Certified Public Accountant CPA Questions + Answers Part 36

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QUESTION 43
Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed?
A. Theinvestmentcommitteeoftheboardofdirectorsperiodicallyreviewstheinvestmentdecisionsdelegatedtothetreasurer.
B. Twocompanyofficialshavejointcontrolofmarketablesecurities,whicharekeptinabanksafedepositbox.
C. The internal auditor and the controller independently trace all purchases and sales of marketable securities from the subsidiary ledgers to the general ledger. D. The chairman of the board verifies the marketable securities, which are kept in a bank safe-deposit box, each year on the balance sheet date.
Correct Answer: B

Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Joint custody by two company officials over assets like cash and marketable securities helps safeguard the assets. Under joint custody, collusion is required for a defalcation to occur.
Choice "a" is incorrect. Review of investment decisions made by the treasurer might reduce the probability of poor investment policies, but would not be likely to safeguard marketable securities after purchase.
Choice "c" is incorrect. Tracing purchases and sales from the subsidiary ledger to the general ledger would help ensure that all existing securities are recorded in the financial statements, but would not help safeguard marketable securities.
Choice "d" is incorrect. An annual count by the chairman of the board might provide a small safeguard, but the infrequent performance of the control makes it a fairly weak one.
QUESTION 44
When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs:
A. Testsofcontrolsandextensivetestsofpropertyandequipmentbalancesattheendoftheyear. B. Analyticalproceduresforcurrentyearpropertyandequipmenttransactions.
C. Tests of controls and limited tests of current year property and equipment transactions.
D. Analytical procedures for property and equipment balances at the end of the year.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Since control risk is assessed at a low level, tests of controls would be required to evaluate the effectiveness of the internal controls to support that assessed level. Assuming controls are operating effectively, only limited substantive testing would be performed. Choice "a" is incorrect. Extensive tests of property and equipment balances would not typically be required when control risk is assessed at a low level. Choice "b" is incorrect. Since control risk is to be assessed at a low level, tests of controls would be required. Analytical procedures would not be particularly useful, since property and equipment transactions are subject to management discretion.
Choice "d" is incorrect. Analytical procedures would not be particularly useful, since property and equipment transactions are subject to management discretion. Year-end balances may therefore be unpredictable.
QUESTION 45
In determining the effectiveness of an entity's internal controls relating to the occurrence assertion for payroll transactions, an auditor most likely would inquire about and:

A. Observethesegregationofdutiesconcerningpersonnelresponsibilitiesandpayrolldisbursement. B. Inspectevidenceofaccountingforprenumberedpayrollchecks.
C. Recompute the payroll deductions for employee fringe benefits.
D. Verify the preparation of the monthly payroll account bank reconciliation.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The occurrence assertion as it relates to payroll transactions would correspond to an audit objective to determine that payroll transactions actually occurred (i.e., that all payroll checks were issued to valid employees for hours actually worked). Segregation of duties between personnel and payroll departments is an important control to ensure that only valid employees receive paychecks. Choice "b" is incorrect. Inspecting evidence related to prenumbering of payroll checks would relate to the completeness assertion.
Choice "c" is incorrect. Recomputing payroll deductions is a substantive test related to the accuracy assertion.
Choice "d" is incorrect. Verifying the preparation of the monthly payroll account bank reconciliation would provide significant evidence for the accuracy assertion for payroll transactions.
QUESTION 46
A weakness in internal control over recording retirements of equipment may cause an auditor to:
A. Inspectcertainitemsofequipmentintheplantandtracethoseitemstotheaccountingrecords.
B. Reviewthesubsidiaryledgertoascertainwhetherdepreciationwastakenoneachitemofequipmentduringtheyear. C. Trace additions to the "other assets" account to search for equipment that is still on hand but no longer being used. D. Select certain items of equipment from the accounting records and locate them in the plant.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Testing to see whether equipment listed in the accounting records is physically present in the plant and still in service is an effective way to test whether unrecorded disposals occurred.
Choice "a" is incorrect. Tracing from equipment found in service to accounting records would be performed to test the completeness assertion that all equipment on hand has been recorded, rather than testing the assertion that all recorded equipment is still in service. Choice "b" is incorrect. Reviewing whether depreciation is still being taken would not provide evidence about unrecorded fixed asset disposals unless the auditor also performs a physical inspection of the assets being

depreciated. Also, assets that are fully depreciated but still in service would not appear in depreciation records.
Choice "c" is incorrect. Examining additions to the other assets account would not be likely to lead to discovery of unrecorded fixed asset disposals, since newer assets are not likely to have been retired.
QUESTION 47
The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because:
A. Manycustomersmerelysignandreturntheconfirmationwithoutverifyingitsdetails. B. Recipientsusuallyrespondonlyiftheydisagreewiththeinformationontherequest. C. Customers may not be inclined to report understatement errors in their accounts.
D. Auditorstypicallyselectmanyaccountswithlowrecordedbalancestobeconfirmed.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The completeness assertion states that all transactions that should be recorded are recorded. Accounts receivable confirmations rarely provide evidence about completeness since the recipients of the confirmations have a vested interest in not reporting understatements (i.e., transactions that have not been recorded).
Choice "a" is incorrect. While some customers may sign and return a confirmation without proper consideration, this is not the reason why confirmations do not provide evidence about the completeness assertion relative to other assertions.
Choice "b" is incorrect. If customers respond whenever they disagree with information printed on the confirmation, they would report both understatements and overstatements, in which case confirmations would provide evidence about completeness. However, this is not what the auditor usually sees -- respondents are less likely to report understatement errors. Choice "d" is incorrect. The balance of the account is not a relevant factor in determining whether the completeness assertion is tested by sending confirmations. If there are many accounts with low balances, the auditor may decide to send negative confirmations.
QUESTION 48
Which of the following Explanation: s most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts?
A. Theestimatedremainingusefullivesofplantassetswererevisedupward. B. Plantassetswereretiredduringtheyear.
C. The prior year's depreciation expense was erroneously understated.
D. Overhead allocations were revised at year-end.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D)

Explanation Explanation/Reference:
Explanation:
Choice "b" is correct. A debit to accumulated depreciation decreases the balance in that account. The retirement of plant assets necessitates the removal (decrease) of accumulated depreciation related to the retired asset by debiting accumulated depreciation.
Choice "a" is incorrect. Remember that correction of an estimate is given prospective, not retroactive, treatment. Therefore, there would not be any decrease in the accumulated depreciation taken in previous years, although future credits would be lower than previous credits had been. Choice "c" is incorrect. If the prior year's depreciation expense were understated (i.e., too low), the entry to correct the error would be a credit to accumulated depreciation. Choice "d" is incorrect. Revision of overhead allocations would not result in a debit to accumulated depreciation.
QUESTION 49
Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme?
A. Therearesignificantunexplainedvariancesbetweenstandardandactuallaborcost. B. Payrollchecksaredisbursedbythesameemployeeeachpayday.
C. Employee time cards are approved by individual departmental supervisors.
D. A separate payroll bank account is maintained on an imprest basis.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Significant unexplained variances between standard and actual labor costs may cause the auditor to suspect an employee payroll fraud scheme. Choice "b" is incorrect. Payroll checks generally are disbursed by the same person (or the same department) each payday, and this would not cause the auditor to suspect an employee payroll fraud scheme.
Choice "c" is incorrect. Time card approval by departmental supervisors is a standard practice, and would not raise an auditor's suspicions of a payroll fraud scheme. Choice "d" is incorrect. Maintenance of a separate payroll bank account is a standard practice, and would not raise an auditor's suspicions of a payroll fraud scheme.
QUESTION 50
An auditor generally tests the segregation of duties related to inventory by:
A. Personalinquiryandobservation.
B. T est counts and cutoff procedures.
C. Analytical procedures and invoice recomputation.

D. Document inspection and reconciliation.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The independent auditor's direct personal knowledge, based on personal inquiry and observation, are auditing procedures commonly used to test segregation of duties. Choice "b" is incorrect. Test counts and cutoff procedures represent substantive tests, and they would not be used to test segregation of duties.
Choice "c" is incorrect. Analytical procedures and invoice recomputation represent substantive tests, and they would not be used to test segregation of duties. Choice "d" is incorrect. Document inspection and reconciliation represent substantive tests, and they would not be used to test segregation of duties.
QUESTION 51
An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of completeness with respect to:
A. Presentationanddisclosure. B. Transactionsandevents.
C. Account balances.
D. All of the above.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Inspecting loan agreements under which an entity's inventories are pledged provides evidence regarding completeness with respect to presentation and disclosure, since such information must be disclosed in the financial statements. Choices "b", "c", and "d" are incorrect. Inspecting loan agreements under which an entity's inventories are pledged does not provide information regarding the completeness of transactions, events, or account balances.
QUESTION 52
Tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion regarding:
A. Accuracy.

B. Obligations. C. Cutoff.
D. Classification.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. If purchases made before the end of the year have been recorded in the subsequent year, inventory will not be complete. The auditor uses cutoff tests to detect such situations and to determine that inventory quantities include all products, materials and supplies owned by the company. (Note that the cutoff assertion is closely related to the completeness and occurrence assertions.)
Choice "a" is incorrect. Assertions about accuracy deal with whether data related to recorded transactions has been included in the financial statements at appropriate amounts. Cutoff tests do not provide evidence related to the accuracy assertion for purchases. Choice "b" is incorrect. Assertions about obligations deal with account balances, not with transactions and events.
Choice "d" is incorrect. Assertions about classification deal with whether particular components of the financial statements are properly presented, described, and disclosed. Cutoff tests would not provide evidence relevant to classification.
QUESTION 53
An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of:
A. Valuationandallocation.
B. Rightsandobligations.
C. Existence.
D. Understandabilityandclassification.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. An audit objective for inventory valuation and allocation is to determine that slowmoving, excess, defective and obsolete items included in inventory are properly identified. Inquiries of production and sales personnel concerning possible excess or obsolete inventory items would support management's assertion of valuation and allocation. Choice "b" is incorrect. Assertions about rights and obligations deal with whether assets are the rights of the entity and liabilities are the obligations of the entity at a given date. Choice "c" is incorrect. Assertions about existence deal with whether assets, liabilities, and equity interests exist at a given date.

Choice "d" is incorrect. Assertions about understandability and classification deal with whether particular components of the financial statements are properly presented, described, and disclosed.
QUESTION 54
Which of the following statements is correct concerning the use of negative confirmation requests?
A. Unreturnednegativeconfirmationrequestsrarelyprovidesignificantexplicitevidence.
B. Negativeconfirmationrequestsareeffectivewhendetectionriskislow.
C. Unreturned negative confirmation requests indicate that alternative procedures are necessary.
D. Negative confirmation requests are effective when understatements of account balances are suspected.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Although returned negative confirmations may provide evidence about the financial statement assertions, unreturned negative confirmation requests do not provide explicit evidence that the intended third parties received the confirmation requests and verified that the information contained in them is correct.
Choice "b" is incorrect. Negative confirmation requests may be used when the combined assessed level of inherent and control risk is low, which would generally imply that a somewhat higher level of detection risk could be accepted.
Choice "c" is incorrect. Alternative procedures are necessary only for unreturned positive confirmation requests. Unreturned negative confirmation requests generally imply that the respondent agrees with the stated balance.
Choice "d" is incorrect. Accounts receivable confirmations in general provide little assurance when understatements of account balances are suspected, since recipients have a vested interest in not reporting such understatements.
QUESTION 55
When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would:
A. Inspecttheallowanceaccounttoverifywhethertheaccountsweresubsequentlywrittenoff. B. Increasetheassessedlevelofdetectionriskforthevaluationandcompletenessassertions. C. Ask the client to contact the customers to request that the confirmations be returned.
D. Increase the assessed level of inherent risk for the revenue cycle.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation

Explanation/Reference:
Explanation:
Choice "c" is correct. When using positive confirmation requests, the auditor should generally follow up with a second and sometimes third request to those parties from whom replies have not been received.
In addition, asking the client to contact its customers may encourage further responses. Choice "a" is incorrect. Confirmations are designed to provide evidence of existence, so nonresponses would require alternative procedures focused on existence as well. Verification that the account was subsequently written off tests the valuation assertion, but does not provide evidence of existence. Choice "b" is incorrect. The auditor sets detection risk based on the assessed levels of inherent risk and control risk, and would only increase the acceptable level of detection risk in response to a decrease in inherent or control risk. Failure to receive confirmations would not cause the auditor to make such a change.
Choice "d" is incorrect. Inherent risk assessments would not be affected by confirmation response rates, which are not subject to client control.
QUESTION 56
In confirming a client's accounts receivable in prior years, an auditor found that there were many differences between the recorded account balances and the confirmation replies. These differences, which were not misstatements, required substantial time to resolve. In defining the sampling unit for the current year's audit, the auditor most likely would choose:
A. Individualoverduebalances. B. Individualinvoices.
C. Small account balances.
D. Large account balances.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The auditor should consider the nature of the information requested when determining the sampling unit for the current year audit. Certain respondents' accounting systems may facilitate the confirmation of single transactions rather than of entire balances. Choice "a" is incorrect. The auditor would not limit the population to overdue balances, since current balances can also be misstated.
Choices "c" and "d" are incorrect. Defining the sampling unit based on account size would not address the problem that caused differences during the prior year.
QUESTION 57
While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records.
This situation could be the result of the client's failure to record: A. Purchasediscounts.

B. Purchasereturns. C. Sales.
D. Sales returns.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Failure to record sales returns would result in actual inventory quantities being greater than those recorded in the perpetual inventory records. Choice "a" is incorrect. Failure to record purchase discounts would result in a difference in recorded costs, rather than recorded quantities.
Choice "b" is incorrect. Failure to record purchase returns would result in actual inventory quantities being less than those recorded in the perpetual inventory records. Choice "c" is incorrect. Failure to record sales would result in actual inventory quantities being less than those recorded in the perpetual inventory records.
QUESTION 58
When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and:
A. Observingthedistributionofpaychecks.
B. Footingandcrossfootingthepayrollregister. C. Inspecting payroll tax returns.
D. Recalculating payroll accruals.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. If the control risk is assessed as low, less substantive testing is necessary. In such an instance, substantive testing would normally be limited to analytical procedures and recalculating yearend accruals.
Choice "a" is incorrect. Observing distribution of paychecks is a test of controls, not a substantive test. Choice "b" is incorrect. Footing and crossfooting the payroll register is an important substantive test, but it is limited in its effectiveness. Even if control risk is assessed as low, more effective substantive procedures should be performed.
Choice "c" is incorrect. Inspection of payroll tax returns is an extensive substantive test that would be performed if the control risk were assessed as high.
QUESTION 59

Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions?
A. Arerequestsformajorrepairsapprovedatahigherlevelthanthedepartmentinitiatingtherequest? B. Areprenumberedpurchaseordersusedforequipmentandperiodicallyaccountedfor?
C. Are requests for purchases of equipment reviewed for consideration of soliciting competitive bids? D. Areproceduresinplacetomonitorandproperlyrestrictaccesstoequipment?
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Questions relating to access controls for assets would not normally be a part of a questionnaire related to controls over the initiation and execution of equipment purchases. Choice "a" is incorrect. Questions about controls related to the authorization of major repairs would likely be included on a questionnaire related to controls over the initiation and execution of equipment purchases.
Choice "b" is incorrect. Questions about the existence of prenumbered purchase orders would likely be included on the internal control questionnaire since prenumbering functions as an important control supporting the completeness assertion.
Choice "c" is incorrect. Questions about controls related to competitive bids would likely be included on a questionnaire related to controls over the initiation and execution of equipment purchases.
QUESTION 60
Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation?
A. Testingtheentity'scomputationofstandardoverheadrates.
B. Obtainingconfirmationofinventoriespledgedunderloanagreements. C. Reviewing shipping and receiving cutoff procedures for inventories. D. Tracing test counts to the entity's inventory listing.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Testing the entity's computation of standard overhead rates generally provides assurance about a client's inventory valuation.
Choice "b" is incorrect. Obtaining confirmation of inventories pledged under loan agreements provides assurance about the appropriate presentation, description,

and disclosure of such matters in the financial statements.
Choice "c" is incorrect. Reviewing shipping and receiving cutoff procedures for inventories provides assurance about completeness and existence of inventory. Choice "d" is incorrect. Tracing test counts to the entity's inventory listing provides assurance about the completeness of the client's listing.
QUESTION 61
In establishing the existence and ownership of a long-term investment in the form of publicly-traded stock, an auditor should inspect the securities or:
A. Correspondwiththeinvesteecompanytoverifythenumberofsharesowned.
B. Inspecttheauditedfinancialstatementsoftheinvesteecompany.
C. Confirm the number of shares owned that are held by an independent custodian. D. Determine that the investment is carried at the lower of cost or market.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The auditor would confirm the number of shares held by an independent custodian to establish the existence and ownership of a long-term investment in publicly traded securities.
Choice "a" is incorrect. The investee company may not have timely information regarding the ownership of its stock.
Choice "b" is incorrect. Inspection of the audited financial statements of the investee company does not provide evidence about ownership of the securities. Choice "d" is incorrect. Determination that the investment is carried at the proper market value provides assurance about valuation and about appropriate presentation and disclosure in the financial statements.
QUESTION 62
Determining that proper amounts of depreciation are expensed provides assurance about management's assertion of:
A. Valuation,allocation,andaccuracy.
B. Completeness,accuracy,andoccurrence. C. Rights and obligations, and valuation.
D. Existence, completeness, and accuracy.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:

Choice "a" is correct. Determining that proper amounts of depreciation are expensed provides assurance with regard to valuation and allocation related to the asset, and accuracy in terms of financial statement presentation.
Choices "b", "c", and "d" are incorrect. Verifying depreciation computations does not provide evidence with respect to completeness, rights and obligations, existence, or occurrence.
QUESTION 63
In auditing accounts receivable the negative form of confirmation request most likely would be used when:
A. Recipientsarelikelytoreturnpositiveconfirmationrequestswithoutverifyingtheaccuracyoftheinformation. B. Thecombinedassessedlevelofinherentandcontrolriskrelativetoaccountsreceivableislow.
C. A small number of accounts receivable are involved but a relatively large number of errors are expected.
D. The auditor performs a dual purpose test that assesses control risk and obtains substantive evidence.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Negative confirmations are used when the combined assessed level of inherent and control risk is low, a large number of small balances is involved, and the auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration. Choice "a" is incorrect. Blank positive confirmations should be used if the recipient is likely to return a positive confirmation without verifying the accuracy of the information. Choice "c" is incorrect. If a small number of accounts are involved and a large number of errors are anticipated, positive confirmations should be used.
Choice "d" is incorrect. Confirmations are used exclusively as a substantive test, and are not used in the assessment of control risk.
QUESTION 64
When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be:
A. Vendorswithwhomtheentityhaspreviouslydonebusiness. B. Amountsrecordedintheaccountspayablesubsidiaryledger. C. Payees of checks drawn in the month after the year-end.
D. Invoices filed in the entity's open invoice file.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:

Explanation:
Choice "a" is correct. When testing the completeness assertion for accounts payable, the appropriate population would be a list of vendors with whom the entity has previously done business. Choice "b" is incorrect. Confirming amounts recorded would test the existence assertion, rather than completeness.
Choice "c" is incorrect. Checks drawn in the subsequent period represent only a subset of the client's vendor listing. (It would not include liabilities that have not yet been paid). In obtaining information about the completeness assertion, the auditor is concerned with determining whether liabilities exist which are not reflected in the client's financial statements. Choice "d" is incorrect. The invoices filed in the entity's open invoice file would provide only a subset of the client's vendor listing. (It would not include liabilities for which the invoice had not yet been received.)
In obtaining information about the completeness assertion, the auditor is concerned with determining whether liabilities exist which are not reflected in the client's financial statements.
QUESTION 65
A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably:
A. Increasetheextentoftestsofcontrolsoftheinventorycycle.
B. Requesttheclienttoschedulethephysicalinventorycountattheendoftheyear.
C. Insist that the client perform physical counts of inventory items several times during the year. D. Apply gross profit tests to ascertain the reasonableness of the physical counts.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The assessment of control risk affects the nature, timing, and extent of substantive audit procedures. If the assessed level of control risk is high, the auditor would generally request that the client schedule the inventory at the end of the year. Choice "a" is incorrect. If the assessed level of control risk is high, an auditor would probably increase the extent of substantive testing, not the extent of tests of controls. Choice "c" is incorrect. Client performance of physical counts is an effective internal control, but requesting multiple inventory counts through the year is not an appropriate reaction to the auditor's assessment of control risk as high. The assessment of control risk affects the nature, timing, and extent of substantive audit procedures.
Choice "d" is incorrect. The assessment of control risk affects the nature, timing, and extent of substantive audit procedures. Given the high assessment of control risk, the auditor would prefer more effective substantive procedures; analytical procedures are generally less effective.
QUESTION 66
In auditing payroll, an auditor most likely would:
A. Verifythatchecksrepresentingunclaimedwagesaremailed. B. Traceindividualemployeedeductionstoentityjournalentries. C. Observe entity employees during a payroll distribution.

D. Compare payroll costs with entity standards or budgets.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The analytical procedure comparing payroll to standards or budgets is the substantive procedure most likely used for payroll.
Choice "a" is incorrect. Unclaimed payroll checks should be returned to an independent individual for follow up.
Choice "b" is incorrect. Individual employee deductions may be difficult to trace directly to journal entries, as companies often make a single journal entry for the sum of individual employee deductions. Comparing payroll costs to standards or budgets is a more commonly used substantive audit procedure. Choice "c" is incorrect. Observing payroll distribution is an effective procedure to detect payments to fictitious employees, but with the advent of electronic payroll distribution, it is not as likely to be performed as comparing payroll costs to standards or budgets.
QUESTION 67
In auditing long-term bonds payable, an auditor most likely would:
A. Performanalyticalproceduresonthebondpremiumanddiscountaccounts. B. Examinedocumentationofassetspurchasedwithbondproceedsforliens.
C. Compare interest expense with the bond payable amount for reasonableness. D. Confirm the existence of individual bondholders at year-end.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Comparing interest expense with the bond payable amount for reasonableness provides evidence that all interest expense was included and that the outstanding balance of the bonds payable is reasonable, as well as providing limited evidence concerning the amortization of bond discounts or premiums. Choice "a" is incorrect. The auditor would recalculate bond premiums and discounts, rather than use an analytical procedure.
Choice "b" is incorrect. The auditor would normally examine documentation of the bond instruments rather than of assets purchased to determine the existence of any liens on the assets. Choice "d" is incorrect. The auditor would confirm the outstanding bonds payable balance, not the existence of individual bondholders.
QUESTION 68
In performing tests concerning the granting of stock options, an auditor should:

A. ConfirmthetransactionwiththeSecretaryofStateinthestateofincorporation.
B. Verifytheexistenceofoptionholdersintheentity'spayrollrecordsorstockledgers. C. Determine that sufficient treasury stock is available to cover any new stock issued. D. Trace the authorization for the transaction to a vote of the board of directors.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. In auditing the granting of stock options, the auditor would normally trace the transactions to approval by the board of directors. Choice "a" is incorrect. The Secretary of State would not be able to confirm the granting of stock options.
Choice "b" is incorrect. Verifying the existence of option holders provides little evidence to support management's financial statement assertions. Choice "c" is incorrect. Converted stock options may be distributed from authorized common shares rather than treasury stock.
QUESTION 69
An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all:
A. Noncapitalizableexpendituresforrepairsandmaintenancehavebeenrecordedintheproperperiod. B. Expendituresforpropertyandequipmenthavebeenrecordedintheproperperiod.
C. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense. D. Expenditures for property and equipment have not been charged to expense.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Analysis of repairs and maintenance expense provides assurance with regard to management's assertion that expenditures for property and equipment have been capitalized and have not been charged to expense.
Choice "a" is incorrect. Analysis of repairs and maintenance accounts provides limited evidence about the appropriate cutoff of transactions for the period. Choice "b" is incorrect. Analysis of repairs and maintenance accounts does not provide evidence about the appropriate cutoff of expenditures for property and equipment. Choice "c" is incorrect. Analysis of capitalized expenditures might help identify noncapitalizable expenditures, which were capitalized erroneously.
QUESTION 70
Which of the following internal controls most likely would prevent direct labor hours from being charged to manufacturing overhead?

A. Periodicindependentcountsofwork-in-processforcomparisontorecordedamounts. B. Comparisonofdailyjournalentrieswithapprovedproductionorders.
C. Use of time tickets to record actual labor worked on production orders.
D. Reconciliation of work-in-process inventory with periodic cost budgets.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The use of time tickets to record actual labor worked on production orders is the best way to prevent direct labor from being charged to manufacturing overhead. Choice "a" is incorrect. The work-in-process inventory contains not only labor, but also materials and overhead.
Choice "b" is incorrect. Daily journal entries are made to record the use of labor and materials. Reconciliation of the amount of daily labor to approved production orders would not prevent direct labor from being charged to manufacturing overhead.
Choice "d" is incorrect. The work-in-process inventory contains not only labor, but also materials and overhead.
QUESTION 71
Which of the following internal controls most likely would be used to maintain accurate inventory records?
A. Perpetualinventoryrecordsareperiodicallycomparedwiththecurrentcostofindividualinventoryitems.
B. Ajust-in-timeinventoryorderingsystemkeepsinventorylevelstoadesiredminimum.
C. Requisitions, receiving reports, and purchase orders are independently matched before payment is approved. D. Periodic inventory counts are used to adjust the perpetual inventory records.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. In order to maintain accurate perpetual inventory records, periodic inventory counts should be used to adjust perpetual records.
Choice "a" is incorrect. By comparing perpetual inventory records to current costs, the company ensures that the inventory is appropriately valued at the lower of cost or market, but the accuracy of the perpetual inventory is not assured.
Choice "b" is incorrect. While a just-in-time inventory system will usually reduce the amount of inventory on hand, it does not necessarily improve the accuracy of inventory records. Choice "c" is incorrect. The matching of requisitions, receiving reports, and purchase orders is a control to ensure that purchases of inventory are properly authorized, but it does not necessarily improve the accuracy of inventory records.

QUESTION 72
When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the:
A. Trustcompanyhasnodirectcontactwiththeentityemployeesresponsibleformaintaininginvestmentaccountingrecords. B. Securitiesareregisteredinthenameofthetrustcompany,ratherthantheentityitself.
C. Interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities.
D. Trust company places the securities in a bank safe-deposit vault under the custodian's exclusive control.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud would be reduced if the trust company deals only with the person reconciling the accounts, and not with the employees responsible for maintaining investment records. Choice "b" is incorrect. The securities should be in the entity's name, and not the trust company's. Choice "c" is incorrect. If interest and dividend checks are mailed directly (custody of the asset) to the employee authorized to sell the securities (authorization), incompatible duties would result which may result in fraud being concealed.
Choice "d" is incorrect. Limiting access to the assets would reduce the possibility of theft, but would not reduce the possibility of concealing fraud.
QUESTION 73
Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements?
A. Accountsreceivableconfirmationrequestsyieldsignificantlyfewerresponsesthanexpected.
B. Audittrailsofcomputer-generatedtransactionsexistonlyforashorttime.
C. The chief financial officer does not sign the management representation letter until the date of the auditor's report. D. Management consults with other accountants about significant accounting matters.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Confirmation of accounts receivable confirm the existence of the receivable. A lower than expected response rate could be indicative of fictitious customer accounts. Choice "b" is incorrect. In a computerized accounting environment, audit trails generally exist for only a short time.
Choice "c" is incorrect. The