Angeles University Foundation
Angeles, Pampanga
AUDITING PROBLEM
Substantive Test Questions-Cash
O2021
CPA Review
M.C. Cerda, CPA, MBA
CASH
1. Who is responsible, at all times, for the amount of the petty cash fund?
a. General cashier
c. President of the company
b. Petty cash custodian
d. Chairman of the Board of Directors
2. What is the effect of not replenishing the petty cash fund at year-end and not
making the appropriate adjusting entry?
a. A detailed audit is necessary.
b. The petty cash custodian should turn over the petty cash to the general
cashier.
c. Cash will be overstated and expenses understated.
d. Expenses will be overstated and cash will be understated.
3. Normally, the audit objective of valuation is of minimum concern during the audit
of cash. However, the auditor’s concern about the valuation objective would most
likely increase when
a. Both currency and negotiable securities are on hand
b. The client uses a demand deposit account.
c. The proof of cash cannot be reconciled.
d. The client has foreign currency accounts.
4. The primary purpose of sending a standard confirmation request to financial
institutions with which the client has done business during the year is to.
a. Detect kiting activities that may otherwise not be discovered.
b. Corroborate information regarding deposit and loan balances.
c. Provide the data necessary to prepare a proof of cash.
d. Request information about contingent liabilities and secured transactions.
5. The auditor should ordinarily mail confirmation requests to all banks with which
the client has conducted any business during the year, regardless of the year-end
balance, since
a. The confirmation form also seeks information about indebtedness to the bank.
b. This procedure will detect kiting activities which otherwise not be detected.
c. The mailing of confirmation forms to all such banks is required by GAAS.
d. This procedure relieves the auditor of any responsibility with respect to nondetection of forged checks.
6. The standard bank confirmation form requests all of the following except
a. Maturity date of a direct liability.
b. The principal amount paid for a direct liability.
c. Description of collateral for a direct liability.
d. The interest rate of a direct liability.
7. As one of the year-end audit procedures, the auditor instructed the client’s
personnel to prepare a standard bank confirmation request for a bank account
that had been closed during the year. After the client’s treasurer had signed the
request, it was mailed by the assistant treasurer. What is the major flaw in this
audit procedure?
a. The confirmation request was signed by the treasurer.
b. Sending the request was meaningless because the account was closed before
year-end.
c. The request was mailed by the assistant treasurer.
d. The CPA did not sign the confirmation request before it was mailed.
8. An auditor who is engaged to examine the financial statements of a business
enterprise will request cutoff bank statement primarily in order to
a. Verify the cash balance reported on the bank confirmation inquiry form.
b. Verify reconciling items on the client’s bank reconciliation.
c. Detect lapping.
d. Detect kiting.
9. On receiving the bank cutoff statement, the auditor should trace
a. Deposits in transit on the year-end bank reconciliation to deposits in the cash
receipts journal.
b. Checks dated prior to year-end to the outstanding checks listed on the yearend bank reconciliation.
c. Deposits listed on the cutoff statement to deposits in the cash receipts journal.
d. Checks dated subsequent to year-end to the outstanding checks listed on the
year-end bank reconciliation.
10. An unrecorded check is issued during the last week of the year would most likely
be discovered by the auditor when
a. Check register for the last month is reviewed.
b. Cutoff bank statement is reconciled.
c. Bank confirmation is reviewed.
d. Search for unrecorded liabilities is performed.
11. To gather evidence regarding the balance per bank in a bank reconciliation, an
auditor would examine all of the following except
a. Cutoff bank statement
c. Bank confirmation
b. Year-end bank statement
d. General ledger
12. An auditor compares information on cancelled checks with information contained
in the cash disbursement journal. The objective of this test is to determine that
a. Recorded cash disbursement transactions are properly authorized.
b. Proper cash purchase discounts have been recorded.
c. Cash disbursements are for goods and services actually received.
d. No discrepancies exist between the data on the checks and the data in the
journal.
13. An auditor should trace bank transfers for the last part of the audit period and for
the first part of the subsequent period to detect whether
a. The cash receipts journal was held open for a few days after the year-end.
b. The last checks recorded before the year-end were actually mailed by the
year-end.
c. Cash balances were overstated because of kiting.
d. Any unusual payments to or receipts from related parties occurred.
14. Which of the following is one of the better auditing techniques that might be used
by an auditor to detect kiting?
a. Review the composition of authenticated deposit slips.
b. Review subsequent bank statements received directly from the banks.
c. Prepare a schedule of bank transfers.
d. Prepare year-end bank reconciliation.
15. Kiting is a technique that might be used to conceal cash shortage. The auditor
can best detect kiting by performing which of the following procedures?
a. Examining the details of deposits made to all bank accounts several days
subsequent to the balance sheet date.
b. Comparing cash receipts records with details on authenticated bank deposit
slips for dates subsequent to the balance sheet date.
c. Examining paid checks returned with bank statements subsequent to the
balance sheet date.
d. Comparing year-end balances per the standard bank confirmation forms with
the like balances on the client’s bank reconciliations.
16. A cash shortage may be concealed by transporting funds from one location to
another or by converting negotiable assets to cash. Because of this, which of the
following is vital?
a. Simultaneous confirmations
c. Simultaneous verifications
b. Simultaneous bank reconciliations
d. Simultaneous surprise cash count
17. When counting cash on hand, the auditor must exercise control over all cash and
other negotiable assets to prevent
a. Theft
c. Substitution
b. Irregular endorsement
d. Deposits-in-transit
18. An auditor would consider a cashier’s job description to contain compatible duties
if the cashier receives remittance from the mailroom and also prepares the:
a. Daily deposit slip
c. Prelist of individual checks.
b. Monthly bank reconciliation.
D. Remittance advices.
19. Postdated checks received by mail from customers should be:
a. Deposited immediately by the cashier.
b. Deposited the day after together with cash receipts.
c. Returned to customer.
d. Stamped with restrictive endorsement.
20. An essential phase of the audit of the cash balance at the end of the year is the
auditor’s review of cut-off bank statement. This specific procedure is not useful in
determining if:
a. Disbursements per bank statement can be reconciled with total checks written.
b. Kiting has occurred.
c. Lapping has occurred.
d. The cash receipts journal was held open.
RECEIVABLES
1. In the audit of which of the following general ledger accounts will tests of controls be
particularly appropriate?
a. Equipment
b. Bonds payable
c. Bank charges
d. Sales
2. An auditor most likely would review an entity’s periodic accounting for the numerical
sequence of shipping documents and invoices to support management’s financial
statement assertion of
a. Existence or occurrence
c. Valuation
b. Rights and obligations
d. Completeness
3. Which of the following might be detected by an auditor’s review of the client’s sales
cut-off?
a. Excessive goods returned for credit
b. Unrecorded sales discounts
c. Lapping of year-end accounts receivable
d. Inflated sales for the year
4. Cut-off tests designed to detect credit sales made before the end of the year that
have been recorded in the subsequent year provide assurance about management’s
assertion of
a. Presentation
b. Completeness
c. Rights
d. Existence
5. The auditor finds situation in which one person has the ability to collect receivables,
make deposits, issue credit memos and record receipt of payments. The auditor
suspects the individual may be stealing from cash receipts. Which of the following
audit procedures would be most effective in discovering fraud in this scenario?
a. Send positive confirmations to a random selection of customers.
b. Send negative confirmations to all outstanding accounts receivable customers.
c. Perform a detailed review of debits to customer discounts, sales returns, or other
debit accounts, excluding cash posted to the cash receipts journal.
d. Take a sample of bank deposits and trace the detail in each bank deposit back to
the entry in the cash receipts journal.
6. Which of the following most likely would give the most assurance concerning the
valuation assertion of accounts receivable?
a. Vouching amounts in the subsidiary ledger to details on shipping documents.
b. Comparing receivable turnover ratios with industry statistics for reasonableness.
c. Inquiring about receivables pledged under loan agreements.
d. Assessing the allowance for uncollectible accounts for reasonableness.
7. In confirming accounts receivable, an auditor decided to confirm customers’ account
balances rather than individual invoices. Which of the following most likely would be
included with the client’s confirmation letter?
a. An auditor prepared letter explaining that a non-response may cause an inference
that the account balance is correct.
b. A client prepared letter reminding the customer that a non-response will cause a
second request to be sent.
c. An auditor prepared letter requesting the customer to supply missing and incorrect
information directly to the auditor.
d. A client prepared statement of account showing the details of the customer’s
account balance.
8. Which of the following statements would an auditor most likely to add to the negative
form of confirmations of accounts receivable to encourage timely consideration by the
recipient?
a. “This is not a request for payment; remittances should not be sent to our auditors;
in the enclosed envelope”
b. “Report any difference on the enclosed statement directly to our auditors; no reply
is necessary if this amount agrees with your records.”
c. “If you do not report any difference within 15 days, it will be assumed that this
statement is correct.”
d. “The following invoices have been selected for confirmation and represent
amounts that are overdue.”
9. Auditing standards define a confirmation as “the process of obtaining and evaluating
a direct communication from a third party in response to a request for information
about a particular item affecting financial statement assertions” Two assertions for
which confirmation of accounts receivable balances provides primary evidence are
a. Completeness and valuation
b. Rights and obligations and existence
c. Valuation and rights and obligations
d. Existence and completeness
10. Auditor may use positive or negative forms of confirmations requests for accounts
receivable. An auditor most likely will use
a. The positive form to confirm all balances regardless of the size.
b. A combination of the two forms, with the positive form used for large balances and
the negative for the small balances
c. A combination of the two forms, with the positive form used for trade receivables
and the negative form for other receivables.
d. The positive form when the combined assessed level of inherent and control risk
for assertions related to receivables is acceptably low, and the negative form
when it is unacceptably high.
11. The negative request form of accounts receivable confirmation may be used when
the
Combined Assessed Level Of
Number of Small
Consideration by the
Inherent and Control Risk Is
Balances is
Recipient is
a.
Low
Many
Likely
b.
Low
Few
Unlikely
c.
High
Few
Likely
d.
High
Many
Likely
12. In the confirmation of accounts receivable, the auditor would most likely
a. Request confirmation of a sample of the inactive accounts
b. Seek to obtain positive confirmations for at least 50% of the total dollar amount of
the receivables.
c. Require confirmation of all receivables from agencies of the federal government.
d. Require that confirmation requests be sent within 1 month of the fiscal year-end.
13. Negative confirmations of accounts receivable is less effective than positive
confirmation of accounts receivable because
a. A majority of recipients usually lack the willingness to respond objectively.
b. Some recipients may report incorrect balances that require extensive follow-up.
c. The auditor cannot infer that all non-respondents have verified their account
information.
d. Negative confirmations do not produce evidence that is statistically quantifiable.
14. To reduce the risks associated with accepting fax responses to request for
confirmation of accounts receivable, an auditor most likely would
a. Examine the shipping documents that provide evidence for the existence
assertion.
b. Verify the sources and contents of the faxes in telephone calls to the senders.
c. Consider faxes to the non-responses and evaluate them as unadjusted
differences.
d. Inspect the faxes for forgeries or alterations and consider them to be acceptable if
none are noted.
15. An auditor confirms a representative number of open accounts receivable as of
December 31 and investigates respondents’ exceptions and comments. By this
procedure, the auditor is most likely to learn of which of the following?
a. One of the cashiers has been covering a personal embezzlement by lapping.
b. One of the sales clerks has not been preparing charge slips for credit sales to
family and friends.
c. One of the computer processing control has been removing all sales invoices
applicable to this account from the data file.
d. The credit manager has misappropriated remittances from customers whose
accounts have been written off.
16. An auditor who has confirmed accounts receivable may discover that the sales
journal was held open past year-end if
a. Positive confirmations sent to debtors are not returned
b. Negative confirmations sent to debtors are not returned
c. Most of the returned negative confirmations indicate that the debtor owes a larger
balance that the amount being confirmed.
d. Most of the returned positive confirmations indicate that the debtor owes a smaller
balance than the amount being confirmed.
17. During the process of confirming accounts receivable as of December 31, 2013 a
positive confirmation was returned indicating the “balance owed as of December 31,
2013 was paid on January 9, 2014”. The auditor will most likely
a. Determine whether there were any changes in the account between January 1
and January 9, 2014.
b. Determine whether a customary trade discount was taken by the customer.
c. Reconfirm the zero balances as of January 10, 2014.
d. Verify that the amount was received.
18. Confirmation of accounts receivable is a generally accepted auditing procedure. The
presumption that an auditor will confirm accounts receivable is not overcome if
a. Based on prior’s years’ audit experience response rates will be inadequate.
b. Based on experience with similar engagements, responses are expected to be
unreliable.
c. The accounts receivable are immaterial.
d. The combined assessed level of inherent and control risk is high.
19. A company has computerized sales and cash receipts journals. The computer
programs for these journals have been properly debugged. The auditor discovered
that the total of the accounts receivables subsidiary accounts differs materially from
the accounts receivable control account. This discrepancy could indicate
a. Credit memoranda being improperly recorded.
b. Lapping of receivables
c. Receivables not being properly aged.
d. Statements being intercepted prior to mailing.
20. Which of the following procedures would an auditor most likely perform for yearend accounts receivable confirmations when the auditor did not receive replies to
second requests?
a. Review the cash receipts journal for the month prior to year-end.
b. Intensify the study of internal control concerning the revenue cycle.
c. Increase the assessed level of detection risk for the existence assertion
d. Inspect the shipping records documenting the merchandise sold to the
debtors.
21. Which of the following is the greatest drawback of using subsequent collections
evidenced only by a deposit slip as an alternative procedure when responses to
positive accounts receivable confirmations are not received?
a. Checking of subsequent collections can never be used as an alternative
auditing procedure.
b. By examining a deposit slip only, the auditor does not know whether the
payment is for the receivable at the balance sheet date or a subsequent
transaction.
c. A deposit slip is not received directly by the auditor.
d. A customer may not have made a payment on a timely basis.
22. The CPA learns that collections of accounts receivable during the last 10 days of
December were not recorded. The effect will be to
a. Leave both working capital and the current ratio unchanged at December 31.
b. Overstate both working capital and the current ratio at December 31.
c. Overstate working capital with no effect on the current ratio at December 31.
d. Overstate the current ratio with no effect on working capital at December 31.
23. All of the following are examples of substantive tests to verify valuation of net
accounts receivable except the
a. Re-computation of the allowance for bad debts.
b. Inspection of accounts for current versus non-current status in the statement of
financial position.
c. Inspection of the aging schedule and credit records of past due accounts.
d. Comparison of the allowance for bad debts with past records.
24. Once a CPA has determined that the accounts receivable have increased
because of slow collections in a tight money environment, the CPA is likely to
a. Increase the balance in the allowance for bad debts account
b. Review the going concern ramifications.
c. Review the credit and collection policy.
d. Expand tests of collectibility.
25. An auditor reconciles the total of the accounts receivables subsidiary ledger to the
general ledger control account as of October 31. By this procedure, the auditor is
most likely to learn of which of the following?
a. An October invoice was improperly computed.
b. An October check from a customer was posted in error to the account of
another customer with a similar name.
c. An opening balance is a subsidiary ledger account was improperly carried
forward from the previous accounting period.
d. An account balance is past due and should be written off.
INVENTORIES
1. Which of the following audit procedures probably provides the most reliable
evidence concerning the entity’s assertion of rights and obligations related to
inventories?
a. Trace test counts noted during the entity’s physical count to the entity’s
summarization of quantities.
b. Inspect agreements to determine whether any inventory is pledged as
collateral or subject to any liens.
c. Select the last few shipping advices used before the physical count and
determine whether shipments were recorded as sales.
d. Inspect the open purchase order file for significant commitments that should
be considered for disclosure.
2. An auditor most likely to inspect loan agreements under which an entity’s
inventories are pledged to support management’s financial statement assertion of
a. Existence or occurrence.
c. Presentation and disclosure.
b. Completeness.
d. Valuation or allocation.
3. An auditor selected items 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
a. Existence or occurrence.
c. Rights and obligations.
b. Completeness.
d. Valuation.
4. Periodic cycle counts of selected inventory items are made at various times during
the year rather than a single inventory count at year-end. Which of the following
is necessary if the auditor plans to observe inventories at interim dates?
a. Complete recounts by independent teams are performed.
b. Perpetual inventory records are maintained.
c. Unit cost records are integrated with production accounting records.
d. Inventory balances are rarely at low levels.
5. A client maintains perpetual inventory records in both quantities and pesos. If the
assessed level of control risk is high an auditor will probably
a. Apply gross profit tests to ascertain the reasonableness of the physical counts.
b. Increase the extent of tests of controls relevant to the inventory cycle.
c. Request the client to schedule the physical inventory count at the end of the
year.
d. Insist that the client perform physical counts of inventory items several times
during the year.
6. After accounting for a sequential of inventory tags, an auditor traces a sample of
tags to the physical inventory listing to obtain evidence that all items
a. Included in the listing have been counted.
b. Represented by inventory tags are included in the listing.
c. Included in the listing are represented by inventory tags.
d. Represented by inventory tags are bona fide.
7. If the perpetual inventory records show lower quantities of inventory that the
physical count an explanation of the difference might be unrecorded
a. Sales.
c. Purchases.
b. Purchase returns.
d. Purchase discounts.
8. 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. Inventory item has been counted but the tags placed on the items had not
been taken off the items and added to the inventory accumulation sheets.
b. Credit memos for several items returned by customers had not been recorded.
c. No journal entry had been made on the retailer’s books for several items
returned to its suppliers.
d. 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.
9. An auditor is most likely to learn of slow-moving inventory through
a. Inquiry of sales personnel
b. Inquiry of warehouse personnel
c. Physical observation of inventory
d. Review of perpetual inventory records.
10. Purchase cut-off procedures should be designed to test whether all inventory
a. Purchased and received before year-end was paid for.
b. Ordered before year-end was received.
c. Purchased and received before year-end was recorded.
d. Owned by the company is in the possession of the company at year-end.
11. The audit of year-end inventories should include steps to verify that the client’s
purchases and sales cutoffs were adequate. This audit steps should be designed
to detect whether merchandise included in the physical count at year-end was not
recorded as a
a. Sale in the subsequent period
b. Purchase in the current period
c. Sale in the current period
d. Purchase in the subsequent period
12. An auditor’s observation of physical inventories at the main plant at year-end
provides direct evidence to support which of the following objectives?
a. Accuracy of the priced-out inventory.
b. Evaluation of lower of cost or market test.
c. Identification of obsolete or damaged merchandise to evaluate allowance
(reserve) for obsolescence.
d. Determination of goods on consignment at another location.
13. In a manufacturing company, which one of the following audit procedures would
give the least assurance of the valuation of inventory at the audit date?
a. Examining paid vendor’s invoices.
b. Obtaining confirmation of inventories pledged under loan agreements.
c. Reviewing direct labor rates.
d. testing the computation of standard overhead rates.
.
14. When auditing merchandise inventory at year-end, the auditor performs a
purchase cut-off test to obtain evidence that:
a. All goods owned at year-end are included in the inventory balance.
b. All gods purchased before year-end are received before the physical inventory
count.
c. No gods held on consignment for customers are included in the inventory
balance.
d. No goods observed during the physical count are pledged or sold.
INVESTMENTS
1. A client has a large and active investment portfolio that is kept in a bank safedeposit box. If the auditor is unable to count the securities at the balance sheet
date, the auditor most likely will
a. Request the bank to confirm to the auditor the contents of the safe deposit box
at the balance sheet date.
b. Examine supporting evidence for transactions occurring during the year.
c. Count the securities at a subsequent date and confirm with bank whether
securities were added or removed since the balance sheet date.
d. Request the client to have a bank seal the safe-deposit box until the auditor
can count the securities at a subsequent date.
2. When an auditor is unable to inspect and count a client’s investment securities
until after the balance sheet date, the bank where the securities are held in a safe
deposit box should be asked to
a. Verify any differences between the contents of the box and the balances in the
client’s subsidiary ledger.
b. Provide a list of securities added and removed from the box between the
balance sheet date and the security count date.
c. Count the securities in the box so that the auditor will have an independent
direct verification.
d. Confirm that there has been no access to the box between the balance- sheet
date and the security-count date.
3. Which of the following is not one of the auditor’s primary objectives in an audit of
trading securities?
a. To determine whether securities are authentic.
b. To determine whether securities are the property of the client.
c. To determine whether securities actually exist.
d. To determine whether securities are properly classified on the balance sheet
date.
4. Apol Boba, CPA, observes the count of securities on December 31. She records
the serial numbers of the securities and reconciles them and the number of
shares with company records. Which fraud should be detected by this procedure?
a. An investee company declared and paid a stock dividend on December 15.
The stock certificate for the additional shares was received directly by the
treasurer who made no record of the receipt and embezzled the shares.
b. The treasurer embezzled and sold securities on April 4. She speculated
successfully with the proceeds and replaced the securities on December 29.
c. The treasurer borrowed securities on July 15 to use as collateral for a personal
loan. He repaid the loan and returned the securities on December 2.
d. The treasurer embezzled interest receipts from bonds by having the payments
mailed directly to him.
5. Which of the following is the least effective audit procedure regarding the
existence assertion for the securities held by the auditee?
a. Examination of paid checks issued in payment of securities purchased.
b. Vouching all changes during the year to supporting documents.
c. Simultaneous count of liquid assets.
d. Confirmation from the custodian.
6. An auditee is holding equity securities as collateral for a debt. The auditor should
a. Determine from data published in the financial press that the auditee has
recorded dividend income from the collateral.
b. Ascertain the value of the securities.
c. Ascertain that the amount recorded for the collateral in the investment account
is equal to its fair value at the balance sheet date.
d. Verify that the client has taken title to the securities.
7. Which of the following is the most effective audit procedure for verification of
dividends earned on investments in equity securities?
a. Tracing deposited dividend checks to the cash receipts book.
b. Reconciling amount received with published dividend records.
c. Comparing the amounts received with preceding year dividends received.
d. Recomputing selected extensions and footings of dividend schedules and
comparing totals to the general ledger.
8. In confirming with an outside agent, such as a financial institution, that the agent
is holding investment securities in the client’s name an auditor most likely gathers
evidence in support of management’s financial statement assertions of existence
and
a. Valuation
c. Completeness
b. Rights and obligations
d. Presentation and disclosure
9. In establishing the existence and ownership of an investment held by a
corporation in the form of publicity traded stock and auditor should inspect the
securities or
a. Obtain written representations from management confirming that the securities
are properly classified as trading securities.
b. Inspect the audited financial statements of the investee company.
c. Confirm the number of shares held by an independent custodian.
d. Determine that the investment is carried at the lower of cost or market.
10. An auditor most likely to verify the interest earned on bond investment by
a. Verifying the receipt and deposit of interest checks.
b. Confirming the bond interest rate with the issuer of the bonds.
c. Recomputing the interest earned on the basis of face amount, interest rate,
and period held.
d. Testing controls relevant to cash receipts.
11. Which of the following provides the best form of evidence pertaining to the annual
valuation of an investment in which the independent auditor’s client owns a 30%
voting interest?
a. Market quotations of the investee company’s stock.
b. Current fair value of the investee company’s assets.
c. Historical cost of the investee company’s assets.
d. Audited financial statements of the investee company.
12. In verifying the amount of goodwill recorded by a client, the most convincing
evidence an auditor can obtain is by comparing the recorded value of assets
acquired with the
a. Assessed value as evidenced by tax bills.
b. Seller’s book value as evidenced by financial statements.
c. Insured value as evidenced by insurance policies.
d. Appraised value as evidenced by independent appraisals.
13. The auditor can best verify a client’s bond sinking-fund transactions and year-end
balance by
a. Confirmation with individual holders of retired bonds.
b. Confirmation with the bond trustee.
c. Recomputation of interest expense, interest payable, and amortization of bond
discount or premium.
d. Examination and count of the bonds retired during the year.
14. An auditor who physically examines securities should insist that a client
representative be present in order to
a. Detect fraudulent securities.
b. Lend authority to the auditor’s directives.
c. Coordinate the return of securities to the proper locations.
d. Acknowledge the receipt of securities returned.
15. In testing long-term investments, an auditor ordinarily would use analytical
procedures to ascertain the reasonableness of the
a. Classification between current and noncurrent portfolios.
b. Valuation of marketable equity securities.
c. Existence of unrealized gains or losses in the portfolio.
d. Completeness of recorded investment income.
16. In performing tests of the carrying value of trading securities, the auditor would
usually:
a. Ask management to estimate the market value of the securities.
b. Refer to the quoted market prices of the securities.
c. Value the securities at cost regardless of their market prices.
d. Count the securities.
17. Which of the following statements is the least accepted reason/purpose for
acquiring long-term investments:
a. To create specific funds.
b. To yield a relatively permanent other income.
c. To generate cash for operating purposes.
d. To establish business relationships.
18. Statement 1 - In testing long-term investments, an auditor would use analytical
procedures to ascertain the reasonableness of the classification between current
and noncurrent portfolios.
Statement 2 - In testing long-term investments, an auditor would use analytical
procedures to ascertain the reasonableness of the valuation of marketable equity
securities.
Statement 3 - In testing long-term investments, an auditor would use analytical
procedures to ascertain the reasonableness of the existence of unrealized gains
or losses in the portfolio.
First statement
Second statement
Third statement
A.
False
True
True
B.
True
True
True
C.
False
False
True
D.
False
False
False
PPEs
1.
Property, plant and equipment is typically judged to be one of the accounts least
susceptible to fraud because
a. The amounts recorded on the balance sheet for most companies are
immaterial.
b. The inherent risk is usually low.
c. The depreciated values are always smaller than cost.
d. Internal control is inherently effective regarding this account.
2.
Which is the best audit procedure to obtain evidence to support the legal
ownership of real property?
a. Examination of corporate minutes and board resolutions with regard to
approvals to acquire real property.
b. Examination of closing documents, deeds and ownership documents
registered and on file at the register of deeds.
c. Discussion with corporate legal counsel concerning the acquisition of a
specific piece of property.
d. Confirmation with the title company that handled the escrow account and
disbursement of proceeds for the closing of the property.
3.
When few property and equipment transactions occur during the year the
continuing auditor usually obtains and understanding of internal control and
performs
a. Tests of controls
b. Analytical procedures to verify current year additions to property and
equipment
c. A thorough examination of the balances at the beginning of the year.
d. Extensive tests of current year property and equipment transactions.
4.
Which of the following combinations of procedures is an auditor most likely to
perform to obtain evidence about fixed asset addition?
a. Inspecting documents and physically examining assets.
b. Recomputing
calculations
and
obtaining
written
management
representations.
c. Observing operating activities and comparing balances to prior period
balances.
d. Confirming ownership and corroborating transactions through inquiries of
client personnel.
5.
If an auditor tours a production facility, which of the misstatements or
questionable practices is most likely to be detected by the audit procedures
specified?
a. Depreciation expense on fully depreciated machinery has been recognized.
b. Overhead has been over-applied.
c. Necessary facility maintenance has not been performed.
d. Insurance coverage on the facility has lapsed.
6.
In testing for unrecorded retirements of equipment, an auditor is most likely to
a. Select items of equipment from the accounting records and then locate them
during the plant tour.
b. Compare depreciation journal entries with similar prior-year entries in search
of fully depreciated equipment.
c. Inspect items of equipment observed during the plant tour and then trace
them to the equipment subsidiary ledger.
d. Scan the general journal for unusual equipment additions and excessive
debits to repairs and maintenance expense.
7.
Determining that proper amounts of depreciation are expensed provides
assurance about management’s assertions of valuation and
a. Presentation and disclosure.
c. Rights and obligations.
b. Completeness.
d. Existence or occurrence.
8.
The auditor may conclude that depreciation charges are insufficient by noting
a. Insured values greatly in excess of book values.
b. Large numbers of fully depreciated assets.
c. Continuous trade-in of relatively new assets.
d. Excessive recurring losses on assets retired.
9.
An auditor analyzes repairs and maintenance accounts primarily to obtain
evidence in support of the audit assertion that all
a. Non-capitalizable expenditures for repairs and maintenance have been
recorded in the proper period.
b. Expenditures for property and equipment have been recorded in the proper
period.
c. Non-capitalizable expenditures for repairs and maintenance have been
properly charged to expense.
d. Expenditures for property and equipment have not been charged expense.
10. In violation of company policy, Coatsen Company erroneously capitalized the
cost of painting its warehouse. An auditor would most likely detect this when
a. Discussing capitalization policies with Coatsen's controller.
b. Examining maintenance expense accounts.
c. Observing that the warehouse had been painted.
d. Examining construction work orders that support items capitalized during the
year.
11. Additions to equipment are sometimes understated. Which of the following
accounts would be reviewed by the auditor to gain reasonable assurance that
additions are not understated?
a. Accounts payable
c. Depreciation expense
b. Gain on disposal of equipment
d. Repair and maintenance expense
12. When an auditor interviews the plant manager, he will most likely seek from the
plant manager information regarding
a. Appropriateness of physical inventory observation procedures.
b. Existence of obsolete machinery.
c. Deferral of procurement of certain necessary insurance coverage.
d. Adequacy of the provision for uncollectible accounts.
13. The auditor is least likely to learn of retirements of equipment through which of
the following?
a. Review of the purchase return and allowance account.
b. Review of depreciation.
c. Analysis of the debits to the accumulated depreciation account.
d. Review of insurance policy riders.
14. Which of the following is not likely a motive for management to manipulate the
timing and amount of impaired asset writedowns?
a. Steady increases in earnings per share over the past 5 years.
b. Income smoothing.
c. A "big bath."
d. An abnormally unprofitable year.
INTANGIBLES
1. Statement 1 - There is goodwill involved in the acquisition of a business if the
purchase price paid is in excess of the proprietorship of the business acquired.
Statement 2 - Goodwill might be viewed as the enjoyment of a profit by a
company in excess of the normal or usual return for the industry as a whole but
such goodwill is not recorded if it has not been purchased or paid for.
Statement 1 & 2, respectively, are:
a. False; True.
c. True; False.
b. False; False.
d. True; True.
2. In auditing intangible assets, an auditor most likely would review or re-compute
amortization and determine whether the amortization period is reasonable in
support of management’s financial statement assertion of
a. Valuation.
c. Completeness.
b. Existence or occurrence.
d. Rights and obligations.
3. In auditing intangible assets, an auditor most likely would review or recomputed
amortization and determine whether the amortization period is reasonable in
support of management’s financial statement assertion of:
a. Completeness.
c. Rights and obligations.
b. Existence or occurrence.
d. Valuation and allocation.
4. The most effective means for the auditor to determine whether a recorded
intangible asset possesses the characteristics of an asset is to:
a. Analyze research and development expenditures to determine that only
those expenditures possessing future economic benefits have been
capitalized.
b. Evaluate the future revenue producing capacity of the intangible asset.
c. Inquire as tot the status of patent application.
d. Vouch the purchase by the reference to underlying documentation.
5. An auditor has set an audit objective of determining whether research and
development projects were properly authorized. Which of the following audit
techniques will best meet this objective?
a. Analytical review.
c. Inspection of documents.
b. Inquiry.
d. Observation.