nonfictitious
employees" is the control objective of
a. authorization.
b. completeness.
c. existence.
d. accuracy.
84. Because of the lack of available
evidence, it is usually difficult for an auditor to discover if an employee
records more time on his or her time card than actually worked. One procedure
is
a. to reconcile
the total hours paid this period with a previous period.
b. to reconcile
the total hours worked this period with a previous period.
c. to reconcile
the total hours worked according to the summary payroll report with the total
hours worked as recorded on the time card for the period.
d. to reconcile
the total hours paid according to the payroll records with an independent
record of the total hours worked, such as those maintained by production
control.
85. Effective
internal control over the payroll function would include which of the
following?
a. Payroll
department employees should be responsible for maintaining employee personnel
records.
b. Payroll
department employees should be supervised by the management of the personnel
department.
c. Total time
spent on jobs should be compared with total time indicated on time-clock punch
cards.
d. Total time
recorded on time-clock punch cards should be reconciled to job reports by
employees responsible for those specific jobs.
86. The most important consideration in
evaluating the fairness of the amounts accrued for vacation pay, sick pay, and
other benefits is
a. the
consistent accrual of these liabilities relative to those of the preceding
year.
b. the actual
expense incurred for the prior period.
c. the amount
expended to date in the current period.
d. the
profitability of the client which will enable these liabilities to be met.
87. In
auditing payroll, which of the following procedures will take the least amount
of auditor time?
a. Tests of
controls.
b. Substantive
tests of transactions.
c. Analytical
procedures.
d. Tests of
details of balances.
88. An audit procedure which reconciles
total payroll expense in the general ledger with the payroll tax returns and
the W-2 forms is seldom successful in discovering errors because
a. misstatements,
if any, are likely to be in both sets of records.
b. the auditor
expects that these will be different totals.
c. the
financial statements cover a year, but the tax forms must be filed quarterly.
d. accounting
principles used by companies may be different than those required on the tax
return; for example, LIFO on the books but FIFO for taxes.
89. Which of the following is not a
procedure that can be performed on canceled checks in an effort to detect
defalcations?
a. Compare the
endorsements on checks with authorized signatures.
b. Scan
endorsements for unusual or recurring second endorsements.
c. Examine
voided checks to be sure they haven't been used.
d. Examine the
payroll records in subsequent periods to determine that terminated employees
are no longer being paid.
90. The
most important means of verifying account balances in the payroll and personnel
cycle are
a. tests of controls
and tests of transactions.
b. analytical
procedures and tests of controls.
c. analytical
procedures and tests of transactions.
d. test of
controls and tests of details of balances.
91. Which of the following statements is not
correct?
a. Liabilities
for salaries, wages, and payroll taxes are a major part of the balance sheet at
year-end.
b. Labor is an
important consideration in the valuation of inventories in manufacturing and
construction companies.
c. The amounts
involved for salaries, wages, and employer/employee taxes are a major expense
in most companies.
d. Payroll is
an area where large amounts of company resources may be wasted through
inefficiencies or may be stolen through fraud.
92. An auditor decides that it is important
and necessary to observe a client's distribution of payroll checks on a
particular audit. The client organization is so large that the auditor cannot
conveniently observe the distribution of the entire payroll. In these
circumstances, which of the following is most acceptable to the auditor?
a. Observation
should be limited to one or more selected departments.
b. Observation
should be made for all departments regardless of the inconvenience.
c. Observation
should be eliminated, and alternative auditing procedures should be used to
obtain satisfaction.
93. The careful and timely preparation of
all payroll tax returns is necessary to avoid penalties and criminal charges.
The most important control in the timely preparation of these returns is
a. computerized
preparation of tax returns.
b. a
well-defined set of policies that indicate when each form must be filed.
c. independent
verification of computer output by a competent individual.
d. a Gaant
chart.
94. Which of the following circumstances would
not cause an auditor to extend payroll procedures considerably?
a. Payroll
significantly affects inventory valuation.
b. There is a
possibility of material fraudulent payroll transactions.
c. There is a
weak internal control structure.
d. There is a
lack of independent third-party evidence, such as confirmations.
95. Which
of the following is not a type of error that gives the auditor concern in
auditing payroll transactions?
a. An error
that indicates possible fraud.
b. Computational
errors in formulas when a computerized system is used.
c. Classification
errors in charging labor to inventory and job cost accounts.
d. Weaknesses
in the control system which allows underpayment of employees.
96. The periodic payment from the general
cash account to the payroll account for net payroll should be tested for at
least one payroll period. The major audit procedure is
a. an
analytical review procedure that net pay is reasonable.
b. a test of
controls that an imprest account is being used for payroll.
c. a
substantive test that the correct amount was transferred for this test period.
d. a test of
transactions that the check is prepared for the proper amount and deposited
before payroll checks are handed out.
97. Once the auditor has determined the
company's policy for accruing wages and knows it is consistent with that of
previous years, the appropriate audit procedure to test for cutoff and accuracy
is to
a. recalculate
the client's accruals.
b. compare the
ledger balance with the journal and the tax form.
c. confirm the
amount with employees.
d. compare the
recorded accrued wages with the amount approved in the minutes of the Board.
98. Which of the following statements is
correct?
a. The overhead
charged to inventory at the balance sheet date can be understated if the
salaries of administrative personnel are inadvertently or intentionally charged
to indirect manufacturing overhead.
b. When jobs
are billed on a cost-plus basis, revenue and total expenses are both affected
by charging labor to incorrect jobs.
c. Payroll is a
significant portion of inventory for retail and service industry companies.
d. The
valuation of inventory is affected if the direct labor cost of individual
employees is improperly charged to the wrong job or process.
99. Which of the following best describes
proper internal control over payroll?
a. The
preparation of the payroll must be under the control of the personnel
department.
b. The
confidentiality of employee payroll data should be carefully protected to
prevent fraud.
c. The duties
of hiring, payroll computation, and payment to employees should be segregated.
d. The payment
of cash to employees should be replaced with payment by checks.
100. Which
of the following would not be a test used when auditing accrued sales
commissions?
a. Confirm the
commissions directly with the employees.
b. Test the
calculations (recalculate) based on the agreement between client and employees.
c. Compare the
method of accruing commissions with the previous years.
d. Test the
detail tie-in in the commissions expense account at interim dates.
101. The auditor should review the preparation
of at least one of each type of payroll tax form the client is responsible for
filing, as a part of the auditor's responsibility for
a. doing tests
of controls.
b. doing tests
of balances.
c. doing tests
of transactions.
d. understanding
the client's internal controls.
102. Controls should prevent those responsible
for the preparation of payroll checks from all but which one of the following
activities?
a. Signing
paychecks.
b. Distributing
paychecks.
c. Access to
time cards.
d. Access to
the payroll journal.
103. Generally, the tests of transactions
performed in the payroll cycle will use
a. a variables
sampling plan that assumes a zero deviation rate.
b. a variables
sampling plan that assumes a large deviation rate.
c. an
attributes sampling plan that assumes a zero deviation rate.
d. an
attributes sampling plan that assumes a large deviation rate.
104. Which of the following individuals is the
most appropriate person to be assigned the responsibility of distributing
envelopes that include employee payroll checks?
a. The company
paymaster.
b. A member of
the accounting department.
c. The internal
auditor.
d. A
representative of the bank where the company payroll is maintained.
105. The
auditor's primary concern in testing payroll liabilities is to make sure that
a. expense has
not been overstated, thus reducing profits.
b. there are no
understated or omitted accruals.
c. employees'
W-2 forms are accurate.
d. salaries of officers
have not been misclassified as wages.
106. Which of the following is a test of
controls?
a. Review the
payroll journal, general ledger, and payroll earnings records for large or
unusual amounts.
b. Examine time
cards for indication of supervisor approval.
c. Compare
canceled check with payroll journal for name, amount, and date.
d. Examine
canceled checks for proper endorsement.
107. The file for recording each payroll
transaction for each employee and maintaining total employee wages paid for the
year to date is the
a. payroll
master file.
b. summary
payroll report.
c. payroll
journal.
d. job time
ticket.
108. In audits of companies in which payroll is
a significant portion of inventory, the improper account classification of
payroll can
a. increase
asset valuations.
b. decrease
asset valuations.
c. either a or
b.
d. not affect
asset valuations.
109. With respect to a small company's system
of purchasing supplies, an auditor's primary concern should be to obtain
satisfaction that supplies ordered and paid for have been
a. requested by
and approved by authorized individuals who have no incompatible duties.
b. used in the
course of business and solely for business purposes during the year under
audit.
c. received,
counted, and checked to quantities and amounts on purchase orders and invoices.
d. properly
recorded as assets and systematically amortized over the estimated useful life
of the supplies.
110. A
CPA learns that his client has paid a vendor twice for the same shipment, once
based upon the original invoice and once based upon the monthly statement. A
control procedure that should have prevented this duplicate payment is
a. attachment
of the receiving report to the disbursement report.
b. prenumbering
of disbursement vouchers.
c. use of a
limit or reasonableness test.
d. prenumbering
of receiving reports.
111. Which of the following internal accounting
control procedures is effective in preventing duplicate payment of vendors'
invoices?
a. Unused
voucher forms should be prenumbered and accounted for.
b. Canceled
checks should be sent to persons other than the cashier or accounting
department personnel.
c. Properly authorized
and approved vouchers with appropriate documentation should be the basis for
check preparation.
d. The invoices
should be stamped, perforated, or otherwise effectively canceled before
submission for approval of the voucher.
112. Matching the supplier's invoice, the
purchase order, and the receiving report normally should be the responsibility
of the
a. warehouse
receiving function.
b. purchasing
function.
c. general
accounting function.
d. treasury
function.
113. 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
a. merchandise
received.
b. vendors'
invoices.
c. canceled
checks.
d. receiving
reports.
114. For effective internal control purposes,
the vouchers payable department generally should
a. obliterate
the quantity ordered on the receiving department copy of the purchase order.
b. stamp,
perforate, or otherwise cancel supporting documentation after payment is
mailed.
c. establish
the agreement of the vendor's invoice with the receiving report and purchase
order.
d. ascertain
that each requisition is approved as to price, quantity, and quality by an
authorized employee.
115. When
goods are received, the receiving clerk should match the goods with the
a. Purchase
order and the requisition form.
b. Vendor's
invoice and the receiving report.
c. Vendor's
shipping document and the purchase order.
d. Receiving
report and the vendor's shipping document.
116. Statistical sampling is less commonly used
for the audit of accounts payable than for accounts receivable because it is
more difficult to
a. determine
the tolerable exception rate.
b. define the
population.
c. decide on
attributes or variables sampling.
d. mathematically
calculate and interpret the results.
117. The test of transactions which requires
"reconcile recorded cash disbursements with the cash disbursements on the
bank statement" satisfies the objective of
a. existence.
b. completeness.
c. accuracy.
d. posting and
summarization.
118. The analytical procedure that requires the
auditor to "review the list of accounts payable for unusual or nonvendor
payables" would have the best chance of discovering which possible error?
a. Invalid
accounts or misstatements.
b. Unrecorded
accounts or misstatements.
c. Classification
error for non-trade liabilities.
d. Misstatement
of accounts payable and expenses.
119. Which of the following statements is not
true?
a. The
ownership objective is an important part of verifying assets but not
liabilities.
b. In auditing
liabilities, the emphasis is on the search for understatements rather than
overstatements.
c. Because of
the emphasis on understatements in liability accounts, out-of-period liability
tests are important for accounts payable.
d. The success
of the auditor's search for unrecorded accounts payable is not dependent upon
the materiality of the potential balance in the account.
120. The
purpose of the audit procedure to "examine underlying documentation for
subsequent cash disbursements" is to
a. uncover
liabilities on the balance sheet which should not have been recorded until a
subsequent period.
b. find the
documentation relating to a cash disbursement.
c. uncover
payments made in a subsequent accounting period that represent liabilities at
the balance sheet date.
d. uncover cash
disbursements recorded in a subsequent accounting period which should be
recorded in this period.
121. To test for overstatement cutoff errors in
liabilities, the auditor should trace, to vendors' invoices, the receiving
reports issued
a. after
year-end.
b. before
year-end.
c. the last day
of the fiscal year.
d. both before
and after year-end.
122. In determining that the accounts payable
cutoff is correct, it is essential that the cutoff tests be coordinated with
the
a. confirmation
of payables.
b. tests on
long-term liabilities.
c. observation
of inventory.
d. cash count.
123. An inventory acquisition is received late
in the afternoon of December 31 after the physical inventory is completed. If
the acquisition is included in accounts payable and purchases, but excluded
from inventory, the result
a. is an
understatement of net earnings.
b. is an
overstatement of net earnings.
c. does not
affect earnings.
d. is
indeterminable from the information given.
124. When an acquisition is on an FOB origin
basis, the inventory and related accounts payable must be recorded in the
current period if the goods were
a. received
prior to the balance sheet date.
b. shipped
prior to the balance sheet date.
c. both shipped
and received prior to the balance sheet date.
d. paid for in
advance.
125. The
auditor gets highly reliable evidence about individual transactions by
examining
a. vendors'
invoices.
b. vendors'
statements.
c. confirmations
of accounts payable balances.
d. all of the
above.
126. Which of the documents listed below is
best for verifying the correct balance in accounts payable?
a. Bills of
lading.
b. Confirmations.
c. Vendors'
invoices.
d. Vendors'
statements.
127. A company failed to record an acquisition
of merchandise and its attendant liability, but it was included in the physical
count of ending inventory. The effect on the financial statements would be to
a. understate
both assets and liabilities.
b. overstate
net income and owners' equity.
c. understate
assets and owners' equity.
d. understate
liabilities, and overstate both net income and owners' equity.
128. Which of the following is the most
effective control procedure to detect vouchers that were prepared for the
payment of goods that were not received?
a. Count goods
upon receipt in storeroom.
b. Match purchase
order, receiving report, and vendor's invoice for each voucher in accounts
payable department.
c. Compare
goods received with goods requisitioned in receiving department.
d. Verify
vouchers for accuracy and approval in internal audit department.
129. The auditor is primarily concerned with
the overstatement of assets and the understatement of liabilities. The
difference in emphasis results directly from
a. GAAP.
b. GAAS.
c. the legal
liability of the CPA.
d. the nature
of the errors which could occur.
130. When
a client uses perpetual inventory records, the tests of details of balances for
inventory can be significantly reduced if the auditor believes the perpetuals
are accurate. The controls over the acquisitions included in the perpetuals are
normally tested as a part of the
a. tests of
controls.
b. tests of
controls and tests of transactions.
c. tests of
details of balances.
d. analytical
procedures and tests of controls.
131. For good internal control, the purchasing
department should not be responsible for
a. finding the
lowest cost vendor.
b. reviewing
vendors' catalog descriptions and prices for standardized items.
c. designing
the purchase order form.
d. authorizing
the acquisition of goods.
132. The purchase order, usually in writing, is
a legal document that is
a. an offer to
buy.
b. not
enforceable if it is not in writing.
c. a binding
agreement between client and vendor.
d. an
acceptance of a vendor's catalog offer to sell.
133. Since the audit of accounts payable
generally takes a considerable amount of audit time, effective internal
control, properly tested, can significantly reduce audit costs by reducing
a. tests of
controls.
b. tests of
transactions.
c. analytical
procedures.
d. tests of
details of balances.
134. The main focus taken by the auditor in
verifying liability balances is on the discovery of
a. understated
liabilities.
b. overstated
liabilities.
c. understated
or omitted liabilities.
d. overstated or
extraneous liabilities.
135. For
effective internal control, the accounts payable department should compare the
information on each vendor's invoice with the
a. receiving
report and the voucher.
b. vendor's
packing slip and the voucher.
c. receiving
report and the purchase order.
d. vendor's
packing slip and the purchase order.
136. Internal controls which are likely to
prevent the client from including as a business expense those transactions that
primarily benefit management or other employees rather than the entity being
audited satisfy the control objective that
a. acquisitions
are correctly valued.
b. existing
acquisitions are recorded.
c. acquisitions
are correctly classified.
d. recorded
acquisitions are for goods and services received.
137. The personnel in the receiving department
should
a. be
supervised by the head of the storeroom, since it is the storeroom personnel
who are responsible for the physical control of goods.
b. be
supervised by the accounting department, since it is the accounting personnel
who are responsible for the accuracy of the records about the goods.
c. be
independent of both the storeroom and accounting functions.
d. be
supervised by the shipping department since the receiving docks and the
shipping docks are in close proximity.
138. Vendors' statements and vendors' invoices
are both relatively reliable evidence because they
a. come
directly to the auditor without being in client's possession.
b. originate
from a third party.
c. validate the
effectiveness of the control system.
d. all of the
above.
139. Because many of the types of errors and
irregularities that may be found in the acquisition and payment cycle represent
a misstatement of earnings and are of significant concern to the auditor, the
tolerable exception rate selected by the auditor will be
a. low.
b. high.
c. average.
d. 15% or less.
140. Failure
to record the acquisition of goods received and services received directly
affects the balance in
a. inventory.
b. property,
plant, and equipment.
c. accounts
payable.
d. capital.
141. It usually takes more time to audit the
acquisition and payment cycle than any other cycle because
a. there is a greater
possibility of fraud in these transactions.
b. internal
controls in this area are usually weakest.
c. of the large
number of accounts affected.
d. there is a
greater likelihood of lawsuits against the CPA relating to these accounts.
142. Accounts affected by the acquisition and
payment cycle include
a. liability
and expense accounts.
b. asset,
liability, and expense accounts.
c. expense and
miscellaneous income accounts.
d. asset,
liability, expense, and miscellaneous income accounts.
143. When processing and recording cash
disbursements, it is important to have a method of canceling the supporting
documents to prevent their reuse as support for another check at a later time.
A common method is to
a. shred the
documents so they can't be reused.
b. transfer
possession of the documents to a bank vault such as a safety deposit box.
c. move the
documents to a permanent off-site facility such as a warehouse.
d. write the
check number on the supporting documents.
144. Because of the importance of tests of
controls and substantive tests of transactions for acquisitions and cash
disbursements, it is common in this audit area to use
a. block
sampling.
b. variables
sampling.
c. attributes
sampling.
d. probability-proportional-to-size
sampling.
145. Which
of the below three is most reliable for verifying the correct balance of
accounts payable?
a. Vendors'
invoices.
b. Vendors'
statements.
c. Confirmations.
d. Bills of
lading.
146. Which of the following is an effective
internal accounting control over cash payments?
a. Signed
checks should be mailed under the supervision of the check signer.
b. Spoiled
checks that have been voided should be disposed of immediately.
c. Checks should
be prepared only by persons responsible for cash receipts and cash
disbursements.
d. A
check-signing machine with two signatures should be utilized.
147. For good internal control, the person who
should sign checks should be the
a. treasurer.
b. purchasing
agent.
c. accounts
payable clerk.
d. person
preparing the checks.
148. Which of the documents listed below is
best for testing acquisition in tests of transactions?
a. Bills of
lading.
b. Confirmations.
c. Vendors'
invoices.
d. Vendors'
statements.
149. The test of transactions which requires
"recompute cash discounts" satisfies the objective of
a. existence.
b. completeness.
c. accuracy.
d. posting and
summarization.
150. Which
of these would not be considered an important control in the cash disbursements
function?
a. Signing of
checks by an individual with proper authority.
b. Separation
of check signing from the accounts payable function.
c. Examination
of the supporting documents by the Controller at the time the check is signed.
d. Physical
control over the blank, voided, and signed checks.
151. The major balance sheet account in the
acquisition and payment cycle is
a. purchases.
b. common
stock.
c. accounts
payable.
d. merchandise
inventory.
152. When auditing accounts payable, auditors
are usually especially concerned about the
a. existence
and completeness objectives.
b. completeness
and cutoff objectives.
c. existence
and cutoff objectives.
d. existence
and accuracy objectives.
153. An important control in the accounts
payable and EDP departments is to require that those personnel who record
acquisitions do not have access to
a. vendors'
price lists.
b. the accounts
payable master file.
c. lists of
vendors' names and addresses.
d. cash,
marketable securities, and other assets.
154. The internal control which requires that
"checks are prenumbered and accounted for" satisfies the objective of
a. accuracy.
b. existence.
c. completeness.
d. posting and
summarization.
155. When
the client's physical inventory takes place before the last day of the year, it
is still necessary to perform an accounts payable cutoff at the time of the
physical count. In addition, the auditor must verify whether all acquisitions
taking place between the physical count and the end of the year were added to
a. the physical
inventory.
b. accounts
payable.
c. accounts
payable and cost of goods sold.
d. the physical
inventory and accounts payable.
156. Operating control of the check-signing
machine normally should be the responsibility of the
a. general
accounting function.
b. treasury
function.
c. legal
counsel.
d. internal
audit function.
157. Internal control is strengthened when the
quantity of merchandise ordered is omitted from the copy of the purchase order
sent to the
a. department
that initiated the requisition.
b. receiving
department.
c. purchasing
agent.
d. accounts
payable department.
158. During the physical observation of the
inventory, the auditor should review the procedures in the receiving department
to determine that all inventory received was counted, and the auditor should
record in the working papers the last receiving report number included in the
physical count. During the year-end field work, the auditor should test the
accounting records for
a. completeness.
b. cutoff.
c. classification.
d. calibration.
159. Once the auditor has decided on the
specific procedures, the acquisitions tests and the cash disbursements tests
are typically performed
a. concurrently.
b. sequentially.
c. independently.
d. separately.
160. Many
companies do not maintain an accounts payable master file by vendor. These
companies pay on the basis of
a. vendors'
monthly statements.
b. individual
vendors' invoices.
c. the accounts
payable account in the general ledger.
d. dunning
letters.
161. Which of the following departments
typically has responsibility for verifying the propriety of acquisition
transactions?
a. Sales
department.
b. Purchases
department.
c. Accounts
payable department.
d. Accounts
receivable department.
162. Sending confirmations to active vendors for
which a balance has not been included in the accounts payable list is referred
to as
a. positive
confirmations.
b. negative
confirmations.
c. zero-balance
confirmations.
d. omitted
confirmations.
163. A file for recording individual
acquisitions, cash disbursements, and acquisition returns and allowances for
each vendor is the
a. accounts
payable master file.
b. cash
disbursements transactions file.
c. acquisitions
transactions file.
d. summary
acquisitions report.
164. The substantive test which requires the
auditor to "compare recorded transactions in the acquisitions journal with
the vendor's invoice, receiving report, and other supporting
documentation" satisfies the audit objective of
a. existence.
b. authorization.
c. completeness.
d. accuracy.
165. With
which one of the following procedures would it not be appropriate to examine
supporting documentation as a test of overstatement of accounts payable?
a. Trace
receiving reports issued after year-end to related invoices.
b. Send
confirmations to vendors with which the client does business.
c. Examine
underlying documents for subsequent cash disbursements.
d. Examine
underlying documentation for bills paid several weeks after the year-end.
166. Under which of the following circumstances
would it be advisable for the auditor to confirm accounts payable with
creditors?
a. Internal
accounting control over accounts payable is adequate, and there is sufficient evidence
on hand to minimize the risk of a material misstatement.
b. Confirmation
response is expected to be favorable, and accounts payable balances are of
immaterial amounts.
c. Creditor
statements are not available, and internal accounting control over accounts
payable is unsatisfactory.
d. The majority
of accounts payable balances are with associated companies.
167. Auditor confirmation of accounts payable
balances at the balance sheet date may be unnecessary because
a. this is a
duplication of cutoff tests.
b. there is
likely to be other reliable external evidence available to support the
balances.
c. accounts
payable balances at the balance sheet date may not be paid before the audit is
completed.
d. correspondence
with the audit client's attorney will reveal all legal action by vendors for
nonpayment.
168. A client's purchasing system ends with the
assumption of a liability and the eventual payment of the liability. Which of
the following best describes the auditor's primary concern with respect to
liabilities resulting from the purchasing system?
a. Accounts
payable are not materially understated.
b. Authority to
incur liabilities is restricted to one designated person.
c. Acquisition
of materials is not made from one vendor or one group of vendors.
d. Commitments
for all purchases are made only after established competitive bidding
procedures are followed.
169. The test of details of balances procedure
to "trace from account payable list to vendors' invoices and
statements" satisfies the objective of
a. existence.
b. completeness.
c. classification.
d. detail
tie-in.
170. Although
all accounts are affected to some degree by effective controls over
classification, one of the areas least affected is
a. current
period acquisitions of permanent assets.
b. repairs and
maintenance expense.
c. leaseholds.
d. cash.
171. The point at which most companies first
recognize the acquisition and related liability on their records is when the
a. purchase
requisition is completed.
b. purchase
order is completed.
c. receiving
report is completed.
d. vendor's
invoice is paid.
172. Comparing expenses to prior years' is an
effective analytical procedure for accounts payable because expenses from year
to year are
a. erratic.
b. variable.
c. dynamic.
d. relatively
stable.
173. The overall objective in the audit of
accounts payable is to determine whether accounts payable
a. is fairly
stated and properly disclosed.
b. is
overstated.
c. is understated.
d. is
accurately stated.
174. The accounts payable department usually
has responsibility for verifying the propriety of acquisitions by comparing the
details on the
a. vendor's
invoice and the receiving report.
b. vendor's
invoice and the purchase requisition.
c. purchase
order, receiving report, and vendor's invoice.
d. purchase
requisition, purchase order, and receiving report.
175. The
auditor's internal control objective to determine that "recorded
acquisitions are for goods and services received" satisfies the audit
objective of
a. accuracy.
b. existence.
c. authorization.
d. completeness.
176. By tracing receiving reports issued at and
before year-end to vendors' invoices and making sure they are included in
accounts payable, the auditor is testing for
a. theft of
merchandise by employees.
b. unrecorded
obligations.
c. lapping.
d. kiting.
177. The audit procedures used to verify accrued
liabilities differ from those employed for the verification of accounts payable
because
a. accrued
liability balances are less material than accounts payable balances.
b. accrued
liabilities at year-end will become accounts payable during the following year.
c. evidence
supporting accrued liabilities is non-existent, whereas evidence supporting
accounts payable is readily available.
d. accrued
liabilities usually pertain to services of a continuing nature, whereas
accounts payable are the result of completed transactions.
178. The erroneous inclusion of transactions
that should properly be recorded as assets into accounts such as repairs
expense, lease expense, or supplies is a common client error. The auditor
should evaluate the likelihood of these types of misclassifications in
conjunction with
a. obtaining an
understanding of the internal control structure.
b. the test of
controls.
c. the tests of
transactions.
d. the tests of
details of balances.
179. To achieve effective internal accounting
control over fixed-asset additions, a company should establish procedures that
require
a. authorization
and approval of major fixed-asset additions.
b. capitalization
of the cost of fixed-asset additions in excess of a specific dollar amount.
c. classification,
as investments, of those fixed-asset additions that are not used in the
business.
d. performance
of recurring fixed-asset maintenance work solely by maintenance department
employees.
180. In
verifying accumulated depreciation, the credits to accumulated depreciation are
verified as part of the audit of depreciation expense, whereas the debits are
normally tested as a part of the audit of
a. asset
acquisitions.
b. capital
acquisitions.
c. disposal of
assets.
d. accumulated
depreciation.
181. The most common audit test to verify
additions to property, plant, and equipment is examination of vendors' invoices
and receiving reports. This process is known as
a. verifying.
b. vouching.
c. dual referencing.
d. cross
referencing.
182. Which of the following analytical
procedures might highlight a possible misstatement of cost of goods sold?
a. Compare
inventory turnover ratio with previous years'.
b. Compare
individual expenses with previous years'.
c. Compare
commission expense divided by sales with previous years'.
d. Compare
prepaid insurance expense with previous years'.
183. Which of the following would not be
classified as property, plant, and equipment?
a. Land and
land improvements.
b. Leasehold
improvements.
c. Construction
of property, plant, and equipment in process.
d. Investments.
184. Property, plant, and equipment are assets
that
a. have
expected lives of more than one year.
b. are used in
the business.
c. are not
acquired for resale.
d. meet all of
the requirements stated above.
185. The
test of details of balances procedure which requires "review of
transactions near the balance sheet date for proper period" is done to
satisfy the audit objective of
a. classification.
b. existence.
c. cutoff.
d. accuracy.
186. It should ordinarily be unnecessary to
examine supporting documentation for each addition to property, plant, and
equipment, but it is normal to verify
a. all large
transactions.
b. all unusual
transactions.
c. a
representative sample of typical additions.
d. all three of
the above.
187. The auditor must know the client's
capitalization policies to determine whether acquisitions are
a. recorded in
accordance with GAAP.
b. treated
consistently with those of the preceding year.
c. both of the
above.
d. none of the
above.
188. If the auditor believes there is a high
likelihood of significant missing permanent assets that are still recorded on
the accounting records, an appropriate procedure is to select a sample from the
assets master file and examine
a. the assets.
b. all the
related journal entries.
c. the
documents verifying their acquisition.
d. the
accumulated depreciation calculations.
189. Ordinarily, it is unnecessary to test the
valuation of fixed assets recorded in prior periods because
a. it will not
affect the current valuations.
b. they were
verified in previous audits.
c. the related
depreciation calculations for the current period are more important.
d. the emphasis
of the audit is on the income statement items, not the balance sheet items.
190. Throughout
the audit of prepaid insurance and insurance expense, the auditor should keep in
mind that the amount in insurance expense is a residual based on
a. the
beginning balance in prepaid insurance.
b. the payment
of premiums during the year.
c. the ending
balance in prepaid insurance.
d. all three of
the above.
191. A common analytical procedure requires the
auditor to compare total prepaid insurance and insurance expense with previous
years'. This is a test of
a. accuracy.
b. existence.
c. disclosure.
d. reasonableness.
192. Estimated unpaid obligations for services
or benefits that have been received prior to the balance sheet date are
classified as
a. accounts
payable.
b. accrued
liabilities.
c. miscellaneous
assets.
d. deferred
charges.
193. The test of details of balances procedure
to "examine vendors' invoices of closely related accounts such as repairs
to uncover items that should be property, plant, and equipment" is done to
satisfy the audit objective of
a. classification.
b. detail
tie-in.
c. cutoff.
d. existence.
194. Occasionally, changing circumstances may
necessitate a revaluation of the useful life of an asset. When this occurs, it
involves a change in
a. accounting
estimate rather than a change in accounting principle.
b. accounting
principle rather than a change in accounting estimate.
c. both
accounting principle and accounting estimate.
d. neither
accounting principle nor accounting estimate.
195. Which
of the following audit procedures would be least likely to lead the auditor to
find an unrecorded fixed asset disposal?
a. Examination
of insurance policies.
b. Review of
repairs and maintenance expense.
c. Review of
property tax files.
d. Scanning of
invoices for fixed asset additions.
196. The tests of details of balances procedure
for property, plant, and equipment which requires the auditor to examine
vendors' invoices of closely related accounts such as repairs and maintenance
to uncover items that should be property, plant, and equipment would satisfy
the audit objective of
a. accuracy.
b. existence.
c. detail
tie-in.
d. completeness.
197. The auditor interviews the plant manager.
The auditor is most likely to rely upon this interview as primary support for
an audit conclusion on
a. capitalization
vs. expensing policy.
b. allocation
of fixed and variable cost.
c. the
necessity to record a provision for deferred maintenance costs.
d. the adequacy
of the depreciation expense.
198. Which of the following is the most
important internal control procedure over acquisitions of property, plant, and
equipment?
a. Requiring
acquisitions to be made by user departments.
b. Using a
budget to forecast and control acquisitions and retirements.
c. Analyzing
monthly variances between authorized expenditures and actual costs.
d. Establishing
a written company policy distinguishing between capital and revenue
expenditures.
199. Materiality is of special importance for
verifying current year additions to property, plant, and equipment. The two major
objectives for this part of the audit are
a. accuracy and
classification.
b. detail
tie-in and cutoff.
c. disclosure
and completeness.
d. rights and
existence.
200. In
connection with a review of the prepaid insurance account, which of the
following procedures would generally not be performed by the auditor?
a. Recompute
the portion of the premium that expired during the year.
b. Prepare
excerpts of insurance policies for audit working papers.
c. Confirm
premium rates with an independent insurance broker.
d. Examine
support for premium payments.
201. The most important objective for
depreciation expense is proper
a. cutoff.
b. accuracy.
c. disclosure.
d. classification.
202. The test of details of balances procedure
which requires a "recalculation of investment credit" is done to
satisfy the audit objective of
a. classification.
b. detail
tie-in.
c. existence.
d. accuracy.
203. The tests of details of balances procedure
which requires the auditor to physically examine assets satisfies the audit
objective of
a. cutoff.
b. existence.
c. classification.
d. completeness.
204. Depreciation expense is one of the few
expense accounts that is not verified as a part of
a. tests of
controls.
b. tests of
transactions.
c. test of
details of balances.
d. analytical
procedures.
205. In
verifying the amount of goodwill recorded by a client, an auditor can obtain the
most convincing evidence by comparing the recorded value of assets acquired
with the
a. assessed
value as evidenced by tax bills.
b. insured
value as evidenced by insurance policies.
c. appraised
value as evidenced by independent appraisals.
d. seller's
book value as evidenced by financial statements.
206. The failure to capitalize a permanent
asset, or the recording of an asset acquisition at the improper amount, affects
the income statement
a. for the
current period.
b. for the
depreciable life of the asset.
c. until the
firm disposes of the asset.
d. forever.
207. An auditor would be least likely to use
confirmations in connection with the examination of
a. inventories.
b. long-term
debt.
c. property,
plant, and equipment.
d. stockholders'
equity.
208. Which of the following explanations might
satisfy an auditor who discovers significant debits to an accumulated
depreciation account?
a. Extraordinary
repairs have lengthened the life of an asset.
b. Prior years'
depreciation charges were erroneously understated.
c. A reserve
for possible loss on retirement has been recorded.
d. An asset has
been recorded at its fair value.
209. The failure to capitalize a permanent
asset, or the recording of an asset acquisition at the improper amount, affects
the balance sheet
a. forever.
b. for the
current period.
c. for the
depreciable life of the asset.
d. until the
firm disposes of the asset.
210. Expense
accounts analysis is closely related to tests of controls and substantive tests
of transactions. The major difference is
a. the
difference in the types of underlying documentation which is examined.
b. the degree
of concentration on an individual account.
c. the use or
nonuse of cutoff tests.
d. that one
emphasizes transactions and the other emphasizes amounts.
211. The proper disclosure of property, plant,
and equipment in the financial statements would ordinarily not include the
disclosure of
a. gross costs.
b. leased
property as a separate line item on the face of the statement.
c. liens on
property as a separate line item on the face of the statement.
d. property,
plant, and equipment as a separate item from other permanent assets.
212. The starting point for the verification of
current year acquisitions of property, plant, and equipment is normally
a. the
property, plant, and equipment account in the general ledger.
b. the
acquisitions journal.
c. the purchase
requisitions file.
d. a schedule
obtained from the client of all acquisitions recorded in the general ledger
during the year.
213. In the audit of property, plant, and
equipment, it is helpful to separate the tests into all but which one of the
following categories?
a. Verification
of the beginning balance.
b. Verification
of current year acquisitions.
c. Verification
of current year disposals.
d. Verification
of the ending balance.
214. A major consideration in verifying the
ending balance in permanent assets is the possibility of existing legal
encumbrances. Tests to identify possible legal encumbrances would satisfy the
audit objective for
a. existence.
b. disclosure.
c. detail
tie-in.
d. classification.
215. On
most financial statements, prepaid insurance is combined with other prepaid
expenses and included as a current asset. This will satisfy the auditor's
presentation and disclosure objective if
a. it is
consistent with the prior year.
b. the amount
is small and not a significant consideration to statement users.
c. there are
only a small number of policies.
d. all of the
above are true.
216. Which of the following ratio and trend
analysis procedures might identify a possible misstatement of expensing amounts
that should be capital items?
a. Compare
"depreciation expense divided by gross property, plant, and equipment
cost" with previous years'.
b. Compare
"accumulated depreciation divided by gross property, plant, and equipment
cost" with previous years'.
c. Compare
"monthly or annual repairs and maintenance, supplies expense, small tools
expense, and similar accounts" with previous years'.
d. Compare
"gross property, plant, and cost divided by some measure of
production" with previous years'.
217. The two most important audit procedures
for allocations are
a. consistency
and GAAP.
b. tests of
controls and tests of details of balances.
c. tests of
controls and substantive tests of transactions.
d. tests for
reasonableness using analytical procedures and recalculation.
218. Income statement accounts resulting from
allocations are typically verified as a part of
a. tests of
controls.
b. substantive
tests of transactions.
c. analytical
procedures.
d. all of the
above.
219. The approach used to verify manufacturing
equipment is different that the one used to verify
a. current
assets.
b. patents.
c. copyrights.
d. all other
types of property, plant, and equipment.
220. The
verification of existence and tests for omissions of the insurance policies in
force can be tested in one of two ways: by referring to supporting
documentation or by obtaining a confirmation of insurance information from the
company's insurance agent. Sending a confirmation to the client's insurance
agent is preferable because
a. it is
usually less time-consuming than vouching tests.
b. it provides
100% verification.
c. both a and b
above.
d. it provides
an adequate sample size.
221. In rare cases, the auditor may believe it
is necessary that a complete physical inventory of fixed assets be taken to
make sure they actually exist. If a physical inventory is taken, the auditor
normally
a. takes the
inventory.
b. requires
client to take the inventory and provide documentation to the auditor.
c. observes the
count.
d. requires
that it be done by an outside, independent third party.
222. A set of records for each piece of
equipment that includes descriptive information, date of acquisition, original
cost, current year depreciation, and accumulated depreciation is
a. the
acquisitions journal.
b. the
depreciation schedule.
c. the fixed
asset master file.
d. the file of
purchase requisitions.
223. The primary accounting record for
property, plant, and equipment is generally
a. the fixed
asset master file.
b. a purchase
requisition.
c. the
depreciation schedule.
d. an
acquisitions journal.
224. After assessing control risk, the auditor
must decide whether it is necessary to verify the existence of individual items
of property, plant, and equipment included in the master file. This audit
procedure, if performed, would satisfy the audit objective of
a. accuracy.
b. existence.
c. detail
tie-in.
d. classification.
225. A
record of insurance policies in force and the due date of each policy is
contained in the
a. voucher
register.
b. insurance
register.
c. insurance
expense account.
d. prepaid
insurance account.
226. The emphasis in auditing property, plant,
and equipment is on the verification of
a. current
period acquisitions and retirements.
b. the balance
carried forward in the account from the previous period (beginning balance).
c. the balance
in the account after the current year's activities are considered (ending
balance).
d. all three of
the above.
227. An area of special concern to the auditor
occurs when the client disposes of assets affected by the investment credit
recapture provisions. Since the recapture affects the current year's income-tax
expense and liability, the auditor must determine that client's calculation of
the investment credit is accurate. Before the recalculation can be made, it is
necessary to have an understanding of the recapture provisions for
a. the year the
asset was disposed.
b. the year the
investment credit was implemented by Congress.
c. the year the
asset was acquired.
d. every year
since the investment credit was implemented and/or changed by Congress.
228. When an asset is sold or disposed of
without having been traded in for a replacement asset, the valuation of the
transaction can be verified by examining the related
a. sales
invoice and property master file.
b. purchase
order and property master file.
c. sales
invoice and merchandise inventory listing.
d. purchase
order and merchandise inventory listing.
229. If the client fails to record disposals of
property, plant, and equipment, both the original cost of the asset account and
the net book value will be incorrect.
a. Both will be
overstated indefinitely.
b. The original
cost will be overstated indefinitely, and the net book value will be overstated
until the asset is fully depreciated.
c. The original
cost will be overstated indefinitely, and the net book value will be
understated indefinitely.
d. The original
cost will be overstated indefinitely, and the net book value will be
understated until the asset is finally depreciated.
230. Which
of the following is a customary audit procedure for the verification of the
legal ownership of real property?
a. Examination
of correspondence with the corporate counsel concerning acquisition matters.
b. Examination
of ownership documents registered and on file at a public hall of records.
c. Examination
of corporate minutes and resolutions concerning the approval to acquire
property, plant, and equipment.
d. Examination
of deeds and title guaranty policies on hand.
231. Prepaid expenses, deferred charges, and
intangibles are assets that vary in life from several months to several years.
Their inclusion as assets results from the concept of
a. materiality.
b. consistency.
c. resale or
liquidation value.
d. matching
expenses with revenues.
232. The auditor's starting point for verifying
disposals of property, plant, and equipment is the
a. equipment
account in the general ledger.
b. file of
shipping documents.
c. client's
schedule of recorded disposals.
d. equipment
subsidiary ledger.
233. Inadequate controls and misstatements
discovered through tests of controls and substantive tests of transactions are
an indication of the likelihood of misstatements in
a. the balance
sheet.
b. the income
statement.
c. the cash
flow statement.
d. both the
income statement and the balance sheet.
234. The internal allocations of accounting
expense data are important because they determine
a. what GAAP
must be used.
b. what GAAS
must be applied.
c. the life of
the asset.
d. whether a
particular expenditure is an asset or a current period expense.
235. Because
the failure to record disposals of property, plant, and equipment can
significantly affect the financial statements, the search for unrecorded
disposals is essential. Which of the following is not a procedure used to
verify disposals?
a. Make
inquiries of management and production personnel about the possibility of the
disposal of assets.
b. Review
whether newly acquired assets replace existing assets.
c. Test the
valuation of fixed assets recorded in prior periods.
d. Review plant
modifications and changes in product line, taxes, or insurance coverage.
236. One typical difference between the asset
prepaid expenses and other assets, such as accounts receivable and inventory,
is the immateriality of the former in many audits. Because of this
immateriality, frequently the only audit procedure necessary to perform is
a. tests of
control.
b. tests of
transactions.
c. tests of
details of balances.
d. analytical
procedures.
237. Once the initial audit of a newly
constructed industrial plant has been performed, with respect to consistency,
which of the following is of least concern to the continuing auditor in the
following year?
a. Prior years'
capitalization policy.
b. Prior years'
capitalization costs.
c. Prior years'
depreciation methods.
d. Prior years'
depreciable life.
238. When auditing a public warehouse, which of
the following is the most important audit procedure with respect to disclosing
unrecorded liabilities?
a. Observation
of inventory.
b. Review of
outstanding receipts.
c. Inspection
of receiving and issuing procedures.
d. Confirmation
of negotiable receipts with holders.
239. Which of the following is an internal
control weakness for a company whose inventory of supplies consists of a large
number of individual items?
a. The cycle
basis is used for physical counts.
b. Supplies of
relatively little value are expensed when purchased.
c. Perpetual
inventory records are maintained only for items of significant value.
d. The
storekeeper is responsible for maintenance of perpetual inventory records.
240. To
best ascertain that a company has properly included merchandise that it owns in
its ending inventory, the auditor should review and test the
a. terms of the
open purchase orders.
b. purchase
cutoff procedures.
c. contractual
commitments made by the purchasing department.
d. purchase
invoices received on or around year-end.
241. Which of the following is an effective
internal accounting control measure that encourages receiving department
personnel to count and inspect all merchandise received?
a. Quantities
ordered are excluded from the receiving department copy of the purchase order.
b. Vouchers are
prepared by accounts payable department personnel only after they match item
counts on the receiving report with the purchase order.
c. Receiving
department personnel are expected to match and reconcile the receiving report
with the purchase order.
d. Internal
auditors periodically examine, on a surprise basis, the receiving department
copies of receiving reports.
242. Stone was asked to perform the first audit
of a wholesale business that does not maintain perpetual inventory records.
Stone has observed the current inventory but has not observed the physical
inventory at the previous year-end date and concludes that the opening
inventory balance, which is not auditable, is a material factor in the
determination of cost of goods sold for the current year. Stone will probably
a. decline the
engagement.
b. disclaim an
opinion on the balance sheet and income statement.
c. express an
unqualified opinion on the balance sheet and income statement, except for
inventory.
d. express an
unqualified opinion on the balance sheet and disclaim an opinion on the income
statement.
243. Which one of the following procedures
would not be appropriate for an auditor in discharging his responsibilities
concerning the client's physical inventories?
a. Confirmation
of goods in the hands of public warehouses.
b. Supervising
the taking of the annual physical inventory.
c. Carrying out
physical inventory procedures at an interim date.
d. Obtaining
written representation from the client as to the existence, quality, and dollar
amount of the inventory.
244. A CPA's client maintains perpetual
inventory records. In the past, all inventory items have been counted on a
cycle basis at least once during the year. Physical count and perpetual record
differences have been minor. Now, the client wishes to minimize the cost of
physically counting the inventory by changing to a sampling method in which
many inventory items will not be counted during a given year. For purposes of
expressing an opinion on his client's financial statements, the CPA will accept
the sampling method only if
a. a stratified
sampling plan is used.
b. the sampling
method has statistical validity.
c. the client
is willing to accept a scope qualification in the auditor's report.
d. the client
is willing to accept an opinion qualification in the auditor's report.
245. If
the perpetual inventory master files show lower quantities of inventory than
the physical count, an explanation of the difference might be unrecorded
a. sales.
b. sales
discounts.
c. purchases.
d. purchase
discounts.
246. Which of the following control procedures
would most likely be used to maintain accurate perpetual inventory records?
a. Independent
storeroom count of goods received.
b. Periodic
independent comparison of records with goods on hand.
c. Periodic
independent reconciliation of control and subsidiary records.
d. Independent
matching of purchase orders, receiving reports, and vendors' invoices.
247. Apex Manufacturing Corporation
mass-produces eight different products. The controller who is interested in
strengthening internal controls over the accounting for materials used in
production would be most likely to implement
a. a perpetual
inventory system.
b. a job order
cost accounting system.
c. an economic
order quantity (EOQ) system.
d. a separation
of duties among production personnel.
248. Cost accounting controls are those related
to the physical inventory and the consequent costs from the point at which
a. materials
are ordered for purchase until the finished product is sold.
b. the
customer's order is received until the finished product is shipped.
c. raw materials
are requisitioned until the finished product is sent to storage.
d. raw
materials are requisitioned until the finished product is completely
manufactured.
249. The requirements imposed by SAS No. 1
regarding the taking of inventory make the following distinction between those
of auditor and client.
a. Client has
the responsibility for setting up the procedures and auditor has the
responsibility for making and recording the counts.
b. Client has
the responsibility for setting up the procedures for taking an accurate
physical inventory and actually making and recording the counts.
c. Auditor has
the responsibility for setting up the procedures for taking an accurate
physical inventory and actually making and recording the counts.
d. Auditor has
the responsibility for setting up the procedures and client has the
responsibility for following the procedures when actually making and recording
the counts.
250. Controls
which provide a means of ensuring that the physical counts are properly
summarized, priced at the same amount as the unit records, correctly extended
and totaled, and included in the general ledger at the proper amount are known
as
a. standard
cost controls.
b. pricing
internal controls.
c. compilation
internal controls.
d. count
quantity internal controls.
251. Assume that the client's valuation of an
inventory item is $10 per unit for 1,000 units, using FIFO. If the most recent
acquisition of inventory was for 600 units at $10 per unit and the immediately
preceding acquisition was for 700 units at $9 per unit, the inventory item is
in error and it is
a. understated
$400.
b. understated
$300.
c. overstated
$400.
d. overstated
$700.
252. Assume that the client's valuation of an inventory
item is $10 per unit for 1,000 units, using LIFO. If the most recent
acquisition of a layer of inventory was for 600 units at $10 per unit and the
immediately preceding layer was for 700 units at $9 per unit, the inventory
item is in error and it is
a. understated
$700.
b. understated
$300.
c. overstated
$400.
d. overstated
$700.
253. When an outside specialist has assumed
full responsibility for taking the client's physical inventory, reliance on the
specialist's report is acceptable if
a. the
auditor's report contains a reference to the assumption of full responsibility.
b. the auditor
is satisfied through application of appropriate procedures as to the reputation
and competence of the specialist.
c. the auditor
conducted the same audit tests and procedures as would have been applicable if
the client's employees took the physical inventory.
d. circumstances
made it impracticable or impossible for the auditor either to do the work
personally or observe the work done by the inventory firm.
254. Ball Company, which has no perpetual
inventory records, takes a monthly physical inventory and reorders any item
that is less than its reorder point. On February 5, 2001, Ball ordered 5,000
units of item A. On February 6, 2001, Ball received 5,000 units of item A that
had been ordered on January 3, 2001. To prevent this excess ordering, Ball
should
a. keep an
adequate record of open purchase orders and review it before ordering.
b. use
perpetual inventory records which indicate goods received, issued, and amounts
on hand.
c. use
prenumbered purchase orders.
d. prepare
purchase orders only on the basis of purchase requisitions.
255. The
test of details of balance procedure which requires the auditor to perform
tests of lower-of-cost-or-market, selling price, and obsolescence is an attempt
to satisfy the objective of
a. existence.
b. completeness.
c. accuracy.
d. realizable
value.
256. In the case of inventories which in the
ordinary course of business are in the hands of public warehouses or other
outside custodians, the auditor's responsibility is to
a. make test
counts of the inventory.
b. observe the
client counting the inventory.
c. observe the
custodian counting the inventory.
d. get direct
confirmation in writing from the custodian.
257. The costs used to value the physical
inventory must be tested to determine whether the client has correctly followed
an inventory method that is in accordance with GAAP and is consistent with
previous years. The audit procedures used to verify these costs are referred to
as
a. price tests.
b. compilation
tests.
c. cost tests.
d. consistency
tests.
258. The
inventory and warehousing cycle can be thought of as comprising two separate
but closely related systems, one involving the actual physical flow of goods,
and the other the
a. related
costs.
b. storing of
the goods.
c. internal
control over those goods.
d. prevention
of waste, obsolescence, and theft.
259. A basic characteristic of the audit of the
inventory and warehousing cycle for a manufacturing company is the close
relationship to other transaction cycles in the organization. Which of the
following cycles does not have a direct tie-in to the inventory and warehousing
cycle?
a. Acquisition
and payment cycle.
b. Payroll and
personnel cycle.
c. Sales and
collection cycle.
d. Capital
acquisition cycle.
260. The
auditor must verify whether the physical counts were correctly summarized, the
inventory quantities and prices were correctly extended, and the extended
inventory was correctly footed. These tests are called
a. price tests.
b. compilation
tests.
c. cost tests.
d. mechanical
tests.
261. SAS No. 1 requires that audit procedures
for inventory include that the auditor
a. must count
the inventory.
b. must be
present at the count and must receive adequate documentation form the client
regarding the effectiveness of inventory-taking.
c. must be
present at the count and satisfy him/herself regarding the effectiveness of
inventory-taking.
d. need not be
present at the count but must be satisfied regarding the effectiveness of
inventory-taking.
262. The test of details of balance procedure
which requires the auditor to account for unused inventory tag numbers to make
sure none have been deleted is associated with the audit objective of
a. accuracy.
b. existence.
c. detail
tie-in.
d. completeness.
263. The
audit of year-end physical inventories should include steps to verify that the
client's purchases and sales cutoffs were adequate. The audit steps should be designed
to detect whether merchandise included in the physical count at year-end was
not recorded as a
a. sale in the
current period.
b. sale in the
subsequent period.
c. purchase in
the current period.
d. purchase
return in the subsequent period.
264. The primary objective of a CPA's
observation of a client's physical inventory count is to
a. discover
whether a client has counted a particular inventory item or group of items.
b. obtain
direct knowledge that the inventory exists and has been properly counted.
c. provide an
appraisal of the quality of the merchandise on hand on the day of the physical
count.
d. allow the
auditor to supervise the conduct of the count so as to obtain assurance that
inventory quantities are reasonably accurate.
265. A
common inventory observation procedure is to be alert for items that are
damaged, rust- or dust-covered, or located in inappropriate places. The
balance-related audit objective being achieved by this procedure is
a. classification.
b. cutoff.
c. realizable
value.
d. rights.
266. An early court case which led to the
expansion of the auditor's responsibility for observing the client count
inventory was the
a. Hochfelder case.
b. Continental Vending case.
c. McKesson & Robbins case.
d. National Student Marketing case.
267. The overall objective in the audit of the
inventory and warehousing cycle is to determine that
a. gross profit
and inventory are fairly presented on the financial statements.
b. inventory
and cost of goods sold are fairly stated on the financial statements.
c. costs of
goods sold and gross profit are correctly stated on the income statement.
d. inventory
items on the balance sheet are neither fraudulent nor materially in error.
268. Which of the following is the best audit
procedure for the discovery of damaged merchandise in a client's ending
inventory?
a. Compare the
physical quantities of slow-moving items with corresponding quantities of the
prior year.
b. Observe
merchandise and raw materials during the client's physical inventory count.
c. Review the
management's inventory representation letter for accuracy.
d. Test overall
fairness of inventory values by comparing the company's turnover ratio with the
industry average.
269. When verifying debits to the perpetual
inventory records of a non-manufacturing company, an auditor would be most
interested in examining a sample of purchase
a. orders.
b. invoices.
c. approvals.
d. requisitions.
270. Finished
goods perpetual inventory master files include the same type of information as
raw materials perpetuals but are
a. considerably
more complex if costs are included along with units.
b. simpler
since materials, labor, and overhead have been combined into one total value.
c. considerably
more complex because of the paper trail that is needed in addition to the
computer records.
d. simpler
because the cost accounting system is in effect and well defined.
271. Which one of the following analytical
procedures would be most helpful in alerting the auditor to the possibility of
obsolete inventory?
a. Compare
gross margin percentage with previous years'.
b. Compare unit
costs of inventory with previous years'.
c. Compare
inventory turnover ratio with previous years'.
d. Compare
current year manufacturing costs with previous years'.
272. A common inventory observation procedure
is to record in the work papers for subsequent follow-up the last shipping
document number used at year-end. This procedure relates to which of the
following audit objectives?
a. Inventory as
recorded exists.
b. Existing
inventory is counted and tagged.
c. Tags are
accounted for to make sure none is missing.
d. Information is
obtained to make sure sales and inventory purchases are recorded in the proper
period.
273. A CPA observes his client's physical
inventory count on December 31, 2001. There are eight inventory-taking teams,
and a tag system is used. The CPA's observation normally may be expected to
result in detection of which of the following inventory errors?
a. An error is
made in the count of one inventory item.
b. The
inventory omits items on consignment to wholesalers.
c. Some of the
items included in the inventory had been received on consignment.
d. The
inventory takers forgot to count all the items in one room of the warehouse.
274. For several years, a client's physical
inventory count has been lower than what was shown on the books at the time of
the count so that downward adjustments to the inventory account were required.
Contributing to the inventory problem could be weaknesses in internal control
that led to the failure to adjust the accounting records for some
a. purchases
returned to vendors.
b. sales
returns received.
c. sales
discounts allowed.
d. cash
purchases.
275. A
common inventory observation procedure is to select a random sample of tag
numbers and identify the tag with that number attached to the actual inventory
item. The audit objective being achieved by this procedure is
a. inventory as
recorded on tags exists (existence).
b. existing
inventory is counted and tagged (completeness).
c. inventory is
counted accurately (accuracy).
d. inventory is
classified correctly (classification).
276. When auditing the inventory and
warehousing cycle, the use of analytical procedures is
a. not
important for this cycle.
b. less
important than for any other cycle.
c. more
important than for any other cycle.
d. as important
as their use in any other cycle.
277. The auditor should be satisfied that
acquisitions of raw materials and manufacturing costs are correctly stated at
the completion of the
a. inventory
and warehousing cycle.
b. payroll and
personnel cycle.
c. acquisitions
and payments cycle.
d. cash cycle.
278. Quigley
Corporation's physical count of inventories was lower than the inventory
quantities shown in its perpetual records. This situation could be the result
of the failure to record
a. sales.
b. sales
returns.
c. purchases.
d. purchase
discounts.
279. From which of the following
evidence-gathering audit procedures would an auditor obtain most assurance
concerning the existence of inventories?
a. Observation
of physical inventory counts.
b. Written
inventory representations from management.
c. Confirmation
of inventories in a public warehouse.
d. Auditor's
recomputation of inventory extensions.
280. A
well-designed computerized system of perpetual inventory master files includes
a. information
about the units of inventory purchased, sold, and on hand.
b. information about
the unit costs of inventory purchased, sold, and on hand.
c. information
about the units of raw materials, work-in-process, and finished goods.
d. information
about the units and unit costs of inventory purchased, sold, and on hand.
281. A major difficulty in the verification of
inventory cost records is determining the reasonableness of
a. direct
labor's hourly rate.
b. raw
materials per unit cost.
c. cost
allocations.
d. all three of
the above.
282. A useful starting point for becoming familiar
with the client's inventory is for the auditor to
a. read the
AICPA's Industry Audit Guide.
b. review
accounting theory covering special problems, such as gas and oil accounting, or
lease-purchase agreements.
c. read the
client's Accounting Manual.
d. tour the
client's facility.
283. Which
of the following situations would most likely require special audit planning by
the auditor?
a. Inventory is
comprised of precious stones.
b. Some items
of factory and office equipment do not bear identification numbers.
c. Depreciation
methods used on the client's tax return differ from those used on the books.
d. Assets
costing less than $500 are expensed even though their expected life exceeds one
year.
284. The auditor tests the quantity of
materials charged to work-in-process by tracing these quantities to
a. cost
ledgers.
b. perpetual
inventory records.
c. receiving
reports.
d. material
requisitions.
285. The
most important part of the observation of inventory is determining whether
a. the counts
are accurate.
b. the
inventory-takers are qualified.
c. obsolete
inventory has been identified.
d. the physical
count is being taken in accordance with the client's instructions.
286. Tests of the perpetual inventory master
files for the purpose of reducing the tests of physical inventory or changing
their timing are done through the use of
a. inquiry.
b. observation.
c. confirmation.
d. documentation.
287. As
finished goods are completed by the production department and await shipment,
they are placed in the
a. stockroom.
b. storeroom.
c. waiting
room.
d. shipping
room.
288. Which one of the following is not an
important consideration with regard to the client's method of pricing
inventory?
a. The method
must be in accordance with GAAS.
b. The method
must be in accordance with GAAP.
c. Application
of the method must be consistent from year to year.
d. Cost vs.
market value (replacement cost or net realizable value) must be considered.
289. After accounting for a sequence of
inventory tags, an auditor traces a sample of tags to the physical inventory
listing to obtain evidence that all items
a. included in
the listing have been counted.
b. represented
by inventory tags actually exist.
c. represented
by inventory tags are included in the listing.
d. included in
the listing are represented by inventory tags.
290. Sample
size in physical observation of inventory is
a. determined
using attributes sampling.
b. determined
using variables sampling.
c. determined
using dollar-unit sampling.
d. impossible
to specify in units because the emphasis is on observing the client's
procedures.
291. It is frequently possible to test the
physical inventory prior to the balance sheet date when
a. there are
accurate perpetual inventory master files.
b. year-end
sales are small.
c. the internal
control system is no better at year-end than at an earlier point in time.
d. the client
counts inventory at interim dates.
292. The main difference between the two types
of cost 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.
293. The test of details of balance procedure
which requires the auditor to review contracts with suppliers and customers and
inquire of management for the possibility of the inclusion of consigned or
other non-owned inventory is associated with the audit objective of
a. rights.
b. existence.
c. completeness.
d. realizable
value.
294. With regard to the physical count of
inventory, an adequate control procedure includes
a. proper
instructions for the physical count.
b. independent
internal verification of the counts.
c. independent
reconciliations of the physical counts with perpetual inventory master files.
d. all three of
the above.
295. Master
files, worksheets, 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.
296. The auditor's tests of the adequacy of the
physical controls over raw materials, work-in-process, and finished goods must
be restricted to
a. observation
and inquiry.
b. documentation
and observation.
c. documentation
and confirmation.
d. documentation
and inquiry.
297. When there are no perpetual inventory
files and the inventory is material,
a. an audit
cannot be performed, so the auditor must issue a disclaimer.
b. a complete physical
inventory must be taken by the client near year-end.
c. the auditor
will have to perform the inventory count and determine valuation instead of the
client.
d. the auditor
is relieved of responsibility for observing inventory counts but still must do
test counts.
298. Restrictions imposed by a client prohibit
the observation of physical inventories, which are 35% of all assets.
Alternative procedures cannot be applied, although the auditor was able to
examine satisfactory evidence for all other items in the financial statements.
The auditor should issue a(n)
a. qualified
opinion.
b. disclaimer
of opinion.
c. unqualified
opinion with a separate explanatory paragraph.
d. adverse
opinion.
299. Most of the audit testing of the storage
of finished goods as well as the shipment of merchandise takes place during the
testing of the
a. sales and
collection cycle.
b. payroll and
personnel cycle.
c. acquisitions
and payments cycle.
d. inventory
and warehousing cycle.
300. When
a physical count of inventory is performed at an interim date, the auditor
observes it at that time and tests the perpetuals for transactions
a. throughout
the year.
b. which are a
representative sample of the period under audit.
c. from the
date of the count to year-end.
d. from the
date of the count to the end of the audit field work.
301. In any company involved in manufacturing,
an adequate cost accounting internal control system is necessary to indicate
the relative profitability of the various products for management planning and
control and to
a. determine
variances from standards.
b. determine
variances from budgets.
c. value
inventories for financial statement purposes.
d. value
inventories for audit verification.
302. Which of the following is not an aspect of
concern when auditing the cost accounting system?
a. Unit cost
records.
b. Physical
controls over inventory.
c. Documents
and records for transferring inventory.
d. Safeguarding
the raw materials from point of receipt to the storeroom.
303. There must be a periodic physical count by
the client of the inventory items on hand
a. only if the
client uses the LIFO method.
b. only if
client uses a lower-of-cost-or-market method.
c. regardless
of the client's inventory valuation method.
d. only if the
client uses either the LIFO or FIFO method.
304. The auditor can best verify a client's
bond sinking fund transactions and year-end balance by
a. confirmation
with the bond trustee.
b. confirmation
with individual holder of retired bonds.
c. examination
and count of the bonds retired during the year.
d. recomputation
of interest expense, interest payable, and amortization of bond discount or
premium.
305. When
a company has treasury stock certificates on hand, a year-end count of the
certificates by the auditor is
a. always
required.
b. not required
if treasury stock is a deduction from stockholders' equity.
c. required
when the company classifies treasury stock with other assets.
d. required
when the company had treasury stock transactions during the year.
306. To prevent the payment of a larger amount
of dividends than was authorized, the corporation should use
a. a separate
imprest dividend account.
b. an outside
independent disbursing agency.
c. checks which
cannot be written for an amount in excess of a stated maximum amount.
d. all of the
above.
307. The tests of details of balances procedure
which requires the auditor to examine notes paid after year-end to determine
whether they were liabilities at the balance sheet date is an attempt to
satisfy the audit objective of
a. existence.
b. completeness.
c. accuracy.
d. classification.
308. Which one of the following is not a
characteristic of the capital acquisition and repayment cycle?
a. The
exclusion of a few transactions is rarely material by itself.
b. There is a
legal relationship between the client and the holder of the equity securities.
c. There is a
direct relationship between the interest and dividends accounts and debt and
equity.
d. Relatively
few transactions affect the account balances, but each transaction is often
highly material in amount.
309. Considering the effect of understatements
of liabilities and owners' equity, a major audit concern is
a. omissions.
b. duplications.
c. redundancies.
d. all three of
the above.
310. Which
of the following is not an objective of the auditor's examination of notes
payable?
a. To determine
whether the internal controls are adequate.
b. To determine
whether client's financing arrangements are effective and efficient.
c. To determine
whether transactions regarding the principal and interest of notes are properly
authorized.
d. To determine
whether the liability for notes and related interest expense and accrued
liabilities are properly stated.
311. Which of the following statements is not
correct?
a. Bonds are
issued infrequently by most companies.
b. The amount of
a bond issue is normally large.
c. It is common
to verify each transaction taking place in the capital acquisition cycle for
the entire year as a part of verifying the balance sheet accounts.
d. It is
unusual to see audit working papers that include the beginning balance of every
account in the capital acquisition and repayment cycle, and documentation of
every transaction that occurred during the year.
312. The audit objective to determine that
existing notes payable are included in the notes payable schedule
(completeness) is accomplished by the following test of balances procedure.
a. Confirm
notes payable.
b. Examine
duplicate copies of notes for principal and interest rates.
c. Trace the
individual notes payable on the schedule to the master file.
d. Review the
bank reconciliation for new notes credited directly to the bank account by the
bank.
313. Any company whose stock is listed on a
securities exchange is required to engage
a. a stock
transfer agent.
b. an
independent registrar.
c. both a and b
above.
d. none of the
above.
314. Round Corporation declared a 100% stock
dividend during 2001. In connection with the examination of Round's financial
statements, Round's auditor should determine that
a. the
additional shares issued do not exceed the number of authorized but previously
unissued shares.
b. stockholders
received their additional shares by confirming year-end holdings with them.
c. the stock
dividend was properly recorded at fair market value.
d. Round's
stockholders have authorized the issuance of 100% stock dividends.
315. In
the audit of notes payable, it is common to include tests of principal and
interest payments as a part of the audit of the acquisitions and payment cycle
because the payments are in the cash disbursements journal that is being
sampled. It is also normal to test these transactions as part of the capital
acquisitions and repayment cycle because
a. it is not
unusual for the auditor to duplicate a process, thereby gathering a larger
quantity of evidence.
b. replicating
the evidence will provide the auditor with a higher level of assurance.
c. the tests
done in the acquisitions and payments cycle will look only at the cash credit
side so the tests done in the capital acquisitions and repayment cycle will
look at the debit side of the transaction.
d. due to the
infrequency of these transactions, in many cases no transactions involving
notes payable are included in the sample tests of acquisitions and payments.
316. Which of the following concerns in
auditing capital stock and paid-in capital involve tests of transactions?
a. Existing
capital stock transactions are recorded.
b. Capital
stock is properly valued.
c. Capital
stock is properly disclosed.
d. All three of
the above.
317. The audit objective requiring that
existing notes payable are included in the notes payable schedule
(completeness) is satisfied by performing the following audit procedure.
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 any are related parties.
d. Obtain
confirmations from creditors who have held notes from the client in the past
and are not currently included in the notes payable schedule.
318. In the audit of the transactions and
amounts in the capital acquisitions and repayments 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.
319. Of the eight tests of details of balances
objectives, which one is usually not an important concern in the audit of notes
payable?
a. valuation.
b. existence.
c. ownership.
d. completeness.
320. Responsibility
for the issuance of new notes should be vested in the
a. board of
directors.
b. purchasing
department.
c. accounting
department.
d. accounts
payable department.
321. Which of the following statements regarding
notes and bonds payable is true?
a. If the debt
is unsecured, it is a note payable; if it is secured by assets, it is a bond
payable.
b. If the debt
is for one year or less, it is a note payable; if it is for more than one year,
it is a bond payable.
c. For loans of
one year or less, a principal and interest payment is required only when the
loan becomes due.
d. None of the
above.
322. The audit objective to determine that
notes payable and accrued interest on the notes payable schedule are accurate
is accomplished by which of the following test of balances procedure?
a. Examine
duplicate copies of notes for principal and interest rates.
b. Review the
minutes of the board of directors for authorized but unrecorded notes.
c. Trace the
total of the notes payable schedule to the general ledger.
d. Review the
notes to determine whether any are with related parties or should be accounts
payable.
323. Usually dividends are audited
a. using block
sampling.
b. on a 100%
basis.
c. using
variables sampling.
d. using
attributes sampling.
324. Analytical procedures are essential for
notes payable because
a. of the
paucity of documentation in this area.
b. there are
few internal controls in this area which the auditor can rely upon to reduce
substantive testing.
c. tests of
details for interest expense and accrued interest can frequently be eliminated
when results are favorable.
d. the large
quantity of transactions would make this an expensive area to audit if some
other means of reducing tests were not available.
325. Which
of the following is a balance-related audit objective for owners' equity?
a. Rights.
b. Obligations.
c. Realizable
value.
d. None of the
above.
326. The primary concern in determining whether
retained earnings is correctly disclosed on the balance sheet is
a. correct
calculation of the net income or loss for the year.
b. correct
calculation of dividend payments for the year.
c. whether
prior-period adjustments have been made correctly.
d. whether
there are any restrictions on the payment of dividends.
327. The audit objective which requires the
auditor to determine that notes payable on the notes payable schedule are
properly classified can be tested with the following procedure.
a. Confirm
notes payable.
b. Examine
corporate minutes for loan approval.
c. Examine
notes, minutes, and bank confirmations for restrictions.
d. Review the
notes to determine whether any are with related parties.
328. Which of the following is not an important
control over notes payable?
a. When the
notes are paid, they should be destroyed so that they cannot be reissued.
b. Responsibility
for the issuance of new notes should be vested in the board of directors or top
management.
c. When notes
payable are renewed, they should be subject to the same authorization
procedures as those for the issuance of new notes.
d. The accounts
payable department should automatically issue checks for the notes when they
become due, in the same manner in which it prepares checks for acquisitions of
goods and services.
329. Proper authorization for the issuance of
notes payable requires that
a. responsibility
for authorization should lie with the manager who must generate the revenue to
repay the loan.
b. responsibility
for authorizing notes should lie with the manager who will receive the benefits
of the loan.
c. whenever
notes are renewed (refinanced), they should be subject to the same
authorization procedures as those used when they were first issued.
d. responsibility
for authorization should lie with the treasurer's function, since the
treasurer's department will receive the cash generated.
330. Tests
of notes payable transactions involve the issue of notes and the repayment of
principal and interest. These audit tests are a part of tests of controls and
substantive tests of transactions for
a. cash
receipts.
b. cash
disbursements.
c. both a and
b.
d. neither a
nor b.
331. The periodic payments of interest and
principal should be controlled as a part of the
a. sales and
collection cycle.
b. acquisition
and payment cycle.
c. interest and
notes/bonds payable cycle.
d. capital
acquisitions and repayments cycle.
332. The amount of time spent verifying owners'
equity is frequently minimal for closely-held corporations because
a. these
companies are so small that it is not necessary to audit the capital section.
b. the few
owners all have access to the books so the auditor spends more time on accounts
like liabilities, which affect outsiders.
c. there are
few if any transactions during the year for the capital stock accounts, except
for earnings and dividends.
d. there is no
public interest in these companies.
333. An auditor would most likely verify the
interest earned on bond investments by
a. testing the
internal controls over cash receipts.
b. vouching the
receipt and deposit of interest checks.
c. confirming
the bond interest rate with the issuer of the bonds.
d. recomputing
the interest earned on the basis of face amount, interest rate, and period
held.
334. It is normal practice to verify all
capital stock transactions
a. only when
the client is small.
b. that are in
excess of a material amount.
c. if there aren't
very many during the year.
d. regardless
of the controls in existence, because of their materiality and permanence in
the records.
335. 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.
336. During an examination, Wicks learns that
the audit client was granted a three-month waiver of the repayment of principal
on the installment loan with Blank Bank without an extension of the maturity
date. With respect to this loan, the audit program used by Wicks would be least
likely to include a verification of
a. interest
expense for the year.
b. balloon
payment.
c. total
liability at year-end.
d. installment
loan payments.
337. Which of the following types of owners'
equity transactions would not require authorization by the board of directors?
a. Issuance of
capital stock.
b. Repurchase
of capital stock.
c. Declaration
of dividends.
d. None of the
above.
338. Notes payable which have been repaid in
full should be
a. canceled and
destroyed.
b. canceled and
returned to the creditor.
c. canceled and
retained by an authorized company official.
d. destroyed so
that they will not be paid again inadvertently.
339. The auditor's independent estimate of
interest expense, using average notes payable outstanding and average interest
rates, tests
a. the
reasonableness of interest expense.
b. for omitted
notes payable.
c. both a and
b.
d. none of the
above.
340. The
tests of details of balances procedure which requires the auditor to trace the
totals of the notes payable list to the general ledger satisfies the objective
of
a. accuracy.
b. existence.
c. detail
tie-in.
d. completeness.
341. When there are not numerous transactions
involving notes during the year, the normal starting point for the audit of
notes payable is
a. a schedule
of notes payable and accrued interest prepared by the audit team.
b. a schedule
of notes payable and accrued interest obtained from client.
c. a schedule
of only those notes with unpaid balances at the end of the year prepared by
client.
d. the notes
payable account in the general ledger.
342. The record of the issuance and repurchase
of capital stock for the life of the corporation is maintained in the
a. shareholders'
capital stock master file.
b. capital
stock certificate books.
c. schedule of
stock owners.
d. corporate
directory.
343. A company issued bonds for cash during the
year under audit. To ascertain that this transaction was properly recorded, the
auditor's best course of action is to
a. trace the
cash received from the issuance to the accounting records.
b. confirm the
results of the issuance with the underwriter or investment banker.
c. verify that
the new cash received is credited to an account entitled "Bonds
Payable."
d. request a
statement from the bond trustee as to the amount of bonds issued and
outstanding.
344. During its fiscal year, a company issued,
at a discount, a substantial amount of first-mortgage bonds. When performing
audit work in connection with the bond issue, the independent auditor should
a. confirm the
existence of the bondholders.
b. review the
minutes for authorization.
c. trace the
net cash received from the issuance to the bond payable account.
d. inspect the
records maintained by the bond trustee.
345. In
connection with the audit of a current issue of long-term bonds payable, the auditor
should
a. decide
whether the bond issue was made without violating state or local law.
b. ascertain
that the client has obtained the opinion of counsel on the legality of the
issue.
c. calculate
the effective interest rate to see if it is substantially the same as the rates
for similar issues.
d. determine
whether bondholders are persons other than owners, directors, or officers of
the company issuing the bond.
346. Many of the Granada Corporation's
convertible bondholders have converted their bonds into stock during the year
under examination. The independent auditor should review the Granada
Corporation's statement of changes in financial position to ascertain that it
shows
a. only
financial resources used to reduce convertible debt.
b. only
financial resources provided by issuance of stock.
c. financial
resources provided by the issuance of stock and used to reduce convertible
debt.
d. nothing
relating to the conversion because it does not affect net working capital.
347. The record of the outstanding shares at
any given time is maintained in the
a. corporate
directory.
b. stock
certificate books.
c. schedule of
stock owners.
d. shareholders'
capital stock master file.
348. Which of the following balance-related
audit objectives is not applicable to notes payable?
a. Detail
tie-in.
b. Obligation.
c. Classification.
d. Realizable
value.
349. The audit objective to determine that
notes payable in the schedule exist is verified by the tests of balances
procedure to
a. foot the
notes payable list.
b. confirm
notes payable.
c. recalculate
interest expense.
d. examine the
balance sheet for proper disclosure of noncurrent portions.
350. Which
of the following concerns in auditing capital stock and paid-in capital involve
tests of balances?
a. Capital
stock is properly disclosed.
b. Existing
capital stock transactions are recorded.
c. Recorded
capital stock transactions are authorized.
d. All three of
the above.
351. Which of the following is not an important
balance-related audit objective in notes payable?
a. Accuracy.
b. Existence.
c. Completeness.
d. Presentation
and disclosure.
352. When a dividend is declared by the Board,
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.
353. If a company employs a capital stock registrar
and/or transfer agent, the registrar or agent, or both, should be requested to
confirm directly to the auditor the number of shares of each class of stock
a. surrendered
and canceled during the year.
b. authorized
at the balance sheet date.
c. issued and
outstanding at the balance sheet date.
d. authorized,
issued, and outstanding during the year.
354. Mars Company has a separate outside
transfer agent and outside registrar for its common stock. A confirmation
request sent to the transfer agent should ask for
a. a list of
all stockholders and the number of shares issued to each.
b. a statement
from the agent that all surrendered certificates have been effectively
canceled.
c. total shares
issued, shares issued in name of client, and unbilled fees.
d. total shares
authorized.
1 - 20. a, d, d, a, a, b, c, d, b, d, c,
c, d, b, d, d, c, a, b, b
21 - 40. d, c, d, a,
c, b, d, a, a, a, b, d, a, b, a, a,
c, c, b, c
41 - 60. d, b, a, c, a, d,
b, b, c, a, c, d, a, a, c, d,
b, c, c, c
61 - 80. d, b, a, b, d, d,
b, b, d, c, a, d, a, a, d, a,
a, c, d, c
81 - 100. a, d, c, d, c, a, d, a, d, a, a,
a, b, d, d, d, a, d, c, d
101 - 120. d,
d, c, a, b, b, a, c, c, a, c,
c, b, c, c, b, b, c, d, c
121 - 140. a, c, a, b, a, d, d, b, c, b, d, a, d, c, c, d,
c, d, a, c
141 - 160. c, d, d, c, c, a, a, c, c, c, c, b, d, c, d, b,
b, b, a, b
161 - 180. c, c, a, d, b, c, b, a, a, d, c, d, a, c, b, b,
d, a, a, c
181 - 200. b, a, d, d, c, d, c, a, b, d, d, b, a, a, b, d,
c, b, a, c
201 - 220. b, d, b, b, c, b, c, a, d, b, c, d, a, b, b, c,
d, c, a, c
221 - 240. c, c, a, b, b, a, c, a, b, d, d, c, d, d, c, d,
b, c, d, b
241 - 260. a, d, b, b, c, b, a, c, b, c, c, d, c, a, d, d,
a, a, d, b
261 - 280. c, d, a, b, c, c,
b, b, b, a, c, d, d, a, a, d,
c, a, a, d
281 - 300. c, d, a, d, d, d,
a, a, c, d, a,
b, a, d, c, a, b, b, a, c
301 - 320. c, d, c, a, a, a, b, a, a, b, d, d, b, a, d, a,
d, b, c, a
321 - 340. d, a, b, c, d, d, d, a, c, c, b, c, d, d, a, b,
d, c, c, c
341 - 354. b, b, a, b, b, c, d, d, b, a, b, a, c, c