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Auditing & Assurance Services, Messier 8e

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A client erroneously recorded a large purchase twice. 1. : Which of the following internal control measures would be most likely to detect this in a timely, efficient manner? Reconciling monthly statement received from the vendor with the accounts payable subsidiary ledger. A client maintains perpetual inventory records in terms 2. of : both quantities and dollar amounts. If the assessed level of control risk is high, the auditor would probably Request that the client take the physical count on or very near year-end. A decrease in inventory turnover that is not consistent with the change in sales may signal to the auditor An overstatement of ending inventory. According to SAB 101, which of the following is not a criteria for revenue recognition? Cash is received.
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Analytical Procedures 13. : Evaluations of financial information made through analysis of plausible relationships among both financial and nonfinancial data. Analytical Procedures 14. : Evaluation of financial information through analysis of plausible relationships among both financial and nonfinancial data. Application Controls 15. : Controls that apply to the processing of specific computer applications and are part of the computer programs in the accounting system. Assertions 16. : Expressed of implied representations by management that are reflected in the financial statement components. Auditors perform a test to verify that all merchandise received has been recorded, in part, to satisfy the completeness assertion with regard to accounts payable. Which of the following would represent the population of documents for this test? 17. : Receiving reports Confirmation 18. : An external confirmation represents audit evidence obtained by the auditor as a direct written response to the auditor from a third party (the confirming party) in paper form or by electronic or other medium. Customers are more likely to complain to the client if which of the following assertions for cash receipts is violated? 19. : Completeness. Fleming, the purchasing manager at Sparks Hardware Wholesalers, has a relative named Patterson who owns a retail hardware store. Fleming arranged for hardware to be delivered by manufacturers directly to the retail store on a C.O.D. (cash-on-delivery) basis to enable Patterson to buy at lower wholesale prices. Fleming was most likely able to do this because of Sparks' poor internal control regarding 20. : Processing of purchase orders. General Controls 21. : Controls that relate to the overall information processing environment and have a pervasive effect on the entity's computer operations. Identify the assertion that is represented by the following statement: "Accounts payable and accrued expenses are included in the financial statements at appropriate amounts." 22. : Valuation and allocation. In auditing intangible assets, an auditor would likely review or re-compute amortization expense and determine whether the write-off period appears reasonable. This would support management's assertion of 23. : Valuation and Allocation

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Accounts payable (A/P) confirmations are generally used 5. : less frequently than accounts receivable confirmations since Other procedures such as the search for unrecorded liabilities are generally very effective. After accounting for a sequence of inventory tags, an 6. : auditor traces a sample of tags to the physical inventory listing to obtain evidence that all of the selected items Represented by inventory tags are included in the client's inventory balance (Completeness). All of the following are inherent risk factors for the purchasing process except: A new IT system placed in operation during the year.
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An auditor gathers receiving reports from the few days 8. : before and after year-end to determine that purchases made before the end of the current year have not been recorded in the following year to provide assurance about management's assertion of Cutoff. An auditor may conclude that depreciation expense charges are insufficient by noting Excessive recurring losses on the disposal of assets.
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An auditor would most likely make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's assertion of 10. : Valuation and allocation An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable is most likely to obtain evidence concerning management's assertions relating to 11. : Valuation or allocation. An example of a deferred charge 12. is: Trademarks

In performing a search for unrecorded retirements of plant assets, an auditor most likely would 24. : Inspect the client's plant asset ledger along with insurance and tax records, and then tour the facilities. In testing plant asset account balances, an auditor decides to physically examine a sample of new additions listed on a client-prepared analysis. The procedure most likely contains evidence concerning management's assertion of 25. : Existence Information regarding which of the following would normally not be included in a client's financial statement disclosures related to plant assets? 26. : Depreciation expenses for tax purposes Intangible Assets 27. : An asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights), goodwill, and brand recognition are common intangible assets. Inventory obsolescence relates 28. to: Valuation and allocation. Key segregations of duties in the inventory management process include separation of all of the following except: 29. : Cost accounting from review of variance reports. Lapping 30. : The process of covering a cash shortage by applying cash from one customer's account receivable against another customer's accounts receivable. Lien 31. : When a creditor or bank has the right to sell the mortgaged or collateral property of those who fail to meet the obligations of a loan contract. Negative Confirmation 32. : A confirmation request to which the recipient responds only if the amount or information stated is incorrect. Positive Confirmation 33. : A confirmation request to which the recipient responds whether or not he or she agrees with the amount or information stated. Prepaid Expense 34. : A type of asset that arises on a balance sheet as a result of a business making payments for goods and services to be received in the near future. While prepaid expenses are initially recorded as assets, their value is expensed over time as the benefit is received. Prepaid insurance should35. be: Amortized over the period of coverage Property, plant, and equipment (PP&E) 36. : An asset that is vital to business operations but cannot be easily liquidated (e.g., warehouse, manufacturing equipment). Property, plant, and equipment transactions include all of the following, except: 37. : Recording Operating leases Reliance Strategy 38. : The auditor's decision to rely on the entity's controls, test those controls, and reduce the direct test of the financial statement accounts. Reviewing the expenditures included in repairs and maintenance for unusually large items is used to test 39. : Classification

Specialist 40. : Experts engaged or employed by auditors to provide evidential matter. For example, a specialist may be an expert in determining fair values of intangible assets. Substantive tests of transactions 41. : Tests to detect errors or fraud in individual transactions. Substantive tests of transactions 42. : Test to detect errors or fraud in individual transactions. Test of controls 43. : Audit procedures performed to test the operating effectiveness of controls in preventing or detecting material misstatements at the relevant assertion level. Test of details of account balances and disclosures 44. : Tests that concentrate on the details of amounts contained in an account balance and in disclosures Tests of Controls 45. : Audit procedures performed to test the operating effectiveness of controls in preventing or detecting and correcting material misstatements at the relevant assertion level. Tests of details of account balances and disclosures 46. : Substantive tests that concentrate on the details of items contained in the account balance and disclosure. The most effective control for preventing fictitious inventory is 47. : Segregation of duties To determine whether the client's internal control operated effectively to minimize the likelihood of failing to bill a customer for a shipment of goods, the auditor should begin by selecting a sample of transactions from the population represented by the 48. : Bill of lading (shipping report) file Tracing a sample of purchase requisitions to receiving reports and to the PP&E records is used to test 49. : Completeness Tracing bills of lading (shipping reports) to sales invoices as a test of controls related to the sales and collection process provides evidence that 50. : Customers were billed for goods shipped to them. Vouching significant PP&E additions and dispositions to vendor invoices or other supporting documentation is used to test 51. : Occurrence Walkthrough 52. : A transaction being traced by an auditor from origination through the entity's IT system until it is reflected in the entity's financial reports. It encompasses the entire process of initiating, authorizing, recording, processing, and reporting individual transactions and controls for each of the significant processes identified. When there are numerous plant asset transactions during the year, an auditor who plans to assess control risk at a high level for a non-public client usually performs 53. : Limited or no tests of controls and extensive substantive tests of current year transactions and ending balances.

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population would most likely be 54. : Vendors with whom the client has done business with during the year. Which of the following actions would best conceal the theft of cash collections from sales on account? 55. : Understating the sales journal amounts. Which of the following audit procedures is best for identifying unrecorded trade accounts payable? 56. : Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the period before the balance sheet date and whether it was recorded. Which of the following best represents a situation in which an auditor would use a tax specialist for the audit of the tax provision? 57. : The company does business overseas. Which of the following comparisons would be most useful to an auditor in evaluating the overall results of an entity's sales efforts? 58. : Current year sales to current year budgeted sales. Which of the following control activities would be most effective in maintaining accurate perpetual inventory records? 59. : Periodic independent reconciliation of perpetual records with actual goods on hand. Which of the following controls would most effectively ensure that recorded purchases are free of material misstatements? 60. : Purchase orders, receiving reports, and vendor invoices are independently matched when preparing vouchers. Which of the following does not represent a major accounting transaction type processed in the purchasing cycle? 61. : Requisition of goods. Which of the following does not represent a major classification of expenses identified by FASB Concept Statement No. 5? 62. : Functional costs. Which of the following is not a common internal control activity related to the acquisition of property, plant, and equipment? 63. : Establishing a written company policy regarding the acquisition of raw material. Which of the following is not a factor that an auditor would consider when assessing the inherent risk associated with client sales transactions? 64. : The nature of the credit authorization process. Which of the following is not a key segregation of duties in the revenue process? 65. : The accounts receivable function should be segregated from the invoice preparation function.

Which of the following is not a major function in the inventory management process? 66. : Receiving. Which of the following is not a role of the inventory management function (not the inventory management process as a whole)? 67. : Maintenance of the cost of manufacturing in cost records Which of the following is not a typical document included in the Inventory Management Process? 68. : B) Purchase order. Which of the following is not a typical procedure performed related to other non-trade receivables? 69. : Write-off of receivables from officers against their bonus pay as those arrangements are inappropriate. Which of the following is not an example of segregation of duties in the property management process? 70. : The employee who computes depreciation for accounting purposes should be separate from the employee who computes depreciation for tax purposes. Which of the following is not an inherent risk factor in the audit of the inventory management process? 71. : The lack of prenumbered materials requisition forms. Which of the following is not considered an important element of segregation of duties in the purchasing process? 72. : Separating the check signing and check mailing functions. Which of the following is not one of the auditor's objectives relating to the examination of inventories in a financial statement audit? 73. : Verifying that all inventory owned by the client is on hand at the main warehousing location for the physical count. Which of the following is not one of the major steps in setting control risk for the purchasing process? 74. : Plan and perform analytical procedures on accounts used in the purchasing process. Which of the following is the population the auditor is most likely to draw from in order to test the cutoff assertion for revenue? 75. : Shipping documents. Which of the following procedures involved in processing accounts payable and cash disbursements should not be performed by the accounts payable department? 76. : Counting and inspection of purchased materials Which of the following procedures would an auditor most likely perform related to year-end accounts receivable confirmations when the auditor does not receive replies even after second requests? 77. : Inspect related shipping records and sales invoices documenting the merchandise sold to customers. Which of the following would be considered an internal control weakness associated with plant assets? 78. : Replacements for plant assets are automatically authorized and processed in the next-to-last year of their estimated useful life.

Which of the following would not be considered a test in the area of accounts receivable that relates to the existence assertion? 79. : Trace the record of shipping to inclusion in the accounts receivable subsidiary ledger. While observing a client's annual physical inventory count, an auditor recorded test counts for several inventory items and noticed that certain test counts were higher than recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record 80. : Sales returns

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