The Third Standard of Field Work -- Evidence
16. To best ascertain that a company has properly included merchandise that it owns in its ending
inventory, the auditor should review and test the
a. Terms of the open purchase orders.
b. Purchase cut-off procedures.
c. Contractual commitments made by the purchasing department.
d. Purchase invoices received on or around year end.
17. Which of the following audit procedures would be least likely to lead the auditor to find unrecorded fixed asset disposals?
a. Examination of insurance policies.
b. Review of repairs and maintenance expense.
c. Review of property tax files.
d. Scanning of invoices for fixed asset additions.
18. 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 items had 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 prepared.
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.
19. In order to efficiently establish the correctness of the accounts payable cutoff, an auditor will be most likely to a. Coordinate cutoff tests with physical inventory
observation.
b. Compare cutoff reports with purchase orders.
c. Compare vendors' invoices with vendors' statements.
d. Coordinate mailing of confirmations with cutoff tests.
20. As a result of analytical review procedures, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should
a. Express an opinion which is qualified due to inability of the client company to continue as a going concern.
b. Evaluate management's performance in causing this decline.
c. Require footnote disclosure.
d. Consider the possibility of an error in the financial statements.
21. The third standard of field work states that sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit. The substantive evidential matter required by this standard may be obtained, in part, through
a. Flowcharting the internal control structure.
b. Proper planning of the audit engagement.
c. Analytical procedures.
d. Auditor working papers.
22. In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the
a. Timing of audit procedures.
b. Cost-benefit of gathering evidence.
c. Selected audit techniques.
d. Financial statement assertions.
23. Which of the following presumptions does not relate to the competence of audit evidence?
a. The more effective the internal control structure, the more assurance it provides about the accounting data and financial statements.
b. An auditor's opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.
c. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.
d. The independent auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly
24. For all audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent
In the As a In the
planning substantive review
stage test stage
a. Yes No Yes
b. No Yes No
c. No Yes Yes
d. Yes No No
25. Which of the following procedures is least likely to be performed before the balance sheet date?
a. Testing of internal control over cash.
b. Confirmation of receivables c. Search for unrecorded liabilities.
d. Observation of inventory.
26. Which of the following procedures would an auditor ordinarily perform during the review of subsequent events?
a. Review the cut-off bank statements for the period after the year-end.
b. Inquire of the client's legal counsel concerning litigation.
c. Investigate reportable conditions previously communicated to the client.
d. Analyze related party transactions to discover possible irregularities.
27. Six months after issuing an unqualified opinion on audited financial statements, an auditor discovered that the engagement personnel failed to confirm several of the client's material accounts receivable balances. The auditor should first
a. Request the permission of the client to undertake the confirmation of accounts receivable.
b. Perform alternative procedures to provide a satisfactory basis for the unqualified opinion.
c. Assess the importance of the omitted procedures to the auditor's ability to support the previously expressed opinion.
d. Inquire whether there are persons currently relying, or likely to rely, on the unqualified opinion.
28. Which of the following circumstances is most likely to cause an auditor to consider whether a material misstatement exists?
a. Transactions selected for testing are not supported by proper documentation.
b. The turnover of senior accounting personnel is exceptionally low.
c. Management places little emphasis on meeting earnings projections.
d. Operating and financing decisions are dominated by several persons.
29. The primary objective of analytical procedures used in the final review stage of an audit is to
a. Obtain evidence from details tested to corroborate particular assertions.
b. Identify areas that represent specific risks relevant to the audit.
c. Assist the auditor in assessing the validity of the conclusions reached.
d. Satisfy doubts when questions arise about a client's ability to continue in existence.
30. To help plan the nature, timing, and extent of substantive auditing procedures, preliminary analytical procedures should focus on
a. Enhancing the auditor's understanding of the client's business and events that have occurred since the last audit date.
b. Developing plausible relationships that corroborate anticipated results with a measurable amount of precision.
c. Applying ratio analysis to externally generated data such as published industry statistics or price indices.
d. Comparing recorded financial information to the results of other tests of transactions and balances.
31. Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. The internal control structure at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely
a. Send positive confirmation requests.
b. Send negative confirmation requests.
c. Examine evidence of subsequent cash receipts.
d. Inspect the internal records such as copies of the tax invoices that were mailed to the residents.
32. An auditor would most likely verify the interest earned on bond investments by
a. Vouching 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 the internal controls over cash receipts.
33. Which of the following most likely would be detected by an auditor's review of a client's sales cut-off?
a. Unrecorded sales for the year.
b. Lapping of year-end accounts receivable.
c. Excessive sales discounts.
d. Unauthorized goods returned for credit.
34. Auditors should request that an audit client send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments.
The primary reason for this request is to provide
a. Information concerning the progress of cases to date.
b. Corroborative evidential matter.
c. An estimate of the dollar amount of the probable loss.
d. An expert opinion as to whether a loss is possible, probable, or remote.
35. A written client representation letter most likely would be an auditor's best source of corroborative information of a client's plans to
a. Terminate an employee pension plan.
b. Make a public offering of its common stock.
c. Settle an outstanding lawsuit for an amount less than the accrued loss contingency.
d. Discontinue a line of business.
36. In an audit of contingent liabilities, which of the following procedures would be least effective?
a. Reviewing a bank confirmation letter.
b. Examining customer confirmation replies.
c. Examining invoices for professional services.
d. Reading the minutes of the board of directors.
37. An auditor searching for related party transactions should obtain an understanding of each subsidiary's relationship to the total entity because:
a. This may permit the audit of intercompany account balances to be performed as of concurrent dates.
b. Intercompany transactions may have been consummated on terms equivalent to arm's-length transactions.
c. This may reveal whether particular transactions would have taken place if the parties had not been related.
d. The business structure may be deliberately designed to obscure related party transactions.
38. An auditor concludes that the omission of a substantive procedure considered necessary at the time of the examination may impair the auditor's present ability to support the previously expressed opinion. The auditor need not apply the omitted procedure if
a. The risk of adverse publicity or litigation is low.
b. The results of other procedures that were applied tend to compensate for the procedure omitted.
c. The auditor's opinion was qualified because of a departure from generally accepted accounting principles.
d. The results of the subsequent period's tests of controls make the omitted procedure less important.
39. Each of the following might, by itself, form a valid basis for an auditor to decide to omit a test except for the a. Difficulty and expense involved in testing a
particular item.
b. Degree of reliance on the relevant internal controls.
c. Relative risk involved.
d. Relationship between the cost of obtaining evidence and its usefulness.
40. Soon after Boyd's audit report was issued, Boyd learned of certain related party transactions that occurred during the year under audit. These transactions were not disclosed in the notes to the financial statements. Boyd should
a. Plan to audit the transactions during the next engagement.
b. Recall all copies of the audited financial statements.
c. Determine whether the lack of disclosure would affect the auditor's report.
d. Ask the client to disclose the transactions in subsequent interim statements.
41. When using the work of a specialist, an auditor may refer to and identify the specialist in the auditor's report if the
a. Auditor wishes to indicate a division of responsibility.
b. Specialist's work provides the auditor greater assurance of reliability.
c. Auditor expresses an adverse opinion as a result of the specialist's findings.
d. Specialist is not independent of the client.
42. Negative confirmation 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 can not infer that all nonrespondents have verified their account information.
d. Negative confirmations do not produce evidential matter that is statistically quantifiable.
43. An auditor's program to examine long-term debt should include steps that require
a. Examining bond trust indentures.
b. Inspecting the accounts payable subsidiary ledger.
c. Investigating credits to the bond interest income account.
d. Verifying the existence of the bondholders.
44. Which of the following documentation is required for an audit in accordance with generally accepted auditing standards?
a. An internal control questionnaire.
b. A client engagement letter.
c. A planning memorandum or checklist.
d. A client representation letter.
45. If specific information comes to an auditor's attention that implies the existence of possible illegal acts that could have a material, but indirect effect on the financial statements, the auditor should next
a. Apply audit procedures specifically directed to ascertaining whether an illegal act has occurred.
b. Seek the advice of an informed expert qualified to practice law as to possible contingent liabilities.
c. Report the matter to an appropriate level of management at least one level above those involved.
d. Discuss the evidence with the client's audit committee, or others with equivalent authority and responsibility.
46. To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all
a. Vendor's invoices.
b. Purchase orders.
c. Receiving reports.
d. Canceled checks.
47. Which of the following internal control procedures most likely addresses the completeness assertion for inventory?
a. Work in process account is periodically reconciled with subsidiary records.
b. Employees responsible for custody of finished goods do not perform the receiving function.
c. Receiving reports are prenumbered and periodically reconciled.
d. There is a separation of duties between payroll
48. Tracing bills of lading to sales invoices provides evidence that
a. Shipments to customers were invoiced.
b. Shipments to customers were recorded as sales.
c. Recorded sales were shipped.
d. Invoiced sales were shipped.
49. Analytical procedures used in planning an audit should focus on identifying
a. Material weaknesses in the internal control structure.
b. The predictability of financial data from individual transactions.
c. The various assertions that are embodied in the financial statements.
d. Areas that may represent specific risks relevant to the audit.
50. Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
a. Examining unusual relationships between monthly accounts payable balances and recorded cash payments.
b. Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date.
c. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
d. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports.
51. The negative request form of accounts receivable confirmation is useful particularly when the
Assessed level
of control Number of Consideration risk relating to small by the
receivables is balances is recipient is
a. Low Many Likely
b. Low Few Unlikely
c. High Few Likely
d. High Many Likely
52. A basic premise underlying the application of analytical procedures is that
a. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations.
b. Statistical tests of financial information may lead to the discovery of material errors in the financial statements.
c. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.
d. These procedures cannot replace tests of balances and transactions.
53. An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management's assertions about
a. Existence or occurrence.
b. Presentation and disclosure.
c. Completeness.
d. Valuation or allocation.
54. An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about
a. Presentation and disclosure.
b. Existence or occurrence.
c. Rights and obligations.
d. Valuation or allocation.
55. Which of the following statements concerning evidential matter is correct?
a. Competent evidence supporting management's assertions should be convincing rather than merely persuasive.
b. An effective internal control structure contributes little to the reliability of the evidence created within the entity.
c. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.
d. A client's accounting data cannot be considered sufficient audit evidence to support the financial statements.
56. In testing the existence assertion for an asset, an auditor ordinarily works from the
a. Financial statements to the potentially unrecorded items.
b. Potentially unrecorded items to the financial statements.
c. Accounting records to the supporting evidence.
d. Supporting evidence to the accounting records.
57. In an audit of inventories, an auditor would least likely verify that
a. All inventory owned by the client is on hand at the time of the count.
b. The client has used proper inventory pricing.
c. The financial statement presentation of inventories is appropriate.
d. Damaged goods and obsolete items have been properly accounted for.
58. The scope of an audit is not restricted when an attorney's response to an auditor as a result of a client's letter of audit inquiry limits the response to
a. Matters to which the attorney has given substantive attention in the form of legal representation.
b. An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity.
c. The attorney's opinion of the entity's historical experience in recent similar litigation.
d. The probable outcome of asserted claims and pending or threatened litigation.
59. Two assertions for which confirmation of accounts receivable balances provides primary evidence are a. Completeness and valuation.
b. Valuation and rights and obligations.
c. Rights and obligations and existence.
d. Existence and completeness.
60. Cutoff 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.
61. An auditor's analytical procedures most likely would be facilitated if the entity
a. Corrects material weaknesses in internal control before the beginning of the audit.
b. Develops its data from sources solely within the entity.
c. Segregates obsolete inventory before the physical inventory count.
d. Uses a standard cost system that produces variance reports.
62. If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the
a. Cash receipts journal to the sales journal.
b. Sales journal to the cash receipts journal.
c. Source documents to the accounting records.
d. Accounting records to the source documents.
63. Which of the following procedures most likely would justify the use of the negative form of accounts receivable confirmation?
a. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
b. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
c. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
d. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
64. The audit working paper that reflects the major components of an amount reported in the financial statements is the
a. Interbank transfer schedule.
b. Carryforward schedule.
c. Supporting schedule.
d. Lead schedule.
65. An auditor concluded that no excessive costs for idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the financial statement assertions regarding inventory, including presentation and disclosure and a. Valuation and allocation.
b. Completeness.
c. Existence or occurrence.
d. Rights and obligations
66. Which of the following types of audit evidence is the least persuasive?
a. Prenumbered purchase order forms.
b. Bank statements obtained from the client.
c. Test counts of inventory performed by the auditor.
d. Correspondence from the client’s attorney about litigation.
67. Which of the following combinations of procedures would an auditor most likely perform to obtain evidence about fixed asset additions?
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.
68. An auditor most likely would inspect loan agreements under which an entity’s inventories are pledged to support management’s financial statement assertion of
a. Existence or occurrence.
b. Completeness.
c. Presentation and disclosure.
d. Valuation or allocation.
69. An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management’s assertions about
a. Existence or occurrence.
b. Rights and obligations.
c. Presentation and disclosure.
d. Valuation or allocation.
70. Which of the following procedures would an auditor most likely perform to verify management’s assertion of completeness?
a. Compare a sample of shipping documents to related sales invoices.
b. Observe the client’s distribution of payroll checks.
c. Confirm a sample of recorded receivables by direct communication with the debtors.
d. Review standard bank confirmations for indications of kiting.
71. An auditor’s decision either to apply analytical procedures as substantive tests or to perform tests of transactions and account balances usually is determined by the
a. Availability of data aggregated at a high level.
b. Relative effectiveness and efficiency of the tests.
c. Timing of tests performed after the balance sheet date.
d. Auditor’s familiarity with industry trends.
72. Analytical procedures used in the overall review stage of an audit generally include
a. Considering unusual or unexpected account balances that were not previously identified.
b. Performing tests of transactions to corroborate management’s financial statement assertions.
c. Gathering evidence concerning account balances that have not changed from the prior year.
d. Retesting control procedures that appeared to be ineffective during the assessment of control risk.
73. In using the work of a specialist, an understanding should exist among the auditor, the client, and the specialist as to the nature of the specialist’s work. The documentation of this understanding should cover a. A statement that the specialist assumes no
responsibility to update the specialist’s report for future events or circumstances.
b. The conditions under which a division of responsibility may be necessary.
c. The specialist’s understanding of the auditor’s corroborative use of the specialist’s findings.
d. The auditor’s disclaimer as to whether the specialist’s findings corroborate the representations in the financial statements.
74. To which of the following matters would materiality limits not apply when obtaining written client representations?
a. Losses from sales commitments.
b. Unasserted claims and assessments.
c. Irregularities involving management.
d. Noncompliance with contractual agreements.
75. Which of the following factors most likely would affect an auditor’s judgment about the quantity, type, and content of the auditor’s working papers?
a. The assessed level of control risk.
b. The likelihood of a review by a concurring (second) partner.
c. The number of personnel assigned to the audit.
d. The content of the management representation letter.
76. Which of the following most likely would indicate the existence of related parties?
a. Writing down obsolete inventory just before year end.
b. Failing to correct previously identified internal control structure deficiencies.
c. Depending on a single product for the success of the entity.
d. Borrowing money at an interest rate significantly below the market rate.
77. Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
a. Recomputing a sample of large-dollar transactions occurring after year end for arithmetic accuracy.
b. Investigating changes in stockholders' equity occurring after year end.
c. Inquiring of the entity's legal counsel concerning litigation, claims, and assessments arising after year end.
d. Confirming bank accounts established after year end.
78. Which of the following matters is an auditor required to communicate to an entity's audit committee?
I. Disagreements with management about matters significant to the entity's financial statements that have been satisfactorily resolved.
II. Initial selection of significant accounting policies in emerging areas that lack authoritative guidance.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
79. Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?
a. Accounts receivable.
b. Interest expense.
c. Accounts payable.
d. Travel and entertainment expense.