FINAL EXAM DUE IN 1 1/2 HRS.

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FINAL EXAM (46 QUESTIONS)

For audit evidence to be compelling to the auditor it must be sufficient and appropriate. Which statement below is not correct regarding the appropriateness of audit evidence?

· Correct Answer

The more effective the internal control system, the more assurance it provides the auditor about the reliability of financial reporting by the client.

· Correct Answer

An auditor's opinion, to be economically useful and profitable to the auditing firm needs to be formed within a reasonable time and based on evidence obtained that assures profits for the auditing firm.

· Correct Answer

The independent auditor's direct personal knowledge, obtained through inquiry, observation and inspection, is generally more persuasive than information obtained indirectly.

· Correct Answer

Evidence obtained from independent sources outside the entity is generally more reliable than evidence secured solely within the entity.

The final step in the evaluation of the audit results is the decision to:

· Correct Answer

project the point estimate.

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determine sampling error and calculate the estimated total population error.

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determine the error in each sample.

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accept the population as fairly stated or to require further action.

The word below that best explains the relationship between required sample size and the acceptable risk of incorrect acceptance is:

· Correct Answer

inverse.

· Correct Answer

proportional.

· Correct Answer

direct.

· Correct Answer

indeterminate.

The introductory paragraph of the standard audit report for a non-public company performs which functions? I. It states the CPA has performed an audit. II. It lists the financial statements being audited. III. It states the financial statements are the responsibility of the auditor.

· Correct Answer

I and III

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I, II and III

· Correct Answer

I and II

· Correct Answer

II and III

Master files, spreadsheets, and reports that accumulate material, labor, and overhead as the costs are incurred are:

· Correct Answer

finished goods inventory records.

· Correct Answer

accounting systems.

· Correct Answer

storeroom documents.

· Correct Answer

cost accounting records.

Which of the following balance-related audit objectives typically is assessed as having high inherent risk for cash?

· Correct Answer

Presentation and disclosure

· Correct Answer

Cutoff

· Correct Answer

Existence

· Correct Answer

Detail tie-in

In addition to confirming bank balances of your audit client, a bank confirmation would normally contain:

· Correct Answer

the client's credit history as regards to paying back loans.

· Correct Answer

the client's managements bank account information.

· Correct Answer

the client's bank loans with due date, interest rate, and collateral requested.

· Correct Answer

the client's business prospects.

A commitment is best described as:

· Correct Answer

an agreement to commit the firm to a set of fixed conditions in the future that depends on current market conditions.

· Correct Answer

an agreement to commit the firm to a set of fixed conditions in the future.

· Correct Answer

an agreement to commit the firm to a set of fixed conditions in the future that depends on company profitability.

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a potential future obligation to an outside party for an as yet to be determined amount.

The management's responsibility section of the standard audit report for a non-public company states that the financial statements are:

· Correct Answer

the responsibility of management.

· Correct Answer

the joint responsibility of management and the auditor.

· Correct Answer

none of the above.

· Correct Answer

the responsibility of the auditor.

Which of the following audit procedures would be the most correct in determining the audit objective of existence for the equipment account in the fixed asset master file?

· Correct Answer

Review transactions near the balance sheet date.

· Correct Answer

Examine vendor invoices and receiving reports.

· Correct Answer

Examine vendor invoices for correct accounting treatment.

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Recalculate vendor invoices.

Which of the following is not explicitly stated in the standard unqualified audit report?

· Correct Answer

The audit was conducted in accordance with generally accepted accounting principles.

· Correct Answer

The auditors believe that the audit evidence provides a reasonable basis for their opinion.

· Correct Answer

The financial statements are the responsibility of management.

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An audit includes assessing the accounting estimates used.

The ________ is a contract between a carrier (e.g., a trucking company) and the seller of goods that dictates the details surrounding the shipment of goods.

· Correct Answer

picking ticket

· Correct Answer

bill of lading

· Correct Answer

remittance advice

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sales invoice

The appropriate and sufficient evidence to be obtained from tests of details must be decided on an:

· Correct Answer

none of the above.

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efficiency basis.

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audit objectives basis.

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effectiveness basis

Which of the following groups has the responsibility for identifying and deciding the appropriate accounting treatment for recording or disclosing contingent liabilities?

· Correct Answer

Management and the auditors

· Correct Answer

Management

· Correct Answer

Auditors

· Correct Answer

Legal counsel

Which of the following business functions is not considered to be part of the acquisitions class of transactions?

· Correct Answer

Processing purchase orders

· Correct Answer

Receiving goods and services

· Correct Answer

Processing cash disbursements

· Correct Answer

Recognizing liabilities

When auditing the capital acquisition and repayment cycle, it is common to verify each transaction taking place in the cycle for the entire year as a part of verifying the balance sheet accounts.

· Correct Answer

False

· Correct Answer

True

The computer-generated file which records acquisitions, disbursements and allowances for each vendor is the:

· Correct Answer

Accounts payable master file.

· Correct Answer

Purchase approval file.

· Correct Answer

Acquisitions transaction file.

· Correct Answer

Cash disbursements file.

________ accumulate costs by individual jobs as material is issued into production and labor costs are incurred.

· Correct Answer

Process cost systems

· Correct Answer

Manufacturing systems

· Correct Answer

Job order cost systems

· Correct Answer

Just-in-time production systems

Which of the following expenses is not typically evaluated as part of the audit of the acquisition and payment cycle?

· Correct Answer

Insurance expense

· Correct Answer

Depreciation expense

· Correct Answer

Property tax expense

· Correct Answer

Estimated liability for warranties

Which of the following accounts is not associated with the acquisition and payment cycle?

· Correct Answer

Accrued property taxes

· Correct Answer

Income tax expense

· Correct Answer

Common stock

· Correct Answer

Property, plant and equipment

Some companies have customers send payments directly to an address maintained by a bank. This is called a(n) ________ system.

· Correct Answer

direct deposit

· Correct Answer

funds transfer

· Correct Answer

interbank transfer

· Correct Answer

lockbox

In most manufacturing companies, the inventory and warehousing cycle begins with the:

· Correct Answer

completion of production of a customer's order.

· Correct Answer

receipt of a customer's order.

· Correct Answer

acquisition of raw materials for production of an order.

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initiation of production of a customer's order.

You are auditing Rodgers and Company. You are aware of a potential loss due to non-compliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to:

· Correct Answer

accrue a $4 million liability.

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disclose a liability and provide a range of outcomes.

· Correct Answer

since there is less than a 50% chance of occurrence, ignore.

· Correct Answer

since there is greater that a remote chance of occurrence, accrue the $10 million.

The audit procedure that requires an auditor to "foot the acquisition schedule" relates to which balance-related audit objective?

· Correct Answer

Cut-off

· Correct Answer

Classification

· Correct Answer

Existence

· Correct Answer

Detail tie-in

The standard unqualified audit report for a non-public entity must:

· Correct Answer

include an explanatory paragraph.

· Correct Answer

be addressed to the company's stockholders and creditors.

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be dated.

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have a report title that includes the word "CPA."

When the auditor decides to select less than 100 percent of the population for testing, the auditor is said to use:

· Correct Answer

poor judgment.

· Correct Answer

audit sampling.

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estimation sampling.

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representative sampling

Which of the following does not have to be considered in determining the initial sample size of a test of details?

· Correct Answer

Estimate of misstatements in the population

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Acceptable risk of incorrect rejection

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Tolerable misstatement

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Acceptable audit risk

Auditors seldom learn about the capital acquisition and repayment cycle when gaining an understanding of the client's business and industry.

· Correct Answer

False

· Correct Answer

True

Which of the following statements is not correct?

· Correct Answer

The sample size for any given procedure is likely to vary from audit to audit.

· Correct Answer

It is possible to vary the sample size from one unit to 100% of the items in the population.

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The decision of how many items to test must be made by the auditor for each audit procedure.

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The decision of how many items to test should not be influenced by the increased costs of performing the additional tests.

A document used by organizations to establish a formal means of recording and controlling acquisitions which usually contains a package of documents about the acquisition is the:

· Correct Answer

purchase order.

· Correct Answer

purchase requisition.

· Correct Answer

voucher.

· Correct Answer

receiving report

One unique characteristic of the capital acquisition and repayment cycle is that relatively few transactions affect the account balances, but each transaction is often highly material in amount.

· Correct Answer

False

· Correct Answer

True

Smaller privately held companies may not maintain an accounts payable master file by vendor. These companies pay on the basis of:

· Correct Answer

dunning letters.

· Correct Answer

vendors' monthly statements.

· Correct Answer

individual vendors' invoices.

· Correct Answer

the accounts payable account in the general ledger

Which of the following is an analytical procedure to determine if there is idle equipment or equipment that was disposed of but not written off?

· Correct Answer

Compare depreciation expense divided by gross equipment cost with previous years.

· Correct Answer

Compare accumulated depreciation divided by gross equipment cost with previous years.

· Correct Answer

Compare annual repairs and maintenance accounts with previous years.

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Compare gross manufacturing cost divided by some measure of production with previous years.

A sample in which the characteristics of the sample are the same as those of the population is a(n):

· Correct Answer

variables sample.

· Correct Answer

random sample.

· Correct Answer

attributes sample.

· Correct Answer

representative sample.

Which of the following tests are typically not necessary when auditing a client's schedule of recorded disposals?

· Correct Answer

Footing the schedule

· Correct Answer

All of the above are necessary.

· Correct Answer

Tracing cost and accumulated depreciation of the disposals to the property master file

· Correct Answer

Tracing schedule totals to the general ledger

To determine if a sample is truly representative of the population, an auditor would be required to:

· Correct Answer

use systematic sample selection.

· Correct Answer

never use sampling because of the expense involved.

· Correct Answer

conduct multiple samples of the same population.

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audit the entire population

Which of the following is a business function related to sales returns and allowances?

· Correct Answer

Processing customer orders

· Correct Answer

Writing off uncollectible accounts

· Correct Answer

Granting credit

· Correct Answer

Processing and recording credit memos

You are auditing Manufacturing Company and testing the audit related objective of completeness for the equipment accounts. Which of the following audit procedures is most likely to achieve your objective?

· Correct Answer

Physically examine assets.

· Correct Answer

Examine vendor invoices of closely related accounts such as repairs and maintenance.

· Correct Answer

Trace individual acquisitions to the fixed asset master file.

· Correct Answer

Examine vendor invoices and receiving reports.

Which of the following is not one of the business functions for the payroll and personnel cycle?

· Correct Answer

Timekeeping and payroll preparation

· Correct Answer

Reconciliation of payroll account

· Correct Answer

Payment of payroll

· Correct Answer

Human resources and employment

Which of the following is a correct statement regarding audit evidence?

· Correct Answer

Evidence is usually more reliable for balance sheet accounts when it is obtained within six months of the balance sheet date.

· Correct Answer

A large sample of evidence provided by an independent party is always considered persuasive evidence.

· Correct Answer

The auditor must obtain a sufficient amount of relevant and reliable evidence to form an opinion on the fairness of the financial statements.

· Correct Answer

A small sample of only one or two pieces of highly appropriate evidence is always considered persuasive evidence

Accrued payroll taxes are normally considered to be associated with the acquisition and payment cycle.

· Correct Answer

True

· Correct Answer

False

Because cash is the most desirable asset for people to steal, it has a higher:

· Correct Answer

control risk.

· Correct Answer

detection risk.

· Correct Answer

liquidity risk.

· Correct Answer

inherent risk.

The computer file used for recording payroll transactions for each employee and maintaining total wages paid for the year to date is the: 44

44.The total of the individual employee earnings in the payroll master file should equal the total:

· Correct Answer

gross payroll plus the total contributed by the employer for payroll taxes.

· Correct Answer

balance of gross payroll in general ledger accounts.

· Correct Answer

of the checks drawn to employees for payroll.

· Correct Answer

gross pay for the current week's payroll.

· Correct Answer

payroll transaction file.

· Correct Answer

payroll tax returns.

· Correct Answer

payroll master file.

· Correct Answer

payroll bank account reconciliation.

Auditors are especially concerned with three aspects of internal control for the sales and collection cycle. Which of the following is not one of their major concerns?

· Correct Answer

Controls over sales discounts

· Correct Answer

Controls over cutoff

· Correct Answer

Controls that prevent or detect embezzlements

· Correct Answer

Controls related to the allowance for uncollectible accounts

The two primary classes of transactions in the sales and collection cycle are:

· Correct Answer

sales and cash receipts.

· Correct Answer

sales and sales returns.

· Correct Answer

sales and accounts receivable.

· Correct Answer

sales and sales discounts