Chapter 10 - TEST BANK PDF

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Chapter 10 Student: ___________________________________________________________________________ 1. The primary difference between an audit of the statement of financial position and an audit of the income statement lies in the fact that the audit of the income statement deals with the verification of: A. authorisations. B. transactions and events. C. cut-offs. D. presentation and disclosure.

2. To test for unsupported entries in the ledger, the direction of audit testing should be from the: A. journal entries. B. Ledger entries. C. original source documents. D. externally-generated documents.

3. In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of: A. existence. B. rights and obligations. C. completeness. D. occurrence.

4. Which of the following is not a primary objective of the auditor in undertaking substantive testing of accounts receivable? A. Determine the completeness of the recorded receivables. B. Establish existence of the receivables. C. Determine the adequacy of the internal control. D. Determine the approximate amount that can be expected to be received.

5. An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's account balance assertion of: A. valuation and allocation. B. rights and obligations. C. existence. D. completeness.

6. Tests designed to detect goods which arrived at the warehouse just before year end and for which the audit client took ownership that have not been recorded in the perpetual inventory records until the subsequent year would most likely provide evidence about management's assertion of:

A. B. C. D.

accuracy. occurrence. valuation and allocation. cut-off.

7. An auditor will usually trace the details of the test counts of inventory items selected from the factory floor while observing the inventory stocktake through to a final inventory schedule. This audit procedure is undertaken to provide evidence of which assertion(s)?

A. B. C. D.

Valuation and allocation. Existence. Completeness. Cut-off.

8. Two months before the year-end the bookkeeper erroneously recorded the receipt of a long-term bank loan by a debit to cash and a credit to sales. Which of the following is the most effective procedure for detecting this type of misstatement?

A. B. C. D.

Analyse bank confirmation information. Analyse the notes payable journal. Prepare a year-end bank transfer schedule. Prepare a year-end bank reconciliation.

9. An auditor is testing sales transactions. One step is to trace a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. What would the auditor intend to establish by this step? A. All sales invoices have been recorded. B. Sales invoices represent bona fide sales. C. Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoices. D. All sales invoices have been properly posted to customer accounts.

10. To verify that all sales transactions have been recorded (the completeness assertion), a test of transactions should be completed on a representative sample drawn from: A. the billing clerk's file of sales orders. B. entries in the sales journal. C. the shipping clerk's file of duplicate copies of bills of lading (goods shipped notices). D. a file of duplicate copies of sales invoices for which all pre-numbered forms in the series have been accounted for.

11. During the process of confirming receivables as of 30 June 2012, a positive confirmation was returned indicating the 'balance owed as of 30 June was paid on 9 July 2012.' The auditor would most likely: A. determine whether a customary trade discount was taken by the customer. B. determine whether there were any changes in the account between 1 July and 9 July 2012. C. check subsequent cash receipts to confirm that the amount was received. D. reconfirm the zero balance as of 9 July 2012.

12. An auditor should perform alternative procedures to substantiate the existence of an accounts receivable when: A. no reply to a negative confirmation request is received. B. no reply to a positive confirmation request is received. C. pledging of the receivable is probable. D. collectability of the receivable is in doubt.

13. Once an auditor has determined that accounts receivable at year-end have increased due to slow collections in a 'tight money' environment, the auditor would be likely to: A. review the going concern ramifications. B. increase the balance in the allowance for bad debts account. C. expand tests for the valuation and allocation assertion. D. expand tests for the existence assertion.

14. An aged trial balance of accounts receivable is usually used by the auditor to: A. verify the existence assertion for recorded receivables. B. ensure that all accounts receivable are recorded (completeness assertion). C. evaluate the results of tests of controls for the sales/accounts receivable system. D. evaluate the provision for bad debts related to the valuation and allocation assertion.

15. Which of the following is the best argument against the use of negative accounts receivable confirmations? A. The cost-per-response is excessively high. B. There is no way of knowing if the intended recipients received them. C. Recipients are likely to feel that, in reality, the confirmation is a subtle request for payment. D. The inference drawn from receiving no reply may not be correct.

16. An auditor reviews the credit ratings of customers with overdue outstanding accounts receivable balances. The auditor's most likely purpose is to obtain evidence concerning management's assertions about: A. valuation and allocation. B. completeness. C. existence. D. rights and obligations.

17. The audit working papers often include a client-prepared, aged trial balance of accounts receivable as at balance date. This ageing is best used by the auditor to: A. test the accuracy of recorded sales. B. assess control risk for credit sales. C. verify the existence of the recorded receivables. D. test the valuation and allocation assertion of accounts receivable.

18. In auditing accounts receivable the negative form of confirmation request most likely would be used when: A. recipients are likely to return positive confirmation requests without verifying the accuracy of the information. B. the combined assessed level of inherent and control risk relative to accounts receivable is low. C. a small number of accounts receivable are involved but a relatively large number of errors are expected. D. the auditor performs a dual purpose test that assesses control risk and obtains substantive evidence.

19. An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account, as at 30 June 2012. By this procedure, the auditor would be most likely to learn of which of the following? A. An April cheque from a customer was posted in error to the account of another customer with a similar name. B. An April invoice was improperly computed. C. An account balance is past due and should be written off. D. An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.

20. Johnson is engaged in the audit of a power company which supplies power to a residential community. All accounts receivable balances are small and the internal control structure is effective. Customers are billed twice monthly. In order to obtain evidence with regards the valuation and allocation assertion of the accounts receivable balances as at balance date, Johnson would most likely:

A. B. C. D.

send positive confirmation requests. examine evidence of subsequent cash receipts. use statistical sampling instead of sending confirmation requests. send negative confirmation requests.

21. In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following? A. The credit manager's opinion. B. An aging schedule of past due accounts. C. Collection experience of the client's collection agency. D. Ratios calculated showing the past relationship of accounts receivable to net credit sales.

22. The negative form of accounts receivable confirmation request is useful except when: A. a large number of small balances are involved. B. the internal control structure surrounding accounts receivable is considered to be effective. C. individual account balances are relatively large and few in number. D. the auditor has reason to believe the persons receiving the requests are likely to give them consideration.

23. During the current financial year, the client company began dealing with certain distributors on a consignment basis (goods were delivered to the distributor but not deemed sold until the distributor had on-sold them). Which of the following audit procedures is least likely to bring this new fact to the auditor's attention?

A. B. C. D.

Test of cash receipts transactions. Tracing of shipping documents to the sales journal. Observation of physical inventory at the client company's premises. Confirmation of accounts receivable.

24. When evaluating the risk of material misstatement with regards to defalcations involving receivables (a credit entry to accounts receivable for amounts not received), the auditor would expect an experienced bookkeeper to most likely debit which of the following accounts?

A. B. C. D.

Cash. Sales returns. Miscellaneous income. Accounts payable.

25. An auditor, having accounted for a sequence of inventory tags, traces information on a representative number of tags to the physical inventory sheets. The purpose of this procedure is to obtain assurance that: A. inventory sheets do not include untagged inventory items. B. the final inventory is valued at cost. C. the inventory listed on the inventory sheets is complete. D. all inventory represented by an inventory tag is bona fide.

26. Procedures related to the purchases cut-off assertion should be designed to test whether or not all inventory: A. purchased and received before the year-end was recorded. B. on the year-end statement of financial position was recorded at lower of cost or market. C. on the year-end statement of financial position was paid for by the company. D. owned by the company is in the possession of the company.

27. Your client sells a high-technology product which is subject to frequent technological improvements and design changes in order to keep current with the market. Based on this information, for the inventory account, the assertion upon which you should concentrate your audit procedures is:

A. B. C. D.

valuation and allocation. existence. completeness. rights and obligations.

28. During a client's stocktake you select a sample of items from the floor, count them and trace the quantities to the inventory summary sheet. Which financial report assertion is this audit procedure related to? A. Valuation and allocation. B. Rights and obligations. C. Completeness. D. Existence.

29. The accuracy of perpetual inventory records may be established, in part, by comparing entries on the perpetual records with details from: A. receiving reports. B. purchase requisitions. C. vendor payments. D. purchase orders.

30. An auditor would be most likely to learn of slow-moving inventory through: A. review of the cash payments journal. B. inquiry of sales personnel. C. review of perpetual inventory records. D. physical observation of inventory.

31. The auditor tests the quantity of materials charged to work-in-process by tracing these quantities to: A. perpetual inventory records. B. cost ledgers. C. material requisition forms. D. receiving reports.

32. When perpetual inventory records are maintained, and control risk for inventory is high, the auditor would probably: A. insist that the client perform physical counts of inventory items several times during the year. B. want the client to schedule the physical inventory count at the end of the year. C. increase tests of controls around sales and purchases. D. increase the extent of tests for unrecorded liabilities at the end of the year.

33. Tests designed to detect purchases made just before the end of the year that have been recorded in the subsequent year would provide assurance about management's assertion of: A. accuracy. B. occurrence. C. cut-off. D. classification.

34. An auditor selected items that are on the store floor for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of:

A. B. C. D.

rights and obligations. completeness. existence. valuation and allocation.

35. An auditor concluded that no excessive costs for idle plant were charged to inventory in a client's standard costing system. This conclusion most likely related to the auditor's objective to obtain evidence about the account balance assertion for inventory of:

A. B. C. D.

valuation and allocation. completeness. existence. rights and obligations.

36. Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's assertion of valuation and allocation of inventory? A. Testing the entity's computation of standard overhead rates. B. Obtaining confirmation of inventories pledged under loan agreements. C. Reviewing shipping and receiving cut-off procedures for inventories. D. Tracing test counts to the entity's inventory listing.

37. Which of the following procedures would best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10, and a few items selling for hundreds of dollars? A. Have an independent audit firm prepare an internal control structure report on the effectiveness of the controls over inventory. B. Maintain perpetual inventory records with frequent periodic verification of the accuracy of these records. C. Require an authorised officer's signature on all requisitions for the more valuable items. D. Have separate warehouse space for the more valuable items with sequentially numbered tags.

38. From the auditor's point of view, inventory counts are more acceptable prior to the year-end when: A. accurate perpetual inventory records are maintained. B. control risk is high. C. significant amounts of inventory are held on a consignment basis. D. inventory turnover has decreased from the prior year.

39. A client's physical count of inventory was higher than the inventory per the perpetual records. This situation could be the result of the failure to record: A. sales discounts. B. sales. C. purchase returns. D. purchases.

40. When outside firms of non-accountants specialising in the taking of physical inventories are used to count, list, price and subsequently compute the total dollar amount of inventory on hand at the date of the physical count, the auditor will ordinarily:

A. make or observe some physical counts of the inventory, recompute certain inventory calculations and test certain inventory transactions. B. consider the report of the outside inventory-taking firm to be an acceptable alternative procedure to the observation of physical inventories. C. consider the reduced audit effort with respect to the physical count of inventory as a scope limitation. D. not reduce the extent of work on the physical count of inventory. 41. An auditor usually examines receiving reports to support entries in the: A. sales journal and sales returns journal. B. voucher register and sales returns journal. C. cheque register and sales journal. D. voucher register and sales journal.

42. In a manufacturing company, which one of the following audit procedures would give the least assurance with regards to the valuation and allocation assertion for inventory? A. Examining paid vendors' invoices. B. Testing the computation of standard overhead rates. C. Obtaining confirmation of inventories pledged under loan agreements. D. Reviewing direct labour rates.

43. A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably: A. insist that the client perform physical counts of inventory items several times during the year. B. apply gross profit tests to ascertain the reasonableness of the physical accounts. C. increase the extent of tests of controls of the inventory cycle. D. request the client to schedule the physical inventory count at the end of the year.

44. Which assertion for ending inventory is most likely at risk of material misstatement if the gross profit percentage is much greater than last year? A. Existence. B. Completeness. C. Rights and obligations. D. Accuracy.

45. The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference? A. Credit memos for several items returned by customers had not been recorded. B. Inventory items had been counted but the tags placed on the items had not been taken off the items and added to the inventory accumulation sheets. C. An item purchased 'FOB shipping point' had not arrived at the date of the inventory count and had not been reflected in the perpetual records. D. No journal entry had been made on the retailer's books for several items that the retailer returned to its suppliers.

46. Your client's inventory turnover has decreased from 8.2 times to 5.6 times during the year. Based on this decrease, which financial report assertion would you be least concerned with? A. Existence. B. Rights and obligations. C. Valuation and allocation. D. Completeness.

47. To determine whether accounts payable are complete, an auditor commonly performs sampling procedures to test whether all merchandise received is recorded. The population of documents for this test consists of all: A. payment vouchers. B. receiving reports. C. purchase requisitions. D. vendor's invoices.

48. In order to efficiently test the purchases/accounts payable cut-off, an auditor will be most likely to: A. compare cut-off reports with purchase orders. B. coordinate cut-off tests with physical inventory observation. C. coordinate mailing of confirmations with cut-off tests. D. compare vendors' invoices with vendors' statements.

49. Which of the following is the best audit procedure for determining the completeness of the accrued liabilities listing? A. Examine unusual relationships between monthly accounts payable balances and recorded purchases. B. Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable. C. Examine a sample of cash disbursements in the period subsequent to year-end. D. Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded.

50. The auditor is most likely to verify the liability account 'accrued commissions payable' in conjunction with the: A. verification of contingent liabilities. B. review of sales transactions. C. examination of trade accounts payable. D. review of disbursements after year-end.

51. All of the following can assist the auditor in testing the existence assertion for investment securities except: A. physical examination. B. comparing fair value to cost. C. confirmation with the issuer of the securities. D. confirmation with the custodian.

52. A normal audit procedure is to analyse the current year's repairs...