Audit Exam 2 MC Practice PDF

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7 The control procedure “credit sales approved by credit department” is directed toward which assertion?a. Existence/Occurrence.b. Completeness. c. Valuation/Accuracy.d. Cutoff.Credit approval helps ensure that the sale will be collectible.7 In the audit of accounts receivable, the most important em...

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7.37 The control procedure “credit sales approved by credit department” is directed toward which assertion? a. Existence/Occurrence. b. Completeness. c. Valuation/Accuracy. d. Cutoff. Credit approval helps ensure that the sale will be collectible. 7.52 In the audit of accounts receivable, the most important emphasis should be on the a. Completeness assertion. b. Existence assertion. c. Rights and obligations assertion. d. Presentation and disclosure assertion. Financial statement users are more likely to be damaged if assets are found not to exist or assets are overstated. 8.31 Which of the following would not overstate current-period net income? a. Capitalizing an expenditure that should be expensed. b. Failing to record a liability as an expense. c. Failing to record a check paying an item in Vouchers Payable. Has no effect on net income. It overstates cash and payables. d. All of the above would overstate net income. 8.32 A client’s purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes auditors’ 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. The completeness assertion is very important in the audit of liabilities. 8.34 Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a cash-on-delivery (C.O.D.) basis, thereby

enabling his relative to buy at Lake’s wholesale prices. Budd was probably able to accomplish this because of Lake’s poor internal control over a. Purchase requisitions. b. Cash receipts. c. Perpetual inventory records. d. Purchase orders.

6.38 During an audit of cash, the auditor is most concerned with the management assertion of a. Existence. b. Rights and obligations. c. Valuation or allocation. d. Occurrence.

7.35 When auditing the revenue and collection cycle, auditors normally select balances to con- firm from the a. Sales journal. b. Accounts receivable listing.- This would have the balance for confirming c. General ledger. d. Cash receipts listing.

7.40 Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities? a. Unrecorded purchases. b. Unrecorded sales. c. Merchandise purchases being charged to selling and general expense. d. Fictitious sales. Less sales revenue and correct amount of cost of goods sold results in less gross profit, therefore the ratio of gross profit to sales will decrease. (Actually, the gross profit numerator will decrease at a greater rate than the sales denominator in the ratio, causing the ratio to decrease.)

Use the following information to answer questions 7.42 and 7.43: An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. 7.42 Based on this information, the auditor is most likely concerned about a. Unrecorded costs. b. Improper credit approvals. c. Improper sales cutoff. d. Fictitious sales. Fictitious sales would increase sales. Because no actual product was shipped, COGS as a percent of sales would decrease. The most likely debit for fictitious sales is accounts receivable, causing accounts receivable to increase. 7.43 Based on this information, the auditor interviewed the sales manager, who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor test the sales manager’s representation? a. Perform additional inquiries with sales personnel. b. Obtain copies of all price lists in use during the year and vouch the prices to sales invoices. c. Send confirmations asking customers about unit prices paid for product. d. Vouch vender invoices to payments made after year-end. Reviewing the changes in pricing during the year and ensuring that customers were charged the new prices provides sufficient, reliable evidence to support the sales manager’s representation. 7.45 Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern? a. “This amount was paid on December 30.” b. “We received this shipment on January 2.” c. “These goods were returned for credit on November 15.” d. “The balance does not reflect our sales discount for paying by January 5.” This should have been recorded as a reduction or credit to the receivable by 12/31. 7.47 Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily to

a. Evaluate internal control over credit sales. b. Test the accuracy of recorded charge sales. c. Estimate credit losses.- The age of accounts is an indication of credit losses. d. Verify the existence of the recorded receivables. 7.49 Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the a. Collectability of the balances confirmed. b. Ownership of the balances confirmed. c. Existence of the balances confirmed. d. Internal control over balances confirmed. Accounts receivable confirmation enables recipients to respond that they owe the company or that they dispute or disagree with the amount the company says they owe. 7.50 Which of the following is the best reason for prenumbering in numerical sequence documents such as sales orders, shipping documents, and sales invoices? a. Enables company personnel to determine the accuracy of each document. b. Enables personnel to determine the proper period recording of sales revenue and receivables. c. Enables personnel to check the numerical sequence for missing documents and unrecorded transactions. d. Enables personnel to determine the validity of recorded transactions. Checking the sequence for missing numbers identifies documents not yet fully processed in the revenue cycle. It does not provide evidence about accuracy, cutoff, or occurrence. 7.57 When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except a. Send a second request. b. Do nothing for immaterial balances. c. Examine shipping documents. d. Examine client correspondence files. Because the confirmations are a sample of the account balance, even immaterial items should be followed up as they represent other balances in the universe of receivables.

7.63 During the confirmation of accounts receivable, an auditor receives a confirmation via the client’s fax machine. Which of the following actions should the auditor take? a. Not accept the confirmation and select another customer’s balance to confirm. b. Not accept the confirmation and treat it as an exception.

c. Accept the confirmation and file it in the working papers. d. Accept the confirmation but verify the source and content through a telephone call to the respondent. When a reply to a confirmation is received via fax the auditor must determine that the fax actually came from the appropriate person at the client. A telephone call to an appropriate person at the respondent’s company is an acceptable method for verifying the legitimacy of the response.

8.36 Which of the following procedures is least likely to be performed before the balance-sheet date? a. Observation of inventory. b. Review of internal control over cash disbursements. c. Search for unrecorded liabilities. d. Confirmation of receivables. The search for unrecorded liabilities generally depends upon using accounting records created in the period after the year end. 8.37 To determine whether accounts payable are complete, auditors perform a test to verify that all merchandise received has been recorded. The population for this test consists of all a. Vendors’ invoices. b. Purchase orders. c. Receiving reports. d. Canceled checks. The receiving reports are the population that contains the record of all goods received for which liabilities should be recorded. 8.41 An audit team would most likely examine the detail support for charges to which of the following accounts? a. Payroll expense. b. Cost of goods sold. c. Supplies expense. d. Legal expense. The auditor examines the specific charges to determine potential litigation. 8.43 When auditing account balances of liabilities, auditors are most concerned with management’s assertion about

a. Existence. b. Rights and obligations. c. Completeness. d. Valuation and allocation. Completeness is the most important assertion in this cycle. The hiding of liabilities is a primary concern for all auditors in the liability and expense areas. Supplies expense is generally audited in connection with supplies inventory.

8.45 A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows:

Employee

Responsibility

Clerk 1

Reviews vendor invoices for proper signature approval.

Clerk 2

Enters vendor invoices into the accounting system and verifies payment terms.

Clerk 3

Posts entered vendor invoices to the accounts payable ledger for payment and mails checks.

Treasurer

Reviews the vendor invoices and signs each check.

Which of the following would indicate a weakness in the company’s internal control? a. Clerk 1 opens all of the incoming mail. b. Clerk 2 reconciles the accounts payable ledger with the general ledger monthly. c. Clerk 3 mails the checks and remittances after they have been signed. d. The treasurer uses a stamp for signing checks. Clerk 3 has recordkeeping responsibilities. Providing a signed check to Clerk 3 provides the clerk access to an asset and violates the separation of duties. 8.46 Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?

a. Examining reported purchase returns that appear too low. b. Examining vendor statements for amounts not reported as purchases. c. Searching for customer-returned goods that were not reported as returns. d. Reviewing bank transfers recorded as cash received from customers. A purchased item listed on the monthly vendor statement should be included in the accounts payable. If it cannot be traced to the accounts payable record, the vendor account will be understated.

E.25 In an audit sampling application, an auditor a. Performs procedures on all items in a balance and makes a conclusion about the entire balance. b. Performs procedures on less than 100 percent of the items in a balance and formulates a conclusion about the entire balance. c. Performs procedures on less than 100 percent of the items in a class of transactions to become familiar with the client’s accounting system. d. Performs analytical procedures on the client’s unaudited financial statements when planning the audit. When sampling, the auditor performs procedures on less than 100 percent of the items in a balance to form a conclusion about the entire balance.

E.28 The risk that the decision made based on the sample will differ from the decision made based on the entire population is referred to as a. Audit risk. b. Examination risk. c. Sampling risk. d. Nonsampling risk. E.36 The distance from the sample estimate that has a certain likelihood (equal to reliability) of including the true population value is known as the a. Confidence. b. Mean. c. Precision. d. Precision interval. The precision represents a range around the sample estimate that has a certain likelihood (equal to reliability) of including the true population value.

E.37 The likelihood that an identified precision interval contains the true (but unknown) population value is the a. Confidence. b. Mean. c. Precision. d. Sampling risk. E.40 The risks of incorrect acceptance in variables sampling and of overreliance in attributes sampling both relate to a. Effectiveness of an audit. b. Efficiency of an audit. c. Control risk assessment decisions. d. Evidence about assertions in financial statements. E.41 The type of sampling most frequently used by auditors during their study of internal control is referred to as a. Attributes sampling. b. Control sampling. c. Monetary unit sampling. d. Variables sampling. E.44 An advantage of statistical sampling over nonstatistical sampling methods is that statistical methods a. Afford more assurance than a nonstatistical sample of equal size. b. Provide an objective basis for quantitatively evaluating sampling risk. c. Can more easily convert the sample into a dual-purpose test useful for substantive procedures. d. Eliminate the need to use judgment in determining appropriate sample sizes. Statistical sampling methods allow the auditor to quantitatively measure the exposure to sampling risk.

E.69 Factors Affecting Sample Size. Indicate how each of the following factors influences the sam- ple size in an attributes and variables sampling application by using I (inverse relationship), D (direct relationship), or U (unrelated).

Attributes Sampling

Variables Sampling

Population size

D

D

Expected population deviation rate (expected

D

D

misstatement)

Tolerable rate of deviation (tolerable misstatement)

I

I

Sampling risk

I

I

Population variability

U

D

G.32 Which of the following would not cause the audit team to select a larger sample of items under a monetary unit sampling application? a. A reduction in the risk of incorrect acceptance from 10 percent to 5 percent. b. An increase in the tolerable misstatement from $30,000 to $60,000. c. An increase in the expected misstatement from $20,000 to $40,000. d. All of these would result in selecting a larger sample. Increasing the tolerable misstatement would result in a decrease (not increase) in sample size. G.33 Assume that an account with a recorded balance of $5,000 has an audited value of $3,000. By using monetary unit sampling, if the sampling interval is $1,500, the projected misstatement would be a. $600. b. $900. c. $2,000. d. $3,000. Because the logical unit (component) selected for examination is larger than the sampling interval ($1,500), the projected misstatement would equal the actual misstatement, or $2,000 ($5,000 – $3,000 = $2,000). G.39 The projected misstatement is determined by multiplying the sampling interval by the a. Risk of incorrect acceptance. b. Incremental confidence factor. c. Confidence factor.

d. Tainting percentage. G.41 A component of an account balance has a recorded balance of $10,000 and an audited value of $8,000. By using monetary unit sampling, if the sampling interval is $20,000, the projected misstatement would be a. $2,000. b. $4,000. c. $5,000. d. $10,000. The projected misstatement would be calculated as follows: [($10,000 – $8,000) ÷ $10,000] x $20,000 = $4,000.

G.42 Which of the following statements is not true with respect to the calculation of the upper limit on misstatements? a. The tainting percentage is determined based on the difference between the recorded balance and the audited value.

b. A separate incremental allowance for sampling risk is calculated for each misstatement discovered by the auditor.

c. If no misstatements are detected, the basic allowance for sampling risk equals zero. d.The projected misstatement is determined by multiplying the sampling interval by the tainting percentage. The basic allowance for sampling risk will always exist even in situations in which no misstatements are detected.

G.51 Sample Size Relationships: Monetary Unit Sampling. For each of the following cases, provide the missing information. Recorded balance Sample size

$1,500,000

115

Sampling interval

$190,000

(B) (A)

(C)

124 $4,222

$18,000

All of these relationships can be determined by using the sampling interval formula (Sampling interval = Recorded balance ÷ Sample size). 1. Sampling interval = $1,500,000 ÷ 115

Sampling interval = $13,043 (rounded) 2. $4,222 = $190,000 ÷ Sample size Sample size = 45 items 3. $18,000 = Recorded balance ÷ 124 Recorded balance = $2,232,000

G.53 Projected Misstatement Calculation: Monetary Unit Sampling. For each of the following independent misstatements, identify the missing value: 1 2 Recorded balance $15,000 $12,000 Audited value $12,000 Tainting percentage (a) 5% Sampling interval $50,000 $48,000 Projected misstatement (b)

3 $30,000 (c)

$6,000 25% (d)

$5,000

4 (e) (g) (h) $25,000

(f)

$24,000

These relationships can be determined through the use of the following two formulas: Tainting percentage = (Recorded balance – Audited value) ÷ Recorded balance Projected misstatement = Tainting percentage x Sampling interval Tainting percentage = ($15,000 – $12,000) ÷ $15,000 = 0.20, or 20 percent. Projected misstatement = 0.20 x $50,000 = $10,000 0.05 = ($30,000 – Audited value) ÷ $30,000 Audited value = $28,500 $5,000 = 0.05 x Sampling interval Sampling interval = $100,000 0.25 = (Recorded balance – $6,000) ÷ Recorded balance Recorded balance = $8,000 Projected misstatement = 0.25 x $25,000 = $6,250 NOTE TO INSTRUCTOR: Must work (h) prior to working (g). 0.50 [see h)] = ($12,000 – Audited value) ÷ $12,000 Audited value = $6,000 h. $24,000 = Tainting percentage x $48,000 Tainting percentage = 0.50 or 50 percent

a. b. c. d. e. f. g.

H.27 Which of the following would reduce the effectiveness of internal control in an accounting information system? a. The computer librarian maintains custody of computer program instructions and detailed lists.

b. Computer operators have access to operator instructions and detailed program lists. c. The control group is solely responsible for the distribution of all computer output. d. Computer programmers write and debug programs that perform routines designed by the systems analyst. Computer operators should not have access to instructions and detailed program lists because they have would have enough knowledge to alter programs and run those programs. H.30 In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by using substantive tests of transactions. Under these circumstances, the auditor most likely would a. Perform tests of controls to support a lower level of assessed control risk. b. Increase the sample size to reduce sampling risk and detection risk. c. Adjust the materiality level and consider the effect on inherent risk. d. Apply analytical procedures and consider the effect on control risk. When it is not possible to reduce detection risk solely by using substantive tests of transactions, an auditor would most likely rely on a client’s internal controls. H.32 Audit teams use the test data method to gain certain assurances with respect to a. Input data. b. Machine capacity. c. Control procedures contained within the program. d. General controls. Test data are used to examine the operating effectiveness of IT control procedures. H.36 Which of the following statements most likely represents a control consideration for an entity that performs its accounting using mobile computing devices? a. It is usually difficult to detect arithmeti...