Practice Test 2 PDF

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Practice Test 2 Student: ___________________________________________________________________________

1. By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect: ฀ ฀ A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An embezzlement of cash receipts not recorded in the cash receipts journal before they had been deposited into the bank. D. A receivable collected that had previously been written off as uncollectible. 2.

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An auditor may obtain information on the December 31 month-end balance per bank in which of the following?฀ ฀ December 31 Bank Statement

Schedule of Bank (Cash) Transfers

A.

Yes

Yes

B.

Yes

No

C.

No

Yes

D.

No

No

A. Option A B. Option B C. Option C D. Option D 3. The auditors use a bank cutoff statement to compare: ฀ ฀ A. Deposits in transit on the year-end cash general ledger account to deposits in the cash receipts journal. B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. C. Deposits listed on the cutoff statement to disbursements in the cash disbursements journal. D. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank statement. 4. Which of the following is not confirmed on the standard confirmation form used for cash balances at financial institutions? ฀ ฀ A. Cash checking account balances. B. Cash savings account balances. C. Loans payable. D. Securities held for the client by the financial institution. 5. Internal control over marketable securities is enhanced when: ฀ ฀ A. Securities are held by the cashier. B. Securities are registered in the name of the custodian. C. Detailed records of securities are maintained by the custodian of the securities. D. Securities are held under joint control of two or more officials.

6. Properly designed internal control will permit the same employee to: ฀ ฀ A. Receive and deposit checks, and also approve write-offs of customer accounts. B. Approve vouchers for payment, and also receive and deposit cash. C. Reconcile the bank statements, and also receive and deposit cash. D. Sign checks, and also cancel supporting documents. 7. Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department? ฀ ฀ A. Comparing the vendor's invoice with the receiving report. B. Canceling supporting documentation after payment. C. Verifying the mathematical accuracy of the vendor's invoice. D. Preparing the check for signature by an authorized person. 8. The Parmalat fraud case involved: ฀ ฀ A. A fraudulent cash confirmation. B. Kiting of funds between banks in India and banks in Pakistan. C. A bank reconciliation performed by the client that systematically understated cash. D. Major unrecorded disbursements for equipment. 9. Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the: ฀ ฀ A. Check Clearing for the 21st Century Act. B. Public Company Accounting Oversight Board's Standard No. 2. C. Foreign Corrupt Practices Act. D. Sarbanes-Oxley Act. 10. Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation? ฀ ฀ A. Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal. B. Receive a cutoff statement directly from the client's bank. C. Prepare a four column bank reconciliation using the year-end bank statement. D.Confirm the year-end balance using the standard form to confirm account balance information with financial institutions. 11. ฀

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An auditor may obtain information on the December 31 month-end balance per bank in which of the following?฀ ฀ Standard Confirmation Form

January 1-10 Cutoff Statement

A.

Yes

Yes

B.

Yes

No

C.

No

Yes

D.

No

No

A. Option A B. Option B C. Option C D. Option D

12. Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? ฀ ฀ A. A bank lockbox system. B. Approval of all disbursements by an individual independent of cash receipts. C. Monthly bank cutoff statements. D. Prenumbered remittance advices. 13. In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to miscellaneous revenue. The most effective method for detecting this type of error is: ฀ ฀ A. Foot the cash receipts journal for October. B. Send a bank confirmation as of year-end. C. Prepare a bank reconciliation as of year-end. D. Prepare a bank transfer schedule as of year-end. 14. Jones embezzled $10,000 from his company's account in Bank A. At year-end, he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This is an example of: ฀ ฀ A. Lapping. B. Kiting. C. Effective cash management. D. Related party transactions. 15. Which of the following is not a universal rule for achieving internal control over cash? ฀ ฀ A. Separate recordkeeping from accounting for cash to the extent possible. B. Deposit each day's cash receipts intact. C. Separate cash handling from recordkeeping. D. Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks. 16. A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end? ฀ A. Cash receipts. B. Payroll. C. Purchases. D. Sales. 17. Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts? ฀ ฀ A. Examine cash receipts received after year-end. B. Confirm receivables. C. Examine dates of purchase orders. D. Foot the receivables lead schedule. 18. Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice? ฀ ฀ A. Footing the sales journal. B. Confirming accounts receivable. C. Tracing the total sales in the sales journal to the general ledger. D. Observation of the physical inventory count at year-end. 19. An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific procedures to apply to the accounts and transactions. In a particular case, s/he might do this by: ฀ ฀ A. Tracing sales invoices to shipping documents to tests the completeness of reported sales. B. Tracing shipping documents to sales invoices to test the occurrence of reported sales. C. Tracing sales invoices to shipping documents to test the occurrence of reported sales. D. Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.

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20. Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor? ฀ ฀ A.A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year. B. Internal control activities over the recording of cash receipts have been improved since the end of the prior year. C. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet. D The client tightened its credit policy during the current year and sold considerably less merchandise to . customers with poor credit ratings. 21. After the CPAs have selected particular accounts receivable for confirmation: ฀ ฀ A As a control measure, the CPAs should carefully list the audited values of all of those accounts before . turning the letters over to the client to type and mail. BIt is important that every account selected that has a material balance ultimately be verified by . confirmation or the application of alternative procedures; immaterial balances never require any followup through alternative procedures. C All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and . should include a return envelope addressed to the CPA firm. D.All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client. 22. Which of the following manipulations would understate receivables on the financial statements? ฀ A. Understatement of cash sales. B. Closing the sales journal prior to year-end. C. Closing the cash receipts journal prior to year-end. D. Underestimating the allowance for doubtful accounts.

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23. Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts? ฀ ฀ A. Investigate confirmation exceptions for indication of amounts in dispute. B. Review accounts which have been written off as uncollectible prior to year-end. C. Investigate credit ratings for large accounts receivable. D. Discuss with the credit manager the current status of doubtful accounts. 24. Tracing recorded sales transactions to the bills of lading provides evidence about the: ฀ A. Completeness of sales transactions. B. Collectibility of sales transactions. C. Occurrence of sales transactions. D. Billing of all sales transactions.

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25. Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts? ฀ ฀ A. Reviewing an aging of accounts receivable. B. Examination of cash receipts subsequent to the balance sheet date. C. Confirming current (0-30 day) year-end accounts receivable. D. Reviewing credit files for selected account. 26. 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 auditors to: ฀ ฀ A. Consider 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.

27. Which of the following is not a primary objective of the auditors in the examination of accounts receivable? ฀ ฀ A. Determine the approximate realizable value. B. Consider the adequacy of internal control. C. Establish the existence of receivables. D. Determine the expected day of collection of each of the receivables. 28. Tracing copies of sales invoices to shipping documents will provide evidence that all: ฀ A. Shipments to customers were recorded as receivables. B. Billed sales were shipped. C. Debits to the subsidiary accounts receivable ledger are for sales shipped. D. Shipments to customers were billed.

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29. A CPA examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitative data. This is an example of a: ฀ ฀ A. Test of a control. B. Substantive test. C. Cutoff test. D. Statistical test. 30. The individual looking for guidance on revenue recognition is most likely to appropriately review: ฀ A. APB 99. B. SAB 104. C. ASR 44. D. B1 Document.

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31. An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all: ฀ ฀ A. Cash disbursements. B. Approved vouchers. C. Receiving reports. D. Vendors' invoices. 32. Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product? ฀ ฀ A. Factory supervisor salary. B. Indirect materials. C. Miscellaneous expense. D. Sales expense. 33. Which of the following is not a reason for the special significance attached by the auditors to the verification of inventories? ฀ ฀ A. The determination of inventory valuation directly affects net income. B. The existence of inventories is inherently difficult to substantiate. C. Special valuation problems often exist for inventories. D. Inventories are often the largest current asset of an enterprise. 34. Which of the following is true about the auditors' observation of the client's physical inventory? ฀ A. The count must be made at year-end. B. The auditors should supervise the client's personnel. C. The auditors' observation addresses the existence assertion. D. The auditors should justify any omission of the observation in the audit report.

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35. Which of the following best describes the reason that the auditors record their inventory test counts in the working papers? ฀ ฀ A. To document every test count. B. For subsequent comparison with the completed inventory listing. C. To document compliance with generally accepted accounting principles. D. For use in subsequent audits. 36. An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? ฀ ฀ A.Select and examine receiving reports and ascertain that the related canceled checks are dated no earlier than the receiving reports. B.Select and examine receiving reports and ascertain that the related canceled checks are dated no later than the receiving reports. C. Select and examine canceled checks and ascertain that the related receiving reports are dated no earlier than the checks. D.Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks. 37. A client's physical count of inventories was higher than the inventory quantities per the perpetual records. This situation could be the result of the failure to record: ฀ ฀ A. Sales. B. Sales discounts. C. Purchases. D. Purchase returns. 38. To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditors 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. 39. Which of the following is not one of the independent auditor's objectives regarding the examination of inventories? ฀ ฀ A. Verifying that inventory counted is owned by the client. B. Verifying that the client has used proper inventory pricing. C. Ascertaining the physical quantities of inventory on hand. D. Verifying that all inventory owned by the client is on hand at the time of the count. 40. Purchase cutoff procedures should be designed to test whether all inventory: ฀ A. Owned by the company was recorded. B. On the year-end balance sheet was carried at lower-of-cost-or-market. C. On the year-end balance sheet was paid for by the company. D. Owned by the company is in the possession of the company.

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41. Tracing copies of computer-generated sales invoices to copies of the corresponding computer-generated shipping documents provides evidence that: ฀ ฀ A. Shipments to customers were properly billed. B. Entries in the accounts receivable subsidiary ledger were for sales actually shipped. C. Sales billed to customers were actually shipped. D. No duplicate shipments to customers were made. 42. When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs: ฀ ฀ A. Tests of controls and extensive tests of property and equipment balances at the end of the year. B. Analytical procedures for current year property and equipment transactions. C. Tests of controls and limited tests of current year property and equipment transactions. D. Analytical procedures for property and equipment balances at the end of the year.

43. Which of the following best describes the auditors' approach to the audit of the ending balance of property, plant, and equipment for a continuing nonpublic client? ฀ ฀ A. Direct audit of the ending balance. B. Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts. C. Audit of changes in the accounts since inception of the company. D. Audit of selected purchases and retirements for the last few years. 44. Which of the following is used to obtain evidence that the client's equipment accounts are not understated? ฀ ฀ A. Analyzing repairs and maintenance expense accounts. B. Vouching purchases of plant and equipment. C. Recomputing depreciation expense. D. Analyzing the miscellaneous revenue account. 45. A continuing audit client's property, plant, and equipment and accounts receivable accounts have approximately the same year-end balance. In this circumstance, when compared to property, plant and equipment, one would normally expect the audit of accounts receivable to require: ฀ ฀ A. More audit time. B. Less audit time. C. Approximately the same amount of audit time. D. Similar confirmation procedures. 46. When performing an audit of the property, plant, and equipment accounts, an auditor should expect which of the following to be most likely to indicate a departure from generally accepted accounting principles? ฀ ฀ A. Repairs have been capitalized to repair equipment that had broken down. B. Interest has been capitalized for self-constructed assets. C Assets have been acquired from affiliated corporations with the related transactions recorded and . described in the financial statements. D. The cost of freight-in on an acquisition has been capitalized. 47. The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client: ฀ ฀ A. Confirmation. B. Observation. C. Recomputation. D. Inquiry. 48. The auditors may expect a proper debit to goodwill due to: ฀ A. Purchase of a trademark. B. Establishment of an extraordinarily profitable product. C. A business combination. D. Capitalization of human resources.

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49. 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. 50. In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the: ฀ ฀ A. Extent of the control risk. B. Extent of property abandoned during the year. C. Adequacy of replacement funds. D. Reasonableness of the depreciation.

51. A plant manager would be most likely to provide information on which of the following? ฀ A. Adequacy of the provision for uncollectible accounts. B. Appropriateness of physical inventory valuation techniques. C. Existence of obsolete production equipment. D. Deferral of certain purchases of office supplies.

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52. Which of the following is the most important control procedure over acquisitions of property, plant, and equipment? ฀ ฀ A. Establishing a written company policy distinguishing between capital and revenue expenditure...