Which of the following is not true regarding audit documentation for a specific audit? |
Choice "c" is correct. Quality control standards relate to the conduct of a firm’s audit practice as a whole, and compliance with such standards would not be demonstrated by audit documentation for one specific audit engagement. |
Audit documentation serves mainly to: |
Choice "a" is correct. Audit documentation serves mainly to provide 1) the principal support for the auditor’s report; 2) assistance in the planning, conduct, and supervision of the audit; 3) accountability; and 4) useful information . |
An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but |
Choice "c" is correct. The working trial balance generally contains a column for adjustments and recla ssifications. |
Factors affecting the nature and extent of audit documentation include: |
1. The risk of material misstatement; 2. The extent to which judgment was required in performing the work and evaluating the results; 3. The nature of the specific auditing procedure; 4. The significance of the evidence obtained; 5. The nature and extent of any problems identified ; and 6. The need to document conclusions that may not be obvious |
Which of the following documentation is required for an audit in accordance with generally accepted auditing |
Choice "c" is correct. The quantity, type, and content of audit documentation vary with the circumstances, but it should be sufficient to show that the accounting records agree or reconcile with the financial statements. |
Which of the following is not true about the report release date? |
Choice "a" is correct. The documentation completion date (and not the report release date) is defined as the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such. |
Which of the following statements is most accurate regarding sufficient and appropriate documentation? |
Choice "b" is correct. Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed. |
Which of the following comparisons would an auditor most likely make in evaluating an entity’s costs and |
Choice "b" is correct. The most likely analytical review procedure involving costs and expenses would be to compare the current year’s payroll expense (average amount per employee) to the prior year, taking into consideration an average increase in wage rates. This is a very effective technique in auditing payroll expense. |
The objective of tests of details of transactions performed as substantive tests is to: |
Choice "c" is correct. Substantive tests are concerned with dollar amounts and consist of tests of details of transactions and balances and analytical procedures. The objective of tests of details of transactions performed as substantive tests is to detect material (dollar) misstatements in the financial statements. |
Which of the following would not be considered an analytical procedure? |
Choice "b" is correct. Analytical procedures involve comparison of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. Projecting an error rate from a statistical sample does not involve such a comparison. |
In determining whether transactions have been recorded, the direction of the audit testing should be from the: |
Choice "c" is correct. To determine whether transactions have been recorded (completeness assertion), the auditor should test from the source documents to the accounting records (general ledger, trial balances, etc.). Choices "a", "b", and "d" are incorrect. Testing from the accounting records to the source documents provides evidence of existence or occurrence, not completeness. |
Which of the following presumptions is correct about the reliability of audit evidence? |
Choice "d" is correct. Reliability of audit evidence is enhanced by a satisfactory internal control structure. |
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving |
Choice "b" is correct. Relationships among income statement accounts tend to be more predictable than balance sheet accounts (accounts receivable, accounts payable) because they represent transactions over a period of time rather than at one point in time. In addition, relationships involving transactions subject to management discretion (travel and entertainment) are less predictable. |
For audits of financial statements made in accordance with generally accepted auditing standards, the use of |
Choice "c" is correct. Analytical procedures are required to be applied to some extent in planning and in the final review stage. In addition, although not required , analytical procedures may be used as a substantive test when they are more effective or efficient than tests of details. |
Which of the following types of audit evidence generally is the most reliable? |
Choice "b" is correct. Confirmations are among the most reliable types of evidence, as they constitute external evidence sent directly to the auditor. |
An auditor compares annual revenues and expenses with similar amounts from the prior year and |
Choice "b" is correct. Unrealized gains on available-for-sale securities should properly be recorded in other comprehensive income. If such gains were erroneously recorded in the income account for trading securities, this might be discovered through comparison of the current year and prior year revenues and expenses (assuming the error occurred only in the current year, and not in the prior year). |
Which of the following procedures would yield the most reliable evidence? |
Choice "d" is correct. The auditor’s direct personal knowledge (obtained through observation, examination, inspection , or recalculation) is one of the most reliable forms of evidence. |
Which of the following procedures would be most effective in reducing attestation risk? |
Choice "b" is correct. Evidence obtained directly by the accountant (e.g., through physical examination) provides more persuasive evidence than evidence obtained through inquiry, discussion, or analytical procedures, and therefore reduces attestation risk. |
Which of the following procedures would an auditor most likely perform in auditing the statement of cash |
Choice "a" is correct. To audit the statement of cash flows , the auditor reconciles the amounts on the statement to amounts on other financial statements. |
Which of the following most likely would cause an auditor to consider whether a client’s financial statements |
Choice "d" is correct. If the results of an analytical procedure disclose unexpected differences, the auditor should consider that the financial statements may contain a material misstatement. |
Analytical procedures are most appropriate when testing which of the following types of transactions? |
Choice "c" is correct. Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts because income statement accounts represent transactions over a period of time, whereas balance sheet accounts represent amounts as of a point in time. |
When applying analytical procedures during an audit, which of the following is the best approach for |
Choice "b" is correct. Identifying reasonable explanations for unexpected differences before talking to client management helps the auditor in assessing if management’s explanation is reasonable. Management’s explanation should always be corroborated with other evidence. |
An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet |
Choice "a" is correct. Since the employee is destroying the invoices and related vouchers, the most obvious documentation remaining would be the file of all cash disbursements. The auditor would select items from this file and then attempt to trace from specific cash disbursements to the related invoices and approved vouchers. Missing documentation might be indicative of fraud . |
Tracing shipping documents to prenumbered sales invoices provides evidence that: |
Choice "b" is correct. By tracing from the shipping documents to the invoices, the auditor confirms that goods that were shipped were properly billed |
An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to: |
Choice "d" is correct. An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to identify potential liabilities for unpaid payroll taxes. |
An auditor discovered that a client’s accounts receivable turnover is substantially lower for the current year |
Choice "a" is correct. Recording fictitious sales generally has the same impact on revenues and receivables: both would be overstated by the same dollar amount. However, this will cause the accounts receivable turnover ratio to decrease, because the sales figure for the year is generally much larger than the average receivables amount. Since the numerator (sales) is being increased far less proportionately than is the denominator (receivables), overall the ratio will decline. (Try using actual numbers if you want to see how this works: Assume sales of $2,000,000 and average receivables of $300,000. What will happen to the ratio if you increase both of these numbers by $50,000? It will go from 6.7% to 5.9%–a decline.) |
Which of the following strategies most likely could improve the response rate of the confirmation of accounts |
Choice "a" is correct. Some accounting systems facilitate the confirmation of single transactions rather than entire balances. In such cases, inclusion of statements of account showing details of the balances being confirmed makes it easier for the customers to confirm the balances, and therefore may improve the overall response rate. |
In performing a count of negotiable securities, an auditor records the details of the count on a security count |
Choice "a" is correct. After performing a count of negotiable securities, the auditor would generally obtain an acknowledgment from the client that the securities were returned intact. This helps maintain accountability for the securities, and reduces the likelihood of employee misappropriation (e.g., if a client employee were to steal a security and blame the auditor). |
In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant |
Choice "b" is correct. Inspection of plant and equipment by the auditor provides evidence concerning the existence of the equipment; if the auditor can see it, it exists. However, physical inspection does not provide any evidence concerning whether the amounts paid for plant and equipment are properly presented, described , and disclosed. Only reviewing drafts of the financial statements will provide evidence regarding understandability and classification. |
In auditing accounts receivable, the negative form of confirmation request most likely would be used when: |
Choice "d" is correct. Negative confirmations are most likely to be used when the assessed level of audit risk, including inherent and control risk, is low. |
An auditor usually tests the reasonableness of dividend income from investments in publicly-held companies |
Choice "a" is correct. Dividend income from investments is tested by referring to the dividend record books produced by investment advisory services, such as "Moody’s Dividend Record." These books state the dividend that was declared and paid by the investee. |
In determining the effectiveness of an entity’s internal controls relating to the occurrence assertion for payroll |
Choice "a" is correct. The occurrence assertion as it relates to payroll transactions would correspond to an audit objective to determine that payroll transactions actually occurred (i.e. , that all payroll checks were issued to valid employees for hours actually worked). Segregation of duties between personnel and payroll departments is an important control to ensure that only valid employees receive paychecks. |
A weakness in internal control over recording retirements of equipment may cause an auditor to: |
Choice "d" is correct. Testing to see whether equipment listed in the accounting records is physically present in the plant and still in service is an effective way to test whether unrecorded disposals occurred. |
Which of the following explanations most likely would satisfy an auditor who questions management about |
Choice "b" is correct. A debit to accumulated depreciation decreases the balance in that account. The retirement of plant assets necessitates the removal (decrease) of accumulated depreciation related to the retired asset by debiting accumulated depreciation . |
An auditor most likely would inspect loan agreements under which an entity’s inventories are pledged to |
Choice "a" is correct. Inspecting loan agreements under which an entity’s inventories are pledged provides evidence regarding completeness with respect to presentation and disclosure, since such information must be disclosed in the financial statements. |
In confirming with an outside agent, such as a financial institution , that the agent is holding investment |
Choice "b" is correct. A confirmation from an outside agent indicating that securities are being held in the client’s name provides evidence with respect to both the existence assertion and the rights and obligations assertion. |
Which of the following statements is correct concerning the use of negative confirmation requests? |
Choice "a" is correct. Although returned negative confirmations may provide evidence about the financial statement assertions, unreturned negative confirmation requests do not provide explicit evidence that the intended third parties received the confirmation requests and verified that the information contained in them is correct. |
When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, |
Choice "c" is correct. When using positive confirmation requests, the auditor should generally follow up with a second and sometimes third request to those parties from whom replies have not been received . In addition, asking the client to contact its customers may encourage further responses. |
In confirming a client’s accounts receivable in prior years, an auditor found that there were many differences |
Choice "b" is correct. The auditor should consider the nature of the information requested when determining the sampling unit for the current year audit. Certain respondents’ accounting systems may facilitate the confirmation of single transactions rather than of entire balances. |
When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances |
Choice "d" is correct. If the control risk is assessed as low, less substantive testing is necessary. In such an instance, substantive testing would normally be limited to analytical procedures and recalculating year-end accruals. |
Which of the following questions would an auditor least likely include on an internal control questionnaire |
Choice "d" is correct. Questions relating to access controls for assets would not normally be a part of a questionnaire related to controls over the initiation and execution of equipment purchases. |
In auditing accounts receivable the negative form of confirmation request most likely would be used when: |
Choice "b" is correct. Negative confirmations are used when the combined assessed level of inherent and control risk is low, a large number of small balances is involved, and the auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration. |
A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control |
Choice "b" is correct. The assessment of control risk affects the nature, timing , and extent of substantive audit procedures. If the assessed level of control risk is high, the auditor would generally request that the client schedule the inventory at the end of the year. |
In auditing long-term bonds payable, an auditor most likely would: |
Choice "c" is correct. Comparing interest expense with the bond payable amount for reasonableness provides evidence that all interest expense was included and that the outstanding balance of the bonds payable is reasonable, as well as providing limited evidence concerning the amortization of bond discounts or premiums. |
In performing tests concerning the granting of stock options, an auditor should: |
Choice "d" is correct. In auditing the granting of stock options, the auditor would normally trace the transactions to approval by the board of directors. |
An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit |
Choice "d" is correct. Analysis of repairs and maintenance expense provides assurance with regard to management’s assertion that expenditures for property and equipment have been capitalized |
When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing |
Choice "a" is correct. When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud would be reduced if the trust company deals only with the person reconciling the accounts, and not with the employees responsible for maintaining investment records. |
During an audit of an entity’s stockholders’ equity accounts, the auditor determines whether there are |
Choice "d" is correct. Restrictions on retained earnings are for contractual or legal appropriation of retained earnings. The purpose is to restrict dividends, and such restrictions should be disclosed in the financial statements. |
On receiving a client’s bank cutoff statement, an auditor most likely would trace: |
Choice "a" is correct. The auditor should obtain bank cutoff statements that include transactions for 10 to 15 days after year-end. The outstanding checks and deposits in transit at year-end on the bank reconciliation should agree with the information in the bank cutoff statement. |
Which of the following procedures concerning accounts receivable would an auditor most likely perform to |
Choice "a" is correct. In order to obtain audit evidence supporting the effective operation of controls, an auditor must obtain evidence regarding how controls were applied, the consistency with which controls were applied, and by whom or by what means controls were applied. Observing preparation of the schedule of past due accounts receivable provides some of this evidence. |
In testing controls over cash disbursements, an auditor most likely would determine that the person who signs |
Choice "d" is correct. Once signed, the check should be mailed to the payee by the check signer or an employee operating under the supervision of the check signer to prevent defalcations of checks. Generally this occurs in the treasurer’s department. |
For effective internal control, the accounts payable department generally should: |
Choice "d" is correct. Under an effective system of internal control, the accounts payable clerk should ensure that supporting documents (invoice, receiving report, and purchase order) are in agreement before the voucher is submitted for payment. |
Which of the following sets of information does an auditor usually confirm on one form? |
Choice "b" is correct. The standard AICPA bank confirmation form includes spaces for the bank to confirm both cash balances on deposit at the bank and collateral pledged on loans originating from the bank. |
Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? |
Choice "c" is correct. The auditor is able to detect liabilities not recorded at year-end by comparing cash payments made after the balance sheet date to the related receiving reports and vendor invoices; any payments made on transactions dated before year-end reflect a liability that should have been recorded. |
An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and |
Choice "c" is correct. In general , an audit procedure can be restated as the question to be answered. In this case, tracing a sample of purchase orders and related receiving reports to the purchases journal and the cash disbursements journal seeks to answer the question, "Were all purchases properly recorded?" (the completeness assertion). |
Sound internal control dictates that, immediately upon receiving checks from customers by mail, a responsible |
Choice "c" is correct. Upon receipt of cash , a remittance listing should be prepared. |
To provide assurance that each voucher is submitted and paid only once, an auditor most likely would |
Choice "b" is correct. By stamping the voucher "paid," the check signer cancels the voucher so it cannot be resubmitted for payment. |
In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the |
Choice "b" is correct. Vouching to supporting documents tests the occurrence assertion |
Which of the following tests of controls most likely would help assure an auditor that goods shipped are |
Choice "b" is correct. Tracing from a sample of shipping documents to matching sales invoices would provide support for the completeness assertion for billing. |
Which of the following internal controls most likely would assure that all billed sales are correctly posted to the |
Choice "a" is correct. Comparison of daily sales summaries to daily postings to the accounts receivable ledger would ensure the completeness of the accounts receivable ledger. |
Under properly designed internal control, the same employee most likely would match vendors’ invoices with |
Choice "b" is correct. Matching vendor’s invoices with receiving reports provides authorization for payment and is generally performed in the accounts payable department. Recalculation of vendor invoices is compatible with this authorization function. |
An auditor tests an entity’s control of obtaining credit approval before shipping goods to customers in support |
Choice "a" is correct. By ensuring that credit approval is obtained before goods are shipped to customers, the auditor is testing management’s assertion that accounts receivable are collectible (valuation or allocation). |
An independent auditor asked a client’s internal auditor to assist in preparing a standard financial institution |
The auditor should control the mailing of independent confirmations. |
To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating |
Choice "c" is correct. Shipping documents provide evidence that a sale occurred , and therefore selecting from a population of shipping documents allows the auditor to test whether corresponding invoices exist for each sale. |
An auditor scans a client’s investment records for the period just before and just after the year-end to |
Choice "d" is correct. Investments may be classified as trading , available-for-sale, or held-to-maturity. The classification of each investment into one of these three categories determines how it will be shown on the balance sheet (understandability and classification) and whether it will be valued at market or at amortized cost (valuation and accuracy). |
Which of the following procedures represents a weakness in internal controls for payroll? |
Choice "a" is correct. Unclaimed payroll checks should be returned to an independent party for follow up. Returning such checks (assets) to the payroll department (recordkeeping) represents an inadequate segregation of duties. |
An auditor who uses a transaction cycle approach to assessing control risk most likely would test control |
Choice "a" is correct. The revenue cycle includes sales, receivables , and cash receipts, so an auditor using a transaction cycle approach would be likely to test sales and receivables together. |
Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared |
Choice "c" is correct. Tracing from invoices to shipping documents would provide evidence that sales billed to customers were actually shipped. An invoice for which the corresponding shipping documents could not be located might be indicative of fictitious sales (i.e., sales that were recorded but never actually shipped). |
An auditor’s inquiries of management disclosed that the entity recently invested in a series of energy |
Choice "b" is correct. Generally accepted accounting principles specify that, in order to qualify for hedge treatment, the entity must demonstrate and disclose a number of transaction features including risk exposure. The auditor would therefore need to examine the contracts to evaluate the character of the hedge and the degree to which losses should be recognized in the determination of income, as well as the character of any disclosures. |
An auditor usually determines whether dividend income from publicly-held investments is reasonable by |
Choice "c" is correct. Investment income from dividends is generally recalculated by comparing recorded income with dividend record books produced by investment advisory services such as "Moody’s Dividend Record." These books state the dividend that was declared and paid by the investee. |
After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and |
1. no 2. yes Choice "c" is correct. By ensuring that credit approval is obtained before goods are shipped to customers, the auditor is testing management’s assertion that accounts receivable are collectible (allocation and valuation). Ensuring that credit approval is obtained before goods are shipped does not support the rights and obligations assertion. |
Which of the following strategies most likely could improve the response rate of the confirmations of accounts |
Choice "b" is correct. The auditor should consider the types of information respondents will be readily able to confirm. For instance, some accounting systems facilitate the confirmation of single transactions rather than entire balances. In such cases, the auditor might consider including a client-prepared statement of account showing details of the customer’s account balance being confirmed. By making it easier for customers to determine which items are included in the balance being confirmed , the auditor also makes it more likely that those customers will respond. |
An auditor’s tests of controls for completeness for the revenue cycle usually include determining whether: |
Choice "b" is correct. The auditor often traces a sample of shipping documents to sales invoices to test completeness of sales. |
An auditor is testing the reasonableness of dividend income from investments in publicly-held companies. |
Choice "c" is correct. Electronically accessing the details of dividend records on the Internet is an efficient means of verifying dividend rates for multiple investments in a short amount of time. |
In auditing an entity’s computerized payroll transactions, an auditor would be least likely to use test data to |
Choice "b" is correct. In auditing an entity’s computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning control and distribution of unclaimed checks, since these sorts of controls are typically not automated. Controls surrounding unclaimed checks typically rely on proper segregation of duties, which is best evaluated through the auditor’s direct observation. |
An auditor is determining if internal control relative to the revenue cycle of a wholesaling entity is operating |
Choice "b" is correct. Shipping documents provide evidence that a sale occurred, and tracing from shipping documents to sales invoices might identify instances in which a sale occurred but the associated invoice was not prepared (i.e., if no related invoice can be found ). |
Which of the following procedures would be most appropriate for testing the completeness assertion as it |
Choice "d" is correct. Performing cutoff procedures provides assurance that goods in transit (shipped or received) are appropriately included or excluded from inventory and this procedure is most appropriate for testing the completeness assertion. |
To be effective, analytical procedures in the overall review stage of an audit engagement should be |
Choice "c" is correct. The manager and partner on a specific job generally bear a great deal of responsibility for the audit and the report. Typically they would perform analytical procedures during the final review stage, to evaluate overall financial statement presentation and to assess the conclusions reached. In order to evaluate the results of the analysis and to perform an effective review , the manager or partner should have a comprehensive knowledge of the client’s business and the industry. |
Analytical procedures used in the overall review stage of an audit generally include: |
Choice "c" is correct. The objective of analytical procedures used in the overall review stage of the audit is to assist the auditor in assessing conclusions reached and in the evaluation of the overall financial statement presentation. Analytical procedures applied in the overall review stage are used to consider the adequacy of evidence gathered in response to unusual or unexpected balances identified in planning the audit, and to identify unusual or unexpected balances or relationships that were not previously identified . |
Analytical procedures performed in the final review stage of an audit generally would include: |
Choice "b" is correct. Analytical procedures applied during the final review stage should be used to determine whether adequate evidence has been gathered in response to unusual or unexpected balances identified during the audit. |
An auditor finds several errors in the financial statements that the client prefers not to correct. The auditor |
Choice "a" is correct. The auditor should document the errors in the summary of uncorrected errors, and document the conclusion that the errors do not cause the financial statements to be misstated . |
Lore would use which of the following to determine the average days sales in inventory? |
Choice "b" is correct. Average number of days sales in inventory is defined as 365 days per year divided by the inventory turnover. |
In analyzing a company’s financial statements, which financial statement would a potential investor primarily |
Choice "a" is correct. Liquidity ratios and coverage ratios focus on balance sheet account balances. |
Cash $ 300 |
The acid-test ratio is calculated by taking the current assets excluding inventory and prepaid expenses and dividing by current liabilities. In this case, cash and accounts receivable ($300 + $1,200 = $1,500) are divided by current liabilities ($1 ,000), resulting in a ratio of $1 ,500/$1 ,000, or 1.5. |
In a comparison of 20X2 to 20X1 , Neir Co.’s inventory turnover ratio increased substantially although sales |
Gross profit percentage decreased. Cost of sales/ Inventory turnover ratio = Average inventory In order for the inventory turnover ratio to increase, either cost of sales must increase or average inventory must decrease. Since the question indicates that inventory is unchanged, cost of sales must have increased. If the cost of sales increased and sales remained constant, the gross profit percentage would decrease. |
An auditor discovered that a client’s accounts receivable turnover is substantially lower for the current year |
Choice "b" is correct. Accounts receivable turnover is calculated as sales I receivables. A decline in this ratio may indicate that there was an improper cutoff of sales at the end of the year. For example, if sales made at the beginning of the subsequent year were inadvertently recorded in the current year, both sales and receivables would be overstated by the same amount. This would generally result in a larger proportionate effect on receivables (since the receivables balance is smaller than sales for the year), and an overall decrease in the ratio. |
Which of the following ratios would an engagement partner most likely consider in the overall review stage of |
Choice "c" is correct. Inventory turnover is a measure of how quickly inventory is sold, which can be used as an indicator of enterprise performance. In general, the higher the turnover, the better the entity’s performance. |
The audit documentation that makes up the current file most likely would include a copy of the: |
Choice "a" is correct. The audit documentation that makes up the current file most likely would include a copy of the bank reconciliation. |
The third standard of fieldwork states that the auditor must obtain sufficient appropriate audit evidence by |
Choice "c" is correct. Analytical procedures are substantive tests that provide audit evidence used to assess the reasonableness of account balances. |
In testing the existence assertion for an asset, an auditor ordinarily works from the: |
Choice "c" is correct. In testing the existence assertion for an asset, an auditor ordinarily works from the accounting records to the supporting evidence. |
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving |
Choice "d" is correct. Auditors try to identify predictable relationships when using analytical review procedures. Payroll expense is predictable because it is based on objective information (number of employees and pay rates). It can generally be computed directly by the auditor. |
Audit 4 Questions
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