Week 5 questions
-Revenues are normally considered to have been earned when:
The company has substantially accomplished what it must to be entitled to the benefits.
-Which of the following accounts is not normally part of the revenue and
collection cycle?
Purchases Returns and Allowances.
-An audit team is auditing sales transactions. One step is to vouch a
sample of debit entries from the accounts receivable subsidiary ledger
back to the supporting sales invoices. The purpose of this audit
procedure is to establish that:
Entries in the accounts receivable subsidiary ledger were properly invoiced.
-An auditor noted that client sales increased 10 percent for the year. At
the same time, Cost of Goods Sold as a percentage of sales had
decreased from 45 percent to 40 percent and year-end accounts
receivable had increased by 8 percent. Based on this information, the
auditor is most likely concerned about:
Fictitious sales.
-The above figure contains an arrangement of examples of
transaction errors (lettered a–g) and a set of client control
procedures and devices (numbered 1–15).
*see question 5*
-In the audit of accounts receivable, auditors develop specific
audit assertions related to the receivables. They then design
specific substantive procedures to obtain evidence about each
of these assertions. Here is a selection of accounts receivable
assertions:
*see question 6*
-Which of the following would overstate current-period net income?not
Failing to record a check paying an item in Vouchers Payable.
-Budd, the purchasing agent of Lake Hardware Wholesalers, has a
relative who owns a retail hardware store. Budd arranged for hardware
to be delivered by manufacturers to the retail store on a cash-on-
delivery (C.O.D) basis, thereby enabling his relative to buy at Lake’s
wholesale prices. Budd was probably able to accomplish this because
of Lake’s poor internal control over?
Purchase orders.
-Which of the following is the audit procedure for determining the best
existence of unrecorded liabilities?
Examine a sample of cash disbursements in the period subsequent to year-end.
-To determine whether accounts payable are complete, auditors
perform a test to verify that all merchandise received has been
recorded. The population for this test consists of all
Receiving reports.
-Curtis, a maintenance supervisor, submitted maintenance invoices
from a phony repair company and received the checks at a post office
box. This should have been prevented by
Refusal by the purchasing department to approve the vendor.
-An audit team would most likely examine the detail support for charges
to which of the following accounts?
Legal expense.
-Bart's Company has prepared the PP&E and depreciation
schedule shown in Exhibit 8.54.1 below.
*see question 13*
-This question contains three items that are management
assertions about property and equipment. Following them are
several substantive procedures for obtaining evidence about
management’s assertions.
*see question 14*
-Following are the four assertions about account balances that
can be applied to the audit of a company’s PP&E, including
assets the company has constructed itself: existence, rights
and obligations, completeness, and valuation and allocation.
*see question 15*
Week 6 questions
-To determine the client's planned amount and timing of production of a
product, the auditor reviews the
Production plan.
-Which of the following is an internal control weakness for a company
whose inventory of supplies consists of a large number of individual
items?
The warehouse manager is responsible for maintenance of perpetual inventory records.
-From the auditors' point of view, inventory counts are more acceptable
prior to the year-end when
Accurate perpetual inventory records are maintained.
-Which of the following auditing procedures probably would provide the
most reliable evidence concerning the entity’s assertion of rights and
obligations related to inventories?
Inspect agreements to determine whether any inventory is pledged as collateral or
subject to any liens.
-When evaluating inventory controls, an auditor would be likely toleast
Consider policy and procedure manuals.
-When testing a company's cost accounting system, the auditor uses
procedures that are primarily designed to determine that
Costs have been properly assigned to finished goods, work-in-process, and cost of goods
sold.
-You are auditing Martha’s Prison Clothes Inc. as of December
31, 2014 which uses the FIFO inventory method. The inventory
for orange jumpsuits shows 1,263 suits at $782 for a total of
$987,666. When you look at the invoices for the jumpsuits, you
see the following:
*see question 7*
-An auditor reviews job cost sheets to test which ?transaction assertion
Accuracy
Week 7 questions
-When independent stock transfer agents are not employed and the
corporation issues its own stock and maintains stock records, canceled
stock certificates should
Be defaced to prevent reissuance and attached to their corresponding stubs.
-When an entity uses a trust company as custodian of its marketable
securities, the possibility of concealing fraud would be most likely
reduced if the
Trust company has no direct contact with the entity employees responsible for
maintaining investment accounting records.
-An audit plan to examine long-term debt would include most likely
steps that require
Correlating interest expense recorded for the period with outstanding debt.
-Loan covenants are used for which of the following reasons?
To protect the lender from the borrower's financial position substantially weakening.
-In the audit of investment securities, auditors develop specific
audit assertions related to the investments. They then design
specific substantive procedures to obtain evidence about each
of these assertions. Following is a selection of investment
securities assertions:
*see question 5*
-Sorenson Manufacturing Corporation was incorporated on
January 3, 2019. The corporation’s financial statements for its
first year’s operations were not examined by a CPA. You have
been engaged to audit the financial statements for the year
ended December 31, 2017, and your work is substantially
completed. A partial trial balance of the company’s accounts
follows:
*see question 6*
-Which of the following best describes the role of analytical procedures
near the end of the audit engagement?
To provide an overall review of the financial information and assessment of the
adequacy of evidence gathered during the audit engagement.
-Which of these substantive procedures is used to obtain evidence not
about contingencies?
Scanning expense accounts for credit entries.
-The auditing standards regarding subsequently discovered facts refers
to knowledge obtained after
The date of the auditor’s report.
-After the audit report release date, auditors determine that an
important auditing procedure was omitted. Which of the following
initial courses of action is most appropriate?
Determine whether the omitted procedure is important in supporting the auditors’
opinion on the entity’s financial statements.
-Which of the following statements is true with respect to written not
representations?
The failure of management to furnish them is a significant scope limitation, resulting in
either an adverse opinion or a disclaimer of opinion.
-What is an auditor’s method to corroborate information on primary
litigation, claims, and assessments?
Reviewing the response from the client’s lawyer to a letter of audit inquiry.
-Each of the following statements is a communication from
management. Indicate whether the inclusion of each statement
in written representations is appropriate.
*see question 13*
-Classify each of the following issues according to whether they
will be (1) included in written representations in all audits, (2)
included in written representations in audits of public entities
(under PCAOB standards), or (3) not included in written
representations:
*see question 14*
Week 8 questions
-Which of the following is included in the standard not
(unmodified) report on the financial statements?
An emphasis-of-matter paragraph commenting on the effect of economic conditions on
the entity.
-The audit team found that the entity has not capitalized a
material amount of leases in the financial statements. When
considering the materiality of this departure from GAAP, the
auditors would choose between which reporting options?
Qualified opinion or adverse opinion.
-The audit team determined that the entity is suffering financial
difficulty and its going-concern status is seriously in doubt.
Assuming that the entity adequately disclosed this matter in
the financial statements, the auditors must choose between
which of the following report alternatives?
Unmodified opinion with a reference to going-concern or disclaimer of opinion.
-R. Wolfe became the new auditor for Royal Corporation,
succeeding C. Mason, who audited the financial statements last
year. Wolfe needs to report on Royal’s comparative financial
statements and should disclose in the report an explanation
about other auditors having audited the prior year:
To describe the prior audit and the opinion but not name Mason as the predecessor
auditor.
-Under which of the following conditions can a disclaimer of
opinion be issued?never
The audit team has determined that the entity uses the NIFO (next-in, first-out)
inventory costing method.
-Assume that the audit team encountered the following
separate situations when deciding on the report to issue for the
current-year financial statements for a nonissuer.
*see question 6*
-Which of the following factors has a relationship with sample sizedirect
in an attributes sampling application?
Option B (tolerable rate of deviation = no. expected population deviation rate = yes.)
-Which of the following would result in the audit team's selecting a not
larger sample of controls for examination?
An increase in the tolerable rate of deviation from 3 percent to 6 percent.
-Baily Cox, an audit manager, judged that the test of controls of the
company's 50,000 purchase transactions should be based on a
tolerable rate of deviation of 6 percent, a risk of overreliance of 5
percent, and an expected population deviation rate of 3 percent.
Using AICPA sample size tables, Cox determined that the appropriate
sample size in this situation would be
195.
-Tony LaRussa, an audit manager, considered the control risk
assessments listed in the left column of the following table in
evaluating A. Cardinal's internal control over sales transactions. The
sample sizes for the substantive procedures of the customer accounts
receivable are shown to the right of each control risk. What risk of
overreliance (ROO) could be assigned for tests of controls at each
control risk level?
From top to bottom: 1 percent, 5 percent, 10 percent.
-Assume that Dylan Lee found two deviations in a sample of 90
transactions. Using AICPA sample evaluation tables, Lee determined
that the ULRD at a 5 percent risk of overreliance is
6.9 percent.
-If an audit team calculated an ULRD of 5 percent when the tolerable
rate of deviation was 4 percent, both at the same risk of overreliance,
control risk should be
Increased and substantive procedures should be adjusted accordingly.
-Using AICPA sample evaluation tables, determine the conclusion from a
statistical sample of internal controls when a sample of 125 documents
indicates five deviations if the tolerable rate of deviation is 5 percent,
the expected population deviation rate is 2 percent, and the allowance
for sampling risk is 3 percent.
Use the evidence to assess a higher control risk than planned because the sample rate
of deviation plus the allowance for sampling risk exceeds the tolerable rate of deviation.
-If the _____ exceeds the _____, the audit team would decide to rely on
internal control as planned and maintain control risk at planned levels.
tolerable rate of deviation; ULRD.
-If the sample evidence does support the planned level of control not
risk, the audit team could
All of the choices are acceptable.
-Which of the following best describes the method of determining the
ULRD?
Sample rate of deviation + Allowance for sampling risk.
-Review each of the following independent sets of conditions.
*see question 17*
-Jamie Plane is testing the effectiveness of an important control
for Blackheart Inc. Plane is placing a high level of reliance on
this control and has assessed a relatively low risk of
overreliance (5 percent) and tolerable rate of deviation (6
percent). Based on the acceptable risk of overreliance,
expected population deviation rate, and tolerable rate of
deviation, Plane determined a sample size of 60 items. The
tests of controls revealed three deviations.
*see question 18*
-Review each of the following independent sets of conditions.
For each condition, calculate the (1) sample rate of deviation,
and use the AICPA sample evaluation tables to identify the (2)
upper limit rate of deviation and (3) allowance for sampling risk
(n = sample size, d = deviations, ROO = risk of
overreliance). (Round your intermediate computations
and final answers to 1 decimal place.)
*see question 19*
