Certified Public Accountant CPA Questions + Answers Part 38

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QUESTION 110
The audit documentation that makes up the current file most likely would include a copy of the:

A. Bank reconciliation.
B. Pensionplancontract.
C. Articles of incorporation.
D. Flowchart of the internal control.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The audit documentation that makes up the current file most likely would include a copy of the bank reconciliation. Choice "b" is incorrect. The audit documentation that makes up the permanent file would include a copy of the pension plan contract. Choice "c" is incorrect. The audit documentation that makes up the permanent file would include a copy of the articles of incorporation. Choice "d" is incorrect. The audit documentation that makes up the permanent file would include a flowchart of the internal control.
QUESTION 111
The third standard of fieldwork states that the auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit. The appropriate audit evidence required by this standard may be obtained, in part, through:
A. Flowchartingtheinternalcontrolstructure. B. Properplanningoftheauditengagement. C. Analyticalprocedures.
D. Audit documentation.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Analytical procedures are substantive tests that provide audit evidence used to assess the reasonableness of account balances.
Choice "a" is incorrect. Flowcharting the internal control structure is used in obtaining an understanding of internal control, but it is not a procedure by which audit evidence is obtained. Choice "b" is incorrect. Audit evidence with respect to the year-end financial statement balances generally is not obtained as part of the planning process. Choice "d" is incorrect. Audit documentation describes the procedures followed and results of testing. Since it is prepared by the auditor, it does not represent audit evidence by itself.

QUESTION 112
In testing the existence assertion for an asset, an auditor ordinarily works from the:
A. Financialstatementstothepotentiallyunrecordeditems. B. Potentiallyunrecordeditemstothefinancialstatements. C. Accounting records to the supporting evidence.
D. Supporting evidence to the accounting records.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. In testing the existence assertion for an asset, an auditor ordinarily works from the accounting records to the supporting evidence.
Choice "a" is incorrect. If the auditor works from the financial statements, all items selected will have been recorded (i.e., because they are included in the financial statements). Therefore, starting with the financial statements will not lead to any unrecorded items. Choice "b" is incorrect. Tracing potentially unrecorded items to the financial statements tests for completeness, not existence.
Choice "d" is incorrect. Tracing from supporting evidence to the accounting records tests for completeness, not existence.
QUESTION 113
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. Accountspayable. B. Advertisingexpense. C. Accounts receivable. D. Payroll expense.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Auditors try to identify predictable relationships when using analytical review procedures. Payroll expense is predictable because it is based on objective information (number of employees and pay rates). It can generally be computed directly by the auditor. Choices "a", "b", and "c" are incorrect. These account balances are less predictable because they are affected by other factors. Payable and receivable balances can be affected by cash payments or receipts;

advertising expense is subject to management discretion.
QUESTION 114
Which of the following statements concerning audit evidence is correct?
A. Reliableevidencesupportingmanagement'sassertionsshouldbeconclusiveratherthanmerelypersuasive.
B. Aneffectiveinternalcontrolstructurecontributeslittletothereliabilityoftheevidencecreatedwithintheentity.
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.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Audit evidence consists of the underlying accounting data and all corroborating information available to the auditor. A client's accounting data by itself is not considered sufficient audit evidence to support the financial statements.
Choice "a" is incorrect. Reliable evidence supporting management's assertions only needs to be corroborative or persuasive, not conclusive.
Choice "b" is incorrect. An effective internal control structure contributes greatly to the reliability of the evidence created within the entity.
Choice "c" is incorrect. The cost of obtaining evidence is an important consideration to an auditor in selecting appropriate audit procedures. The cost of a procedure may be a valid reason for omitting that procedure, as long as an appropriate alternative procedure is available.
QUESTION 115
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. Occurrence.
B. Understandabilityandclassification. C. Completeness.
D. Valuation and accuracy.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:

Choice "b" is correct. 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 understandability and classification (i.e., classification of the note as current or noncurrent). Choice "a" is incorrect. Occurrence relates to whether recorded transactions have actually occurred during the given period. Since the renewal took place subsequent to year-end, the auditor would not be concerned about how the transaction was actually recorded until the next reporting period. Choice "c" is incorrect. Completeness relates to whether all transactions occurring in the period have been recorded. Since the renewal took place subsequent to year-end, it is not relevant to the completeness assertion for the year under audit.
Choice "d" is incorrect. Valuation and accuracy pertains to the fair disclosure of financial and other information at appropriate amounts. The renewal of a note payable shortly after year-end generally would not affect its valuation or its accuracy.
QUESTION 116
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 regarding:
A. Classification. B. Cutoff.
C. Accuracy.
D. Existence.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Cutoff tests are designed to determine whether transactions have been recorded in the proper period. Tests to detect credit sales made before the end of the year that have been (improperly) recorded in the subsequent year provide assurance about both cutoff and completeness (i.e., whether all current year sales have been properly included). Choice "a" is incorrect. Cutoff tests do not determine whether the components of the financial statements are properly presented, described and disclosed (classification). Choice "c" is incorrect. The cutoff testing described is designed to identify sales recorded in the subsequent year that more properly belong in the current year. This relates to the timing of the entry, not to its accuracy.
Choice "d" is incorrect. To test existence, the auditor would need to start with sales that were recorded in the current year, not those recorded in the subsequent year.
QUESTION 117
Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management's assertion of:
A. Completeness. B. Existence.
C. Presentation. D. Valuation.

Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management's assertion of valuation (i.e., has inventory been properly recorded at lower of cost or market?).
Choice "a" is incorrect. Inquiries regarding obsolete or slow-moving inventory items provide little assurance regarding whether all transactions have been properly included (completeness). Choice "b" is incorrect. Inquiries regarding obsolete or slow-moving inventory items provide little assurance regarding whether all recorded transactions are real (existence). Choice "c" is incorrect. Inquiries regarding obsolete or slow-moving inventory items provide little assurance regarding whether all transactions are properly presented, described, and disclosed.
QUESTION 118
Which of the following statements is generally correct about the reliability of audit evidence?
A. Themoreeffectivetheinternalcontrolstructure,themoreassuranceitprovidesaboutthereliabilityoftheaccountingdataandfinancialstatements.
B. Reliabilityofauditevidencereferstotheamountofcorroborativeevidenceobtained.
C. Information obtained indirectly from independent outside sources is more persuasive than the auditor's direct personal knowledge obtained through observation and inspection.
D. Reliability of audit evidence refers to the audit evidence obtained from outside the entity.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The reliability of accounting data and financial statements is enhanced by a satisfactory system of internal control.
Choice "b" is incorrect. The sufficiency (not reliability) of audit evidence refers to the amount of corroborative evidence obtained. Reliability refers to the quality of evidence. Choice "c" is incorrect. The auditor's direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly from independent outside sources. Choice "d" is incorrect. The reliability of audit evidence refers to its quality, and reliable audit evidence may be obtained from both inside and outside the entity.
QUESTION 119
Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

A. Tracetestcountsnotedduringtheentity'sphysicalcounttotheentity'ssummarizationofquantities.
B. Inspectagreementstodeterminewhetheranyinventoryispledgedascollateralorsubjecttoanyliens.
C. Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales. D. Inspect the open purchase order file for significant commitments that should be considered for disclosure.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Inspecting agreements to determine whether any inventory is pledged as collateral or subject to liens provides the most reliable evidence concerning the entity's assertion of rights and obligations. These documents will probably verify ownership and show lenders' restrictions on the inventories. Choice "a" is incorrect. Tracing from the auditor's test counts to the entity's summarization of quantities would provide evidence concerning the completeness assertion. Choice "c" is incorrect. Determining whether shipments were recorded as sales provides evidence about the completeness of recorded sales. Choice "d" is incorrect. Inspecting the open purchase order file for significant commitments that should be disclosed would provide evidence concerning the appropriate presentation, description, and disclosure of such items.
QUESTION 120
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's assertions about:
A. Existence.
B. Rightsandobligations.
C. Understandabilityandclassification. D. Valuation and allocation.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's assertions about valuation and allocation (i.e., if the inventory is becoming older, an obsolescence reserve might be required).
Choice "a" is incorrect. The existence assertion addresses whether assets, liabilities, and equity interests exist. Analysis of inventory turnover would not provide evidence concerning this assertion. Choice "b" is incorrect. Rights and obligations pertain to ownership of assets and liabilities. Analysis of inventory turnover would not provide evidence concerning this assertion. Choice "c" is incorrect. Understandability and classification deal with whether the components of the financial statements are properly presented, described, and disclosed. Analysis of inventory turnover would not provide evidence concerning this assertion.

QUESTION 121
Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness?
A. Compareasampleofshippingdocumentstorelatedsalesinvoices.
B. Observetheclient'sdistributionofpayrollchecks.
C. Confirm a sample of recorded receivables by direct communication with the debtors. D. Review standard bank confirmations for indications of kiting.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. In order to verify management's assertion of completeness, an auditor would most likely compare a sample of shipping documents to related sales invoices to determine that all goods shipped were properly included in sales.
Choice "b" is incorrect. Observing the client's distribution of payroll checks would test management's assertion regarding existence of employees.
Choice "c" is incorrect. Confirming a sample of recorded receivables by direct communication with the debtors (i.e., sending accounts receivable confirmations) would verify management's assertion of existence of the accounts receivable.
Choice "d" is incorrect. Reviewing standard bank confirmations does not provide evidence of kiting. Kiting involves interbank transfers, and bank confirmations only show year-end balances, not transfers between banks.
QUESTION 122
Which of the following procedures would provide the most reliable audit evidence?
A. Inquiriesoftheclient'sinternalauditstaffheldinprivate.
B. Inspectionofprenumberedclientpurchaseordersfiledinthevoucherspayabledepartment. C. Analyticalproceduresperformedbytheauditorontheentity'strialbalance.
D. Inspection of bank statements obtained directly from the client's financial institution.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. External evidence, such as bank statements obtained directly from the client's financial institution, is more reliable than internal evidence.

Choices "a", "b", and "c" are incorrect, which are all based on internally generated sources of evidence.
QUESTION 123
In a credit sales and cash receipts system flowchart symbol X could represent:
A. Auditor'stestdata.
B. Remittanceadvices.
C. Error reports.
D. Credit authorization forms.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Remittance advices (for customer payments) are the input document not identified in the credit sales and cash receipts system flowchart. Choice "a" is incorrect. The flowchart shows the client's processing of receipts, not the auditor's tests of controls.
Choice "c" is incorrect. Error reports, also called exception reports, are generated after processing, not before.
Choice "d" is incorrect. Credit authorization forms would not be an input used to create a transaction file, although they should be used prior to granting credit.
QUESTION 124
Which of the following presumptions does not relate to the reliability of audit evidence?
A. Themoreeffectivetheinternalcontrolstructure,themoreassuranceitprovidesabouttheaccountingdataandfinancialstatements.
B. Anauditor'sopinion,tobeeconomicallyuseful,isformedwithinreasonabletimeandbasedonevidenceobtainedatareasonablecost.
C. Evidence obtained from independent sources outside the entity is more persuasive 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.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The concept of cost-benefit is embodied in the auditor's opinion which, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost. The cost-benefit concept, however, bears no relationship to the reliability of audit evidence. Choice "a" is incorrect. The more effective the internal control structure, the higher level of assurance it provides about the accounting data and financial statements, and the more reliable

audit evidence will be.
Choice "c" is incorrect. Evidence obtained from independent sources outside the entity is more persuasive, or reliable, than evidence secured solely within the entity. Choice "d" is incorrect. The independent auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive (more reliable) than information obtained indirectly.
QUESTION 125
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 understandability and classification, and:
A. Valuationandallocation. B. Completeness.
C. Existence.
D. Rights and obligations.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. An auditor reviews the overhead allocation to determine that no excessive costs for idle plant were charged to inventory. This is one of the procedures performed by an auditor to determine that the inventory balance is properly valued (assertion of valuation and allocation). Choice "b" is incorrect. Completeness relates to ensuring that all assets, liabilities, and equity interests are properly included in the financial statements. The allocation of overhead costs to inventory does not affect this assertion.
Choice "c" is incorrect. Existence relates to whether assets, liabilities, and equity interests exist. The allocation of overhead costs to inventory does not affect this assertion. Choice "d" is incorrect. Rights and obligations pertain to ownership of assets and liabilities. The allocation of overhead costs to inventory does not affect this assertion.
QUESTION 126
An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of:
A. Rightsandobligations. B. Completeness.
C. Existence.
D. Valuation.
Correct Answer: B

Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When an auditor selects items for test counts and traces the test counts to the client's inventory listing, the auditor has obtained evidence concerning management's assertion of completeness (All inventory on hand has been properly included in the physical listing.) Choice "a" is incorrect. The assertion of rights and obligations would be tested by examining paid vendor's invoices, consignment agreements, and contracts. Choice "c" is incorrect. The assertion of existence would be supported by selecting from a sample of inventory items included in the physical listing and tracing to the floor to determine that the inventory was actually on hand. (Note how changing the direction of testing provides evidence for different assertions.)
Choice "d" is incorrect. Valuation pertains to presentation of balances at their appropriate amounts, whereas tracing test counts to the client's inventory listing relates to the testing of inventory quantities.
QUESTION 127
In testing plant and equipment balances, an auditor examines new additions listed on an analysis of plant and equipment. This procedure most likely obtains evidence concerning management's assertion
of:
A. Completeness.
B. Existence.
C. Understandabilityandclassification. D. Valuation and allocation.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. By examining the assets listed as new additions on an analysis of plant and equipment, an auditor obtains evidence concerning management's assertion of existence. Choice "a" is incorrect. Examining new additions that are already listed on the analysis does not provide evidence of completeness. The assertion of completeness relating to fixed assets might be tested by reviewing large repair and maintenance charges to determine if the cost should more properly have been capitalized (i.e., to evaluate whether fixed asset additions are complete). Choice "c" is incorrect. Understandability and classification deals with whether the components of the financial statements are properly presented, described, and disclosed. Examination of new assets does not provide evidence regarding this assertion.
Choice "d" is incorrect. Valuation and allocation pertains to presentation of balances at their proper amounts. Examination of new assets does not provide evidence regarding this assertion.
QUESTION 128

Which of the following evidence provides the greatest assurance of reliability?
A. Bank statement.
B. Bank reconciliation.
C. Cash receipts journal.
D. Cash disbursements journal.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. External evidence is more reliable than internal evidence. A bank statement is external evidence.
Choices "b", "c", and "d" are incorrect. Bank reconciliations, the cash receipts journal, and the cash disbursements journal are all internal evidence, which is not as reliable as external evidence.
QUESTION 129
Which of the following evidence provides the least assurance of reliability?
A. Accountsreceivableconfirmation. B. Salesinvoice.
C. Vendor invoice.
D. Bank statement.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Internal evidence is less reliable than external evidence. A sales invoice is internal evidence.
Choices "a", "c", and "d" are incorrect. Accounts receivable confirmations, vendor invoices, and bank statements are all external evidence, which is more reliable than internal evidence.
QUESTION 130
Which of the following is not true about accounting estimates?

A. Accountingestimatesmeasuretheeffectsofpasttransactionsoreventsthatcannotbedeterminedinatimelycost-effectivemanner. B. Accountingestimatesmeasuretheeffectsofthepresentstatusofanassetorliability.
C. An accounting estimate is an approximation of an account pending the outcome of a future event.
D. An accounting estimate is an approximation of past events that can be determined on a timely costeffective basis.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. An accounting estimate pertains to determining the approximation of past events that cannot be determined on a timely, cost-effective basis. If the effect of a past event can be determined on a timely, cost-effective basis, there would be no reason to make an estimate. Choices "a", "b", and "c" are incorrect. Accounting estimates may:
A. Measure the effects of past transactions that cannot be determined in a timely cost-effective manner. B. Measure the effects of the present status of an asset or liability. C. Be used to approximate an account pending the outcome of a future event (e.g., uncollectible accounts receivable).
QUESTION 131
An auditor should obtain sufficient knowledge of an entity's information system relevant to financial reporting to understand the:
A. Safeguardsusedtolimitaccesstocomputerfacilities.
B. Processusedtopreparesignificantaccountingestimates.
C. Procedures used to assure proper authorization of transactions. D. Policies used to detect the concealment of irregularities.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. An auditor is responsible for evaluating the reasonableness of significant accounting estimates made by management. An entity's information system may affect the quality of such estimates and therefore should be considered by the auditor. Choices "a", "c", and "d" are incorrect. Control activities such as those designed to limit access, ensure proper authorization, and discover fraud are not directly related to the information system relevant to financial reporting.
QUESTION 132
In evaluating an entity's accounting estimates, one of an auditor's objectives is to determine whether the estimates are:

A. Notsubjecttobias.
B. Consistentwithindustryguidelines. C. Based on objective assumptions. D. Reasonable in the circumstances.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. In evaluating an entity's accounting estimates, one of an auditor's objectives is to determine whether the estimates are reasonable in the circumstances and in conformity with GAAP. Choice "a" is incorrect. Most estimates are subjective in nature and thus subject to bias. Choice "b" is incorrect. Industry guidelines generally do not determine the amount of an accounting estimate, which is developed in accordance with GAAP.
Choice "c" is incorrect. Estimates are generally not based upon objective assumptions; rather, they are uncertain in nature, pending the outcome of future events.
QUESTION 133
Which of the following is true about an auditor's responsibility with respect to accounting estimates?
A. Theauditorisresponsibleforbothpreparingaccountingestimatesandevaluatingtheirreasonableness.
B. Theauditorisresponsibleforpreparingaccountingestimatesinaccordancewithgenerallyacceptedauditingstandards. C. The auditor is responsible for evaluating the reasonableness of accounting estimates.
D. The auditor has no responsibility with respect to accounting estimates.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The auditor is responsible for evaluating the reasonableness of accounting estimates.
Choices "a" and "b" are incorrect. Management is responsible for establishing a process for preparing accounting estimates. Choice "d" is incorrect. The auditor must determine whether the accounting estimate is reasonable in the circumstances.
QUESTION 134
Which of the following is not a reason justifying the use of accounting estimates?

A. Thevaluationormeasurementofsomeaccountsisuncertainpendingtheoutcomeoffutureevents. B. Dataaboutpasteventscannotbeaccumulatedinacost-effectivemanner.
C. Data about future events cannot be accumulated in a cost-effective manner.
D. Data about past events cannot be accumulated in a timely manner.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Accounting estimates are not used to measure future events. (Although, the measurement of some accounts may be uncertain pending the outcome of future events.) Choice "a" is incorrect. Valuation of certain historical accounts is uncertain, and may be dependent upon the outcome of future events. Accounting estimates are used in such situations to more properly reflect the account balance.
Choices "b" and "d" are incorrect. If data about past events cannot be accumulated in a timely, costeffective manner, accounting estimates may be required.
QUESTION 135
An auditor would be most likely to identify a contingent liability by obtaining a (an):
A. Accountspayableconfirmation.
B. Transferagentconfirmation.
C. Standard bank confirmation.
D. Related party transaction confirmation.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An auditor would be most likely to identify a contingent liability by obtaining a standard bank confirmation, which has an "exceptions and comments" box that specifically discloses contingent liabilities as endorser of loans, for open letters of credit, etc. Choice "a" is incorrect. Confirmations of accounts payable relate to existing liabilities, not to contingent liabilities. They are not always performed and rarely disclose contingencies. Choice "b" is incorrect. Transfer agent confirmations relate to purchase and sale of securities. They are not always used and rarely disclose contingencies.
Choice "d" is incorrect. Confirmations of related party transactions relate to transactions that have already occurred. They are not always used and rarely disclose contingencies.
QUESTION 136

The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a (an):
A. Clockcardortimeticket.
B. EmployeeFormW-2.
C. Employee personnel record. D. Payroll register entry.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. To test controls pertaining to the existence of payroll transactions, entries in the payroll register would be the population from which the sample is selecteD. (To test existence, the auditor needs to start with the accounting records and vouch backward to the source documents.) Choice "a" is incorrect. After the sample is taken from the payroll register, the selected samples are traced to clock cards or time tickets to verify that payroll transactions really exist/occurred. Choices "b" and "c" are incorrect. Sampling employee form W-2s and employee personnel records would test controls related to the completeness of recorded payroll, not existence of specific transactions.
QUESTION 137
Which of the following procedures most likely would be considered a weakness in an entity's internal controls over payroll?
A. Avoucherfortheamountofthepayrollispreparedinthegeneralaccountingdepartmentbasedonthepayrolldepartment'spayrollsummary. B. Payrollchecksarepreparedbythepayrolldepartmentandsignedbythetreasurer.
C. The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department.
D. The personnel department sends employees' termination notices to the payroll department.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. If the employee who distributes payroll checks returns unclaimed checks to the payroll department, an unscrupulous payroll department employee might be able to set up a fictitious employee and convert the checks once they are returned to the payroll department. Unclaimed checks should be turned over to the cashier in the treasurer's department. Choices "a", "b", and "d" are incorrect. All of the following procedures are good controls over the payroll system:

A. A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary.
B. Payroll checks are prepared by the payroll department and signed by the treasurer. D. The personnel department sends employees' hire and termination notices to the payroll department.
QUESTION 138
An auditor most likely would perform substantive tests of details on payroll transactions and balances when:
A. Cutofftestsindicateasubstantialamountofaccruedpayrollexpense.
B. Theassessedlevelofcontrolriskrelativetopayrolltransactionsislow.
C. Analytical procedures indicate unusual fluctuations in recurring payroll entries. D. Accruedpayrollexpenseconsistsprimarilyofunpaidcommissions.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An auditor most likely would perform substantive tests of details on payroll transactions and balances when analytical procedures indicate unusual fluctuations in recurring payroll entries. Generally an auditor can audit the payroll accounts utilizing mostly analytical procedures; however if the results of such procedures indicate unusual fluctuations, the auditor would employ more persuasive, substantive tests of details.
Choice "a" is incorrect. A substantial amount of accrued payroll expense would not necessarily cause the auditor to perform substantive tests of details on payroll transactions, since the balance may be effectively tested using analytical procedures.
Choice "b" is incorrect. When the assessed level of control risk relative to payroll is low, the auditor would probably perform only analytical procedures to test the related balances. If control risk rose to a high level, then substantive tests of details would probably be utilized. Choice "d" is incorrect. Unpaid commissions may be tested effectively with analytical procedures.
QUESTION 139
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the:
A. Humanresourcesfunctionfromthecontrollershipfunction.
B. Administrativecontrolsfromtheinternalaccountingcontrols.
C. Authorization of transactions from the custody of related assets. D. Operational responsibility from the recordkeeping responsibility.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation

Explanation/Reference:
Explanation:
Choice "c" is correct. The purpose of segregating the duties of hiring personnel (personnel department/human resources) and distributing payroll checks (treasurer's department) is to separate the authorization of transactions (hiring, pay rates, etC. are authorized by the personnel department/human resources) from the custody of related assets (cash or checks are held in the treasurer's department). Choice "a" is incorrect. Segregation of hiring personnel (human resources/ personnel) from distribution of payroll checks (treasurer's department) does not involve the controllership function. Choice "b" is incorrect. Keeping administrative controls (management's directives) and accounting controls separate is not accomplished by segregating the hiring and distribution functions. Choice "d" is incorrect. Neither operational responsibility nor recordkeeping responsibility includes distributing checks or hiring personnel.
QUESTION 140
An auditor most likely would extend substantive tests of payroll when:
A. Payrollisextensivelyauditedbythestategovernment.
B. Payrollexpenseissubstantiallyhigherthanintheprioryear.
C. Overpayments are discovered in performing tests of details.
D. Employees complain to management about too much overtime.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An auditor most likely would extend (increase) substantive tests of payroll when significant errors, such as overpayments, are discovered in performing the tests of details. Choice "a" is incorrect. The extensive auditing of payroll by the state government might serve to decrease substantive testing since presumably the extensive audit would have already flushed out any problem areas.
Choice "b" is incorrect. A substantial increase in payroll expense would not necessarily increase the substantive tests of payroll if the increase is readily explainable and supportable with analytical review procedures.
Choice "d" is incorrect. An increase in overtime would not necessarily cause the auditor to extend substantive tests of payroll, as long as the effect on payroll is supportable with analytical review procedures.
QUESTION 141
An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that:
A. Paymentstoemployeesarecomputedatauthorizedrates.
B. Employeesworkthenumberofhoursforwhichtheyarepaid.
C. Segregation of duties exists between the preparation and distribution of the payroll. D. Internal controls relating to unclaimed payroll checks are operating effectively.

Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. By vouching to time card data, the auditor is testing the existence assertion for hours worked.
Choice "a" is incorrect. Vouching to approved time card data would provide evidence about hours worked, not pay rates. Pay rates would be tested by comparing to personnel records. Choice "c" is incorrect. Vouching to approved time cards does not provide evidence about segregation of duties.
Choice "d" is incorrect. Vouching to the approved time cards does not provide evidence about internal controls related to unclaimed paychecks. The auditor would need to observe a payroll distribution to evaluate these controls.
QUESTION 142
In a comparison of 20X2 to 20X1, Neir Co.'s inventory turnover ratio increased substantially although sales and inventory amounts were essentially unchanged. Which of the following statements explains the increased inventory turnover ratio?
A. Costofgoodssolddecreased.
B. Accountsreceivableturnoverincreased. C. Total asset turnover increased.
D. Gross profit percentage decreased.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Gross profit percentage decreased.
In order for the inventory turnover ratio to increase, either cost of sales must increase or average inventory must decrease. Since the question indicates that inventory is unchanged, cost of sales must have increased.
If the cost of sales increased and sales remained constant, the gross profit percentage would decrease. Choice "a" is incorrect. If cost of goods sold decreases, the inventory turnover ratio would also decrease.

Choice "b" is incorrect. Accounts receivable turnover is calculated as sales divided by receivables. If sales remain the same while this ratio increases, receivables have likely declined. This would have no impact on inventory turnover.
Choice "c" is incorrect. Total asset turnover is calculated as sales divided by total assets. If sales remain the same while this ratio increases, total assets have likely declined. This would have no impact on inventory turnover.
QUESTION 143
Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables:
A. Valuation.
B. Classification. C. Existence.
D. Completeness.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Confirmation of accounts receivable provides evidence that the customer and the receivable exist.
Choice "a" is incorrect. Accounts receivable confirmations do not provide evidence regarding valuation, since they do not indicate whether customers have the intent or the ability to pay. Choice "b" is incorrect. Accounts receivable confirmations do not provide evidence regarding the appropriate classification of receivables in the financial statements. Choice "d" is incorrect. Accounts receivable confirmations are sent to recorded customers, so they do not provide evidence regarding the possible omission of valid accounts (i.e., completeness).
QUESTION 144
Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because:
A. Amajorityofrecipientsusuallylackthewillingnesstorespondobjectively.
B. Somerecipientsmayreportincorrectbalancesthatrequireextensivefollow-up.
C. The auditor cannot infer that all nonrespondents have verified their account information. D. Negative confirmations do not produce audit evidence that is statistically quantifiable.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:

Explanation:
Choice "c" is correct. Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because the auditor cannot infer that all nonrespondents have verified their account information.
Choice "a" is incorrect. Both positive and negative confirmations are equally affected by recipients' lack of willingness to respond objectively.
Choice "b" is incorrect. Both positive and negative confirms are equally affected by recipients' reporting of incorrect balances.
Choice "d" is incorrect. Negative confirmations returned do produce information (e.g., errors noted in accounts) that can be statistically quantifiable.
QUESTION 145
Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:
A. Thisisaduplicationofcutofftests.
B. Accountspayablebalancesatthebalancesheetdatemaynotbepaidbeforetheauditiscompleted. C. Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment. D. There is likely to be other reliable external evidence available to support the balances.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The documents available to support accounts payable balances come from external sources, which makes them more reliable.
Choice "a" is incorrect. Confirmation of accounts payable is not a duplication of cutoff tests. Cutoff testing addresses questions about proper period (allocation) while confirmation of accounts payable balances generally tests for understated balances.
Choice "b" is incorrect. If liabilities are not paid before the audit is completed, accounts payable confirmations would be more important, since there would be less other evidence supporting the liability.
Choice "c" is incorrect. Legal action usually takes a long time and correspondence with an attorney may not disclose all nonpayment problems. (Notice the all- inclusive word "all," usually the tip-off to a wrong answer.)
QUESTION 146
Two assertions for which confirmation of accounts receivable balances provides primary evidence are:
A. Completenessandvaluation.
B. Valuationandrightsandobligations. C. Rights and obligations and existence. D. Existence and completeness.
Correct Answer: C

Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Two assertions for which the confirmation of accounts receivable balances provides primary evidence are rights and obligations (does the client have a right to the receivable?) and existence (does the receivable really exist?).
Choices "a", "b", and "d" are incorrect. Confirmation of receivables does not provide evidence about completeness, since the sample begins with recorded receivables. (To test completeness, we would be looking for unrecorded receivables). In addition, confirmation of receivables does not necessarily provide evidence related to the valuation assertion. While the existence of the receivables is confirmed, their collectibility is not.
QUESTION 147
The negative request form of accounts receivable confirmation is useful particularly when the:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The negative request form of accounts receivable confirmation is useful particularly when:

- the assessed level of control risk relating to receivables is low (if control risk is high, then positive confirmation requests would probably be sent),
- there are many small balances (which would make it difficult to keep the number of positive confirmations to a reasonably low level), and
- consideration of the confirmation by the recipient is likely (since the auditor is relying on the customers' consideration as the sole basis of support for the confirmation). Choices "b", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 148
Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?
A. Reviewthecashreceiptsjournalforthemonthpriortotheyear-end.
B. Intensifythestudyoftheinternalcontrolstructureconcerningtherevenuecycle. C. Increase the assessed level of detection risk for the existence assertion.
D. Inspect the shipping records documenting the merchandise sold to the debtors.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. When an auditor does not receive replies to second requests on year-end accounts receivable confirmations, the auditor would most likely perform alternate procedures to support the existence of the receivables. These procedures include inspection of the shipping records to determine that the merchandise was actually sold to the debtors. Choice "a" is incorrect. Alternate procedures would also include reviewing the cash receipts journal for the months subsequent to year-end. Reviewing the cash receipts journal for the month prior to year-end would provide no evidence regarding the existence of a year-end receivable, which obviously had not been paid by year-end.
Choice "b" is incorrect. Intensifying the study of the internal control structure concerning the revenue cycle would provide no additional evidence related to the specific accounts receivable confirmations that were not returned.
Choice "c" is incorrect. Increasing the assessed level of detection risk for the existence assertion would provide no additional evidence related to the specific accounts receivable confirmations that were not returned by the customer. (By sending out confirmations, the auditor is already performing substantive tests).
QUESTION 149
In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?
A. Asubstantialnumberofaccountsmaybeindisputeandtheaccountsreceivablebalancearisesfromsalestoafewmajorcustomers.
B. Asubstantialnumberofaccountsmaybeindisputeandtheaccountsreceivablebalancearisesfromsalestomanycustomerswithsmallbalances. C. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
D. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
Correct Answer: D

Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The use of negative confirmations most likely would be justified when there are a small number of accounts that may be in dispute and the accounts receivable balance arises from sales to many customers with small balances (e.g., utility consumer customers). Choice "a" is incorrect. Positive (not negative) confirmations should be used when a substantial number of accounts are expected to be in dispute, or if the accounts receivable balance is comprised of accounts from a few major customers.
Choice "b" is incorrect. Positive (not negative) confirmations should be used when a substantial number of accounts are expected to be in dispute.
Choice "c" is incorrect. Positive (not negative) confirmations should be used when the accounts receivable balance is comprised of accounts from a few major customers.
QUESTION 150
To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would:
A. Examinetheshippingdocumentsthatprovideevidencefortheexistenceassertion.
B. Verifythesourcesandcontentsofthefaxesintelephonecallstothesenders.
C. Consider the faxes to be nonresponses and evaluate them as unadjusted differences.
D. Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. In order to validate the legitimacy of a faxed confirmation, the auditor is likely to call the senders to verify the sources and contents.
Choice "a" is incorrect. Examining shipping documents is an alternative procedure that is more likely to be performed if the confirmation was not received at all. Choice "c" is incorrect. Treating the faxes as non-responses would be to ignore an important source of audit evidence. Treating them as unadjusted differences may cause the auditor to conclude that the accounts receivable balance is misstated, when in fact it is not. Choice "d" is incorrect. Inspecting the faxes for forgeries or alterations is beyond the professional capability of the CPA.
QUESTION 151
Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations?

Explanation:

A. Therecipientsarelikelytosigntheconfirmationswithoutdevotingproperattentiontothem. B. Subsequentcashreceiptsareunusuallydifficulttoverify.
C. Analytical procedures indicate that few exceptions are expected.
D. The combined assessed level of inherent risk and control risk is low.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Choice "a" is correct. If the recipients of confirmations are likely to sign them without devoting proper attention to them, it is possible that a misstatement in the related receivable will not be discovered by the auditor (i.e., when the balance on the confirmation is incorrect and the recipient mistakenly signs it anyway). Use of the blank form of confirmation provides a greater degree of assurance in this situation because it forces the recipient to determine the receivable balance. Choice "b" is incorrect. Inability to verify subsequent cash receipts makes follow-up of unconfirmed accounts more difficult. Since blank forms may result in lower response rates (because they require additional effort), use of the blank form in this situation would be less likely. Choice "c" is incorrect. If few exceptions are expected, it would be acceptable to use positive confirmations. (Blank confirmations may provide a greater degree of assurance, which would be more important if many exceptions were expected.)
Choice "d" is incorrect. In low risk situations, it would be acceptable to use positive confirmations. (Blank confirmations may provide a greater degree of assurance, which would be more important in high risk situations.)