8.23 Which of the following accounts does
not appear in the acquisition and expenditure cycle?
a. Cash.
b. Purchases Returns.
c. Sales Returns.
d. Prepaid Insurance.
8.24 For which of the following accounts would the matching concept be the most
appropriate?
a. Cost of Goods Sold.
b. Research and Development.
c. Depreciation Expense.
d. Sales.
8.25 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 for an expenditure.
c. Failing to record a
check paying an item in Vouchers Payable.
d. All of the above would overstate net income.
8.26 A client’s purchasing system ends with the recording of a liability and
its eventual payment.
Which of the following best describes the auditor’s 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.
8.27 Which of the following is an internal control activity that could prevent
a paid disbursement
voucher from being presented for payment a second time?
a. Vouchers should be prepared by individuals who are responsible for signing
disbursement
checks.
b. Disbursement vouchers should be approved by at least two responsible
management
officials.
c. The date on a disbursement voucher should be within a few days of the date
the voucher
is presented for payment.
d. The official who signs
the check should compare the check with the voucher and should
stamp “PAID” on the voucher documents.
8.28 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 COD 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.
8.29 Which of the following is the best audit procedure for determining the existence of unrecorded
liabilities?
a. Examine confirmation requests returned by creditors whose accounts appear on
a
subsidiary trial balance of accounts payable.
b. Examine a sample of
cash disbursements in the period subsequent to year-end.
c. Examine a sample of invoices a few days prior to and subsequent to the
year-end to
ascertain whether they have been properly recorded.
d. Examine unusual relationships between monthly accounts payable and recorded
purchases.
8.30 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.
8.31 To determine whether accounts payable are complete, an auditor performs 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. Cancelled checks.
(AICPA adapted)
8.32 When verifying debits to the perpetual inventory records of a
nonmanufacturing company,
an auditor would be most interested in examining a sample of purchase
a. Approvals.
b. Requisitions.
c. Invoices.
d. Orders.
10.22 Which of the following approaches is most suitable for auditing the
finance and investment
cycle?
a. Perform extensive tests of controls and limit substantive procedures to
analytical procedures.
b. Ignore internal controls and perform extensive substantive procedures.
c. Review internal
controls, and perform extensive substantive procedures.
d. Ignore internal controls and limit substantive procedures to analytical
procedures.
10.23 Loan covenants are used for which of the following reasons?
a. To protect the lender
from the borrower substantially weakening the borrower’s financial
position.
b. To protect the borrower from the lender calling the loan early.
c. To protect the auditor from false information by the borrower.
d. To protect shareholders from management taking on too much debt.
10.24 A related-party is a person or entity that
a. Has a family tie to a management member.
b. Does business with the company.
c. Can exert significant
influence over or be influenced by the company.
d. Is a member of the company’s management.
10.25 Jones was engaged to examine the financial statements of Gamma
Corporation for the year
ended June 30. Having completed an examination of the investment securities,
which of the
following is the best method of verifying the accuracy of recorded dividend
income?
a. Tracing recorded dividend income to cash receipts records and validated
deposit slips.
b. Utilizing analytical procedures and statistical sampling.
c. Comparing recorded dividends with amounts appearing on federal information
Form
1099.
d. Comparing recorded
dividends with a standard financial reporting service’s record of
dividends.
10.26 When the client holds a large amount of negotiable securities, auditors
need to plan to guard
Against
a. Unauthorized negotiation of the securities before they are counted.
b. Unrecorded sales of securities after they are counted.
c. Substitution of
securities already counted for other securities that should be on hand but
are not.
d. Substitution of authentic securities with counterfeit securities.
10.27 In connection with the audit of an issue of long-term bonds payable, the
auditor should
a. Determine whether bondholders are persons other than owners, directors, or
officers of
the company issuing the bond.
b. Calculate the effective interest rate to see if it is substantially the same
as the rates for
similar issues.
c. Decide whether the bond issue was made without violating state or local law.
d. Ascertain that the
client has obtained the opinion of counsel on the legality of the issue.
10.28 Which of the following is the most important audit consideration when
examining the
stockholders’ equity section of a client’s balance sheet?
a. Changes in the capital stock account are verified by an independent stock
transfer agent.
b. Stock dividends and stock splits during the year under audit were approved
by the
stockholders.
c. Stock dividends are capitalized at par or stated value on the dividend
declaration date.
d. Entries in the capital
stock account can be traced to resolutions in the minutes of meetings
of the board of directors.
10.29 If the auditor discovers that the carrying amount of a client’s
investments is overstated
because of a loss in value that is other than a temporary decline in market
value, the auditor
should insist that
a. The approximate market value of the investments be shown in parentheses on
the face
of the balance sheet.
b. The investments be classified as long term for balance sheet purposes with
full disclosure
in the footnotes.
c. The loss in value is
recognized in the financial statements.
d. The equity section of the balance sheet separately shows a charge equal to
the amount of
the loss.
10.30 The primary reason for preparing a reconciliation between
interest-bearing obligations
outstanding during the year and interest expense in the financial statements is
to
a. Evaluate internal control over securities.
b. Determine the validity of prepaid interest expense.
c. Ascertain the reasonableness of imputed interest.
d. Detect unrecorded
liabilities.
10.31 The auditor should insist that a representative of the client be present during the inspection
and count of securities to
a. Lend authority to the auditor’s directives.
b. Detect forged securities.
c. Coordinate the return of all securities to proper locations.
d. Acknowledge the receipt
of securities returned.
11.26 Which of the following would most likely be audited in conjunction with
the examination
of the client’s interest-bearing notes payable?
a. Interest income.
b. Interest expense.
c. Amortization of goodwill.
d. Royalty revenue.
11.27 The main purpose of management representations is to
a. Shift responsibility for financial statements from the management to the
auditor.
b. Provide a substitute source of audit evidence for substantive procedures that
auditors
would otherwise perform.
c. Provide management a place to make assertions about the quantity and
valuation of the
physical inventory.
d. Impress on management
its ultimate responsibility for the financial statements and
disclosures.
11.28 Which of these substantive procedures or sources is not used to obtain
evidence about
contingencies?
a. Scan expense accounts
for credit entries.
b. Obtain a letter from the client’s attorney.
c. Read the minutes of the board of directors’ meetings.
d. Examine terms of sale in sales contracts.
11.29 A Type I subsequent event involves subsequent information about a
condition that existed
at the balance sheet date. Subsequent knowledge of which of the following would
cause the
company to adjust its December 31 financial statements?
a. Sale of an issue of new stock for $500,000 on January 30.
b. Settlement of a damage lawsuit for a customer’s injury sustained February 15
for
$10,000.
c. Settlement of
litigation in February for $100,000 that had been estimated at $12,000 in
the December 31 financial statements.
d. Storm damage of $1 million to the company’s buildings on March 1.
11.30 A. Griffin audited the financial statements of Dodger Magnificat
Corporation for the year
ended December 31, 2006. She completed the audit fieldwork on January 30 and
later
learned of a stock split voted by the board of directors on February 5. The
financial statements
were changed to reflect the split, and she now needs to dual date the report on
the
company’s financial statements before sending it to the company. Which of the
following is
the proper form?
a. December 31, 2006, except as to Note X, which is dated January 30, 2007.
b. January 30, 2007,
except as to note X, which is dated February 5, 2007.
c. December 31, 2006, except as to Note X, which is dated February 5, 2007.
d. February 5, 2007, except for completion of fieldwork for which the date is
January 30,
2007.
11.31 In connection with a company’s filing a registration statement under the
1933 Securities
Act, auditors have a responsibility to perform substantive procedures to find
subsequent
events until
a. The year-end balance sheet date.
b. The audit report date.
c. The date the
registration statement and audit reports are delivered to the U.S. Securities
and Exchange Commission.
d. The “effective date” of the registration statement, when the securities can
be offered for sale.
11.32 The auditing standards regarding “subsequent discovery of facts that
existed at the balance
sheet date” refers to knowledge obtained after
a. The date the audit
reports are delivered to the client.
b. The audit report date.
c. The company’s year-end balance sheet date.
d. The date interim audit work was complete.
11.33 Which of the following is not required by generally accepted auditing standards?
a. Management representations.
b. Attorney letter.
c. Management letter.
d. Engagement letter.
11.34 Which of these persons generally does not participate in writing the
management letter
(client advisory comments)?
a. Client’s outside
attorneys.
b. Client’s accounting and production managers.
c. Audit firm’s audit team on the engagement.
d. Audit firm’s consulting and tax experts.
11.35 Which of the following is ordinarily performed last in the audit
examination?
a. Securing a signed engagement letter from the client.
b. Performing tests of controls.
c. Performing a review for subsequent events.
d. Obtaining signed
management representations.
8.23 Which of the following accounts does
not appear in the acquisition and expenditure cycle?
a. Cash.
b. Purchases Returns.
c. Sales Returns.
d. Prepaid Insurance.
8.24 For which of the following accounts would the matching concept be the most
appropriate?
a. Cost of Goods Sold.
b. Research and Development.
c. Depreciation Expense.
d. Sales.
8.25 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 for an expenditure.
c. Failing to record a
check paying an item in Vouchers Payable.
d. All of the above would overstate net income.
8.26 A client’s purchasing system ends with the recording of a liability and
its eventual payment.
Which of the following best describes the auditor’s 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.
8.27 Which of the following is an internal control activity that could prevent
a paid disbursement
voucher from being presented for payment a second time?
a. Vouchers should be prepared by individuals who are responsible for signing
disbursement
checks.
b. Disbursement vouchers should be approved by at least two responsible
management
officials.
c. The date on a disbursement voucher should be within a few days of the date
the voucher
is presented for payment.
d. The official who signs
the check should compare the check with the voucher and should
stamp “PAID” on the voucher documents.
8.28 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 COD 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.
8.29 Which of the following is the best audit procedure for determining the existence of unrecorded
liabilities?
a. Examine confirmation requests returned by creditors whose accounts appear on
a
subsidiary trial balance of accounts payable.
b. Examine a sample of
cash disbursements in the period subsequent to year-end.
c. Examine a sample of invoices a few days prior to and subsequent to the
year-end to
ascertain whether they have been properly recorded.
d. Examine unusual relationships between monthly accounts payable and recorded
purchases.
8.30 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.
8.31 To determine whether accounts payable are complete, an auditor performs 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. Cancelled checks.
(AICPA adapted)
8.32 When verifying debits to the perpetual inventory records of a
nonmanufacturing company,
an auditor would be most interested in examining a sample of purchase
a. Approvals.
b. Requisitions.
c. Invoices.
d. Orders.
10.22 Which of the following approaches is most suitable for auditing the
finance and investment
cycle?
a. Perform extensive tests of controls and limit substantive procedures to
analytical procedures.
b. Ignore internal controls and perform extensive substantive procedures.
c. Review internal
controls, and perform extensive substantive procedures.
d. Ignore internal controls and limit substantive procedures to analytical
procedures.
10.23 Loan covenants are used for which of the following reasons?
a. To protect the lender
from the borrower substantially weakening the borrower’s financial
position.
b. To protect the borrower from the lender calling the loan early.
c. To protect the auditor from false information by the borrower.
d. To protect shareholders from management taking on too much debt.
10.24 A related-party is a person or entity that
a. Has a family tie to a management member.
b. Does business with the company.
c. Can exert significant
influence over or be influenced by the company.
d. Is a member of the company’s management.
10.25 Jones was engaged to examine the financial statements of Gamma
Corporation for the year
ended June 30. Having completed an examination of the investment securities,
which of the
following is the best method of verifying the accuracy of recorded dividend
income?
a. Tracing recorded dividend income to cash receipts records and validated
deposit slips.
b. Utilizing analytical procedures and statistical sampling.
c. Comparing recorded dividends with amounts appearing on federal information
Form
1099.
d. Comparing recorded
dividends with a standard financial reporting service’s record of
dividends.
10.26 When the client holds a large amount of negotiable securities, auditors
need to plan to guard
Against
a. Unauthorized negotiation of the securities before they are counted.
b. Unrecorded sales of securities after they are counted.
c. Substitution of
securities already counted for other securities that should be on hand but
are not.
d. Substitution of authentic securities with counterfeit securities.
10.27 In connection with the audit of an issue of long-term bonds payable, the
auditor should
a. Determine whether bondholders are persons other than owners, directors, or
officers of
the company issuing the bond.
b. Calculate the effective interest rate to see if it is substantially the same
as the rates for
similar issues.
c. Decide whether the bond issue was made without violating state or local law.
d. Ascertain that the
client has obtained the opinion of counsel on the legality of the issue.
10.28 Which of the following is the most important audit consideration when
examining the
stockholders’ equity section of a client’s balance sheet?
a. Changes in the capital stock account are verified by an independent stock
transfer agent.
b. Stock dividends and stock splits during the year under audit were approved
by the
stockholders.
c. Stock dividends are capitalized at par or stated value on the dividend
declaration date.
d. Entries in the capital
stock account can be traced to resolutions in the minutes of meetings
of the board of directors.
10.29 If the auditor discovers that the carrying amount of a client’s
investments is overstated
because of a loss in value that is other than a temporary decline in market
value, the auditor
should insist that
a. The approximate market value of the investments be shown in parentheses on
the face
of the balance sheet.
b. The investments be classified as long term for balance sheet purposes with
full disclosure
in the footnotes.
c. The loss in value is
recognized in the financial statements.
d. The equity section of the balance sheet separately shows a charge equal to
the amount of
the loss.
10.30 The primary reason for preparing a reconciliation between
interest-bearing obligations
outstanding during the year and interest expense in the financial statements is
to
a. Evaluate internal control over securities.
b. Determine the validity of prepaid interest expense.
c. Ascertain the reasonableness of imputed interest.
d. Detect unrecorded
liabilities.
10.31 The auditor should insist that a representative of the client be present during the inspection
and count of securities to
a. Lend authority to the auditor’s directives.
b. Detect forged securities.
c. Coordinate the return of all securities to proper locations.
d. Acknowledge the receipt
of securities returned.
11.26 Which of the following would most likely be audited in conjunction with
the examination
of the client’s interest-bearing notes payable?
a. Interest income.
b. Interest expense.
c. Amortization of goodwill.
d. Royalty revenue.
11.27 The main purpose of management representations is to
a. Shift responsibility for financial statements from the management to the
auditor.
b. Provide a substitute source of audit evidence for substantive procedures that
auditors
would otherwise perform.
c. Provide management a place to make assertions about the quantity and
valuation of the
physical inventory.
d. Impress on management
its ultimate responsibility for the financial statements and
disclosures.
11.28 Which of these substantive procedures or sources is not used to obtain
evidence about
contingencies?
a. Scan expense accounts
for credit entries.
b. Obtain a letter from the client’s attorney.
c. Read the minutes of the board of directors’ meetings.
d. Examine terms of sale in sales contracts.
11.29 A Type I subsequent event involves subsequent information about a
condition that existed
at the balance sheet date. Subsequent knowledge of which of the following would
cause the
company to adjust its December 31 financial statements?
a. Sale of an issue of new stock for $500,000 on January 30.
b. Settlement of a damage lawsuit for a customer’s injury sustained February 15
for
$10,000.
c. Settlement of
litigation in February for $100,000 that had been estimated at $12,000 in
the December 31 financial statements.
d. Storm damage of $1 million to the company’s buildings on March 1.
11.30 A. Griffin audited the financial statements of Dodger Magnificat
Corporation for the year
ended December 31, 2006. She completed the audit fieldwork on January 30 and
later
learned of a stock split voted by the board of directors on February 5. The
financial statements
were changed to reflect the split, and she now needs to dual date the report on
the
company’s financial statements before sending it to the company. Which of the
following is
the proper form?
a. December 31, 2006, except as to Note X, which is dated January 30, 2007.
b. January 30, 2007,
except as to note X, which is dated February 5, 2007.
c. December 31, 2006, except as to Note X, which is dated February 5, 2007.
d. February 5, 2007, except for completion of fieldwork for which the date is
January 30,
2007.
11.31 In connection with a company’s filing a registration statement under the
1933 Securities
Act, auditors have a responsibility to perform substantive procedures to find
subsequent
events until
a. The year-end balance sheet date.
b. The audit report date.
c. The date the
registration statement and audit reports are delivered to the U.S. Securities
and Exchange Commission.
d. The “effective date” of the registration statement, when the securities can
be offered for sale.
11.32 The auditing standards regarding “subsequent discovery of facts that
existed at the balance
sheet date” refers to knowledge obtained after
a. The date the audit
reports are delivered to the client.
b. The audit report date.
c. The company’s year-end balance sheet date.
d. The date interim audit work was complete.
11.33 Which of the following is not required by generally accepted auditing standards?
a. Management representations.
b. Attorney letter.
c. Management letter.
d. Engagement letter.
11.34 Which of these persons generally does not participate in writing the
management letter
(client advisory comments)?
a. Client’s outside
attorneys.
b. Client’s accounting and production managers.
c. Audit firm’s audit team on the engagement.
d. Audit firm’s consulting and tax experts.
11.35 Which of the following is ordinarily performed last in the audit
examination?
a. Securing a signed engagement letter from the client.
b. Performing tests of controls.
c. Performing a review for subsequent events.
d. Obtaining signed
management representations.
not appear in the acquisition and expenditure cycle?
a. Cash.
b. Purchases Returns.
c. Sales Returns.
d. Prepaid Insurance.
8.24 For which of the following accounts would the matching concept be the most
appropriate?
a. Cost of Goods Sold.
b. Research and Development.
c. Depreciation Expense.
d. Sales.
8.25 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 for an expenditure.
c. Failing to record a
check paying an item in Vouchers Payable.
d. All of the above would overstate net income.
8.26 A client’s purchasing system ends with the recording of a liability and
its eventual payment.
Which of the following best describes the auditor’s 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.
8.27 Which of the following is an internal control activity that could prevent
a paid disbursement
voucher from being presented for payment a second time?
a. Vouchers should be prepared by individuals who are responsible for signing
disbursement
checks.
b. Disbursement vouchers should be approved by at least two responsible
management
officials.
c. The date on a disbursement voucher should be within a few days of the date
the voucher
is presented for payment.
d. The official who signs
the check should compare the check with the voucher and should
stamp “PAID” on the voucher documents.
8.28 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 COD 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.
8.29 Which of the following is the best audit procedure for determining the existence of unrecorded
liabilities?
a. Examine confirmation requests returned by creditors whose accounts appear on
a
subsidiary trial balance of accounts payable.
b. Examine a sample of
cash disbursements in the period subsequent to year-end.
c. Examine a sample of invoices a few days prior to and subsequent to the
year-end to
ascertain whether they have been properly recorded.
d. Examine unusual relationships between monthly accounts payable and recorded
purchases.
8.30 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.
8.31 To determine whether accounts payable are complete, an auditor performs 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. Cancelled checks.
(AICPA adapted)
8.32 When verifying debits to the perpetual inventory records of a
nonmanufacturing company,
an auditor would be most interested in examining a sample of purchase
a. Approvals.
b. Requisitions.
c. Invoices.
d. Orders.
10.22 Which of the following approaches is most suitable for auditing the
finance and investment
cycle?
a. Perform extensive tests of controls and limit substantive procedures to
analytical procedures.
b. Ignore internal controls and perform extensive substantive procedures.
c. Review internal
controls, and perform extensive substantive procedures.
d. Ignore internal controls and limit substantive procedures to analytical
procedures.
10.23 Loan covenants are used for which of the following reasons?
a. To protect the lender
from the borrower substantially weakening the borrower’s financial
position.
b. To protect the borrower from the lender calling the loan early.
c. To protect the auditor from false information by the borrower.
d. To protect shareholders from management taking on too much debt.
10.24 A related-party is a person or entity that
a. Has a family tie to a management member.
b. Does business with the company.
c. Can exert significant
influence over or be influenced by the company.
d. Is a member of the company’s management.
10.25 Jones was engaged to examine the financial statements of Gamma
Corporation for the year
ended June 30. Having completed an examination of the investment securities,
which of the
following is the best method of verifying the accuracy of recorded dividend
income?
a. Tracing recorded dividend income to cash receipts records and validated
deposit slips.
b. Utilizing analytical procedures and statistical sampling.
c. Comparing recorded dividends with amounts appearing on federal information
Form
1099.
d. Comparing recorded
dividends with a standard financial reporting service’s record of
dividends.
10.26 When the client holds a large amount of negotiable securities, auditors
need to plan to guard
Against
a. Unauthorized negotiation of the securities before they are counted.
b. Unrecorded sales of securities after they are counted.
c. Substitution of
securities already counted for other securities that should be on hand but
are not.
d. Substitution of authentic securities with counterfeit securities.
10.27 In connection with the audit of an issue of long-term bonds payable, the
auditor should
a. Determine whether bondholders are persons other than owners, directors, or
officers of
the company issuing the bond.
b. Calculate the effective interest rate to see if it is substantially the same
as the rates for
similar issues.
c. Decide whether the bond issue was made without violating state or local law.
d. Ascertain that the
client has obtained the opinion of counsel on the legality of the issue.
10.28 Which of the following is the most important audit consideration when
examining the
stockholders’ equity section of a client’s balance sheet?
a. Changes in the capital stock account are verified by an independent stock
transfer agent.
b. Stock dividends and stock splits during the year under audit were approved
by the
stockholders.
c. Stock dividends are capitalized at par or stated value on the dividend
declaration date.
d. Entries in the capital
stock account can be traced to resolutions in the minutes of meetings
of the board of directors.
10.29 If the auditor discovers that the carrying amount of a client’s
investments is overstated
because of a loss in value that is other than a temporary decline in market
value, the auditor
should insist that
a. The approximate market value of the investments be shown in parentheses on
the face
of the balance sheet.
b. The investments be classified as long term for balance sheet purposes with
full disclosure
in the footnotes.
c. The loss in value is
recognized in the financial statements.
d. The equity section of the balance sheet separately shows a charge equal to
the amount of
the loss.
10.30 The primary reason for preparing a reconciliation between
interest-bearing obligations
outstanding during the year and interest expense in the financial statements is
to
a. Evaluate internal control over securities.
b. Determine the validity of prepaid interest expense.
c. Ascertain the reasonableness of imputed interest.
d. Detect unrecorded
liabilities.
10.31 The auditor should insist that a representative of the client be present during the inspection
and count of securities to
a. Lend authority to the auditor’s directives.
b. Detect forged securities.
c. Coordinate the return of all securities to proper locations.
d. Acknowledge the receipt
of securities returned.
11.26 Which of the following would most likely be audited in conjunction with
the examination
of the client’s interest-bearing notes payable?
a. Interest income.
b. Interest expense.
c. Amortization of goodwill.
d. Royalty revenue.
11.27 The main purpose of management representations is to
a. Shift responsibility for financial statements from the management to the
auditor.
b. Provide a substitute source of audit evidence for substantive procedures that
auditors
would otherwise perform.
c. Provide management a place to make assertions about the quantity and
valuation of the
physical inventory.
d. Impress on management
its ultimate responsibility for the financial statements and
disclosures.
11.28 Which of these substantive procedures or sources is not used to obtain
evidence about
contingencies?
a. Scan expense accounts
for credit entries.
b. Obtain a letter from the client’s attorney.
c. Read the minutes of the board of directors’ meetings.
d. Examine terms of sale in sales contracts.
11.29 A Type I subsequent event involves subsequent information about a
condition that existed
at the balance sheet date. Subsequent knowledge of which of the following would
cause the
company to adjust its December 31 financial statements?
a. Sale of an issue of new stock for $500,000 on January 30.
b. Settlement of a damage lawsuit for a customer’s injury sustained February 15
for
$10,000.
c. Settlement of
litigation in February for $100,000 that had been estimated at $12,000 in
the December 31 financial statements.
d. Storm damage of $1 million to the company’s buildings on March 1.
11.30 A. Griffin audited the financial statements of Dodger Magnificat
Corporation for the year
ended December 31, 2006. She completed the audit fieldwork on January 30 and
later
learned of a stock split voted by the board of directors on February 5. The
financial statements
were changed to reflect the split, and she now needs to dual date the report on
the
company’s financial statements before sending it to the company. Which of the
following is
the proper form?
a. December 31, 2006, except as to Note X, which is dated January 30, 2007.
b. January 30, 2007,
except as to note X, which is dated February 5, 2007.
c. December 31, 2006, except as to Note X, which is dated February 5, 2007.
d. February 5, 2007, except for completion of fieldwork for which the date is
January 30,
2007.
11.31 In connection with a company’s filing a registration statement under the
1933 Securities
Act, auditors have a responsibility to perform substantive procedures to find
subsequent
events until
a. The year-end balance sheet date.
b. The audit report date.
c. The date the
registration statement and audit reports are delivered to the U.S. Securities
and Exchange Commission.
d. The “effective date” of the registration statement, when the securities can
be offered for sale.
11.32 The auditing standards regarding “subsequent discovery of facts that
existed at the balance
sheet date” refers to knowledge obtained after
a. The date the audit
reports are delivered to the client.
b. The audit report date.
c. The company’s year-end balance sheet date.
d. The date interim audit work was complete.
11.33 Which of the following is not required by generally accepted auditing standards?
a. Management representations.
b. Attorney letter.
c. Management letter.
d. Engagement letter.
11.34 Which of these persons generally does not participate in writing the
management letter
(client advisory comments)?
a. Client’s outside
attorneys.
b. Client’s accounting and production managers.
c. Audit firm’s audit team on the engagement.
d. Audit firm’s consulting and tax experts.
11.35 Which of the following is ordinarily performed last in the audit
examination?
a. Securing a signed engagement letter from the client.
b. Performing tests of controls.
c. Performing a review for subsequent events.
d. Obtaining signed
management representations.
8.23 Which of the following accounts does
not appear in the acquisition and expenditure cycle?
a. Cash.
b. Purchases Returns.
c. Sales Returns.
d. Prepaid Insurance.
8.24 For which of the following accounts would the matching concept be the most
appropriate?
a. Cost of Goods Sold.
b. Research and Development.
c. Depreciation Expense.
d. Sales.
8.25 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 for an expenditure.
c. Failing to record a
check paying an item in Vouchers Payable.
d. All of the above would overstate net income.
8.26 A client’s purchasing system ends with the recording of a liability and
its eventual payment.
Which of the following best describes the auditor’s 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.
8.27 Which of the following is an internal control activity that could prevent
a paid disbursement
voucher from being presented for payment a second time?
a. Vouchers should be prepared by individuals who are responsible for signing
disbursement
checks.
b. Disbursement vouchers should be approved by at least two responsible
management
officials.
c. The date on a disbursement voucher should be within a few days of the date
the voucher
is presented for payment.
d. The official who signs
the check should compare the check with the voucher and should
stamp “PAID” on the voucher documents.
8.28 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 COD 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.
8.29 Which of the following is the best audit procedure for determining the existence of unrecorded
liabilities?
a. Examine confirmation requests returned by creditors whose accounts appear on
a
subsidiary trial balance of accounts payable.
b. Examine a sample of
cash disbursements in the period subsequent to year-end.
c. Examine a sample of invoices a few days prior to and subsequent to the
year-end to
ascertain whether they have been properly recorded.
d. Examine unusual relationships between monthly accounts payable and recorded
purchases.
8.30 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.
8.31 To determine whether accounts payable are complete, an auditor performs 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. Cancelled checks.
(AICPA adapted)
8.32 When verifying debits to the perpetual inventory records of a
nonmanufacturing company,
an auditor would be most interested in examining a sample of purchase
a. Approvals.
b. Requisitions.
c. Invoices.
d. Orders.
10.22 Which of the following approaches is most suitable for auditing the
finance and investment
cycle?
a. Perform extensive tests of controls and limit substantive procedures to
analytical procedures.
b. Ignore internal controls and perform extensive substantive procedures.
c. Review internal
controls, and perform extensive substantive procedures.
d. Ignore internal controls and limit substantive procedures to analytical
procedures.
10.23 Loan covenants are used for which of the following reasons?
a. To protect the lender
from the borrower substantially weakening the borrower’s financial
position.
b. To protect the borrower from the lender calling the loan early.
c. To protect the auditor from false information by the borrower.
d. To protect shareholders from management taking on too much debt.
10.24 A related-party is a person or entity that
a. Has a family tie to a management member.
b. Does business with the company.
c. Can exert significant
influence over or be influenced by the company.
d. Is a member of the company’s management.
10.25 Jones was engaged to examine the financial statements of Gamma
Corporation for the year
ended June 30. Having completed an examination of the investment securities,
which of the
following is the best method of verifying the accuracy of recorded dividend
income?
a. Tracing recorded dividend income to cash receipts records and validated
deposit slips.
b. Utilizing analytical procedures and statistical sampling.
c. Comparing recorded dividends with amounts appearing on federal information
Form
1099.
d. Comparing recorded
dividends with a standard financial reporting service’s record of
dividends.
10.26 When the client holds a large amount of negotiable securities, auditors
need to plan to guard
Against
a. Unauthorized negotiation of the securities before they are counted.
b. Unrecorded sales of securities after they are counted.
c. Substitution of
securities already counted for other securities that should be on hand but
are not.
d. Substitution of authentic securities with counterfeit securities.
10.27 In connection with the audit of an issue of long-term bonds payable, the
auditor should
a. Determine whether bondholders are persons other than owners, directors, or
officers of
the company issuing the bond.
b. Calculate the effective interest rate to see if it is substantially the same
as the rates for
similar issues.
c. Decide whether the bond issue was made without violating state or local law.
d. Ascertain that the
client has obtained the opinion of counsel on the legality of the issue.
10.28 Which of the following is the most important audit consideration when
examining the
stockholders’ equity section of a client’s balance sheet?
a. Changes in the capital stock account are verified by an independent stock
transfer agent.
b. Stock dividends and stock splits during the year under audit were approved
by the
stockholders.
c. Stock dividends are capitalized at par or stated value on the dividend
declaration date.
d. Entries in the capital
stock account can be traced to resolutions in the minutes of meetings
of the board of directors.
10.29 If the auditor discovers that the carrying amount of a client’s
investments is overstated
because of a loss in value that is other than a temporary decline in market
value, the auditor
should insist that
a. The approximate market value of the investments be shown in parentheses on
the face
of the balance sheet.
b. The investments be classified as long term for balance sheet purposes with
full disclosure
in the footnotes.
c. The loss in value is
recognized in the financial statements.
d. The equity section of the balance sheet separately shows a charge equal to
the amount of
the loss.
10.30 The primary reason for preparing a reconciliation between
interest-bearing obligations
outstanding during the year and interest expense in the financial statements is
to
a. Evaluate internal control over securities.
b. Determine the validity of prepaid interest expense.
c. Ascertain the reasonableness of imputed interest.
d. Detect unrecorded
liabilities.
10.31 The auditor should insist that a representative of the client be present during the inspection
and count of securities to
a. Lend authority to the auditor’s directives.
b. Detect forged securities.
c. Coordinate the return of all securities to proper locations.
d. Acknowledge the receipt
of securities returned.
11.26 Which of the following would most likely be audited in conjunction with
the examination
of the client’s interest-bearing notes payable?
a. Interest income.
b. Interest expense.
c. Amortization of goodwill.
d. Royalty revenue.
11.27 The main purpose of management representations is to
a. Shift responsibility for financial statements from the management to the
auditor.
b. Provide a substitute source of audit evidence for substantive procedures that
auditors
would otherwise perform.
c. Provide management a place to make assertions about the quantity and
valuation of the
physical inventory.
d. Impress on management
its ultimate responsibility for the financial statements and
disclosures.
11.28 Which of these substantive procedures or sources is not used to obtain
evidence about
contingencies?
a. Scan expense accounts
for credit entries.
b. Obtain a letter from the client’s attorney.
c. Read the minutes of the board of directors’ meetings.
d. Examine terms of sale in sales contracts.
11.29 A Type I subsequent event involves subsequent information about a
condition that existed
at the balance sheet date. Subsequent knowledge of which of the following would
cause the
company to adjust its December 31 financial statements?
a. Sale of an issue of new stock for $500,000 on January 30.
b. Settlement of a damage lawsuit for a customer’s injury sustained February 15
for
$10,000.
c. Settlement of
litigation in February for $100,000 that had been estimated at $12,000 in
the December 31 financial statements.
d. Storm damage of $1 million to the company’s buildings on March 1.
11.30 A. Griffin audited the financial statements of Dodger Magnificat
Corporation for the year
ended December 31, 2006. She completed the audit fieldwork on January 30 and
later
learned of a stock split voted by the board of directors on February 5. The
financial statements
were changed to reflect the split, and she now needs to dual date the report on
the
company’s financial statements before sending it to the company. Which of the
following is
the proper form?
a. December 31, 2006, except as to Note X, which is dated January 30, 2007.
b. January 30, 2007,
except as to note X, which is dated February 5, 2007.
c. December 31, 2006, except as to Note X, which is dated February 5, 2007.
d. February 5, 2007, except for completion of fieldwork for which the date is
January 30,
2007.
11.31 In connection with a company’s filing a registration statement under the
1933 Securities
Act, auditors have a responsibility to perform substantive procedures to find
subsequent
events until
a. The year-end balance sheet date.
b. The audit report date.
c. The date the
registration statement and audit reports are delivered to the U.S. Securities
and Exchange Commission.
d. The “effective date” of the registration statement, when the securities can
be offered for sale.
11.32 The auditing standards regarding “subsequent discovery of facts that
existed at the balance
sheet date” refers to knowledge obtained after
a. The date the audit
reports are delivered to the client.
b. The audit report date.
c. The company’s year-end balance sheet date.
d. The date interim audit work was complete.
11.33 Which of the following is not required by generally accepted auditing standards?
a. Management representations.
b. Attorney letter.
c. Management letter.
d. Engagement letter.
11.34 Which of these persons generally does not participate in writing the
management letter
(client advisory comments)?
a. Client’s outside
attorneys.
b. Client’s accounting and production managers.
c. Audit firm’s audit team on the engagement.
d. Audit firm’s consulting and tax experts.
11.35 Which of the following is ordinarily performed last in the audit
examination?
a. Securing a signed engagement letter from the client.
b. Performing tests of controls.
c. Performing a review for subsequent events.
d. Obtaining signed
management representations.
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