Certified Public Accountant CPA Questions + Answers Part 40
Posted: Tue Feb 22, 2022 6:45 pm
QUESTION 181
When a client company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning:
A. Restrictionsonthepaymentofdividends.
B. Thenumberofsharesissuedandoutstanding.
C. Guarantees of preferred stock liquidation value.
D. The number of shares subject to agreements to repurchase.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When a client company does not maintain its own stock records, the auditor should request the transfer agent and registrar to confirm the number of shares issued and outstanding. Choice "a" is incorrect. Restrictions on the payment of dividends should be in the board minutes, or possibly confirmed by the bank if the restrictions are due to outstanding loan(s). Choice "c" is incorrect. Guarantees of preferred stock liquidation value should be in the board minutes or the stock redemption agreement.
Choice "d" is incorrect. The number of shares subject to agreements to repurchase should be in the board minutes and in any repurchase agreements.
QUESTION 182
The primary responsibility of a bank acting as registrar of capital stock is to:
A. Ascertainthatdividendsdeclareddonotexceedthestatutoryamountallowableinthestateofincorporation.
B. Accountforstockcertificatesbycomparingthetotalsharesoutstandingtothetotalintheshareholderssubsidiaryledger.
C. Act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury stock. D. Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Large companies often use a registrar to provide registration services and maintain the stockholder list. The primary responsibility of the registrar is to verify that stock is issued only with proper authorization.
Choice "a" is incorrect. The company's board of directors bears responsibility for proper declaration of dividends, not the stock registrar.
Choice "b" is incorrect. Since the company's management is responsible for maintaining accurate accounting records, a responsible company employee (not the registrar) would periodically compare the recorded number of shares outstanding (per company records) with the total in the shareholders' subsidiary ledger (per the registrar).
Choice "c" is incorrect. A registrar does not have the described responsibility with respect to mergers, acquisitions, and the sale of treasury stock.
QUESTION 183
In auditing a client's retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate management's financial statement assertions with respect to:
A. Transactionsandevents.
B. Accountbalances.
C. Presentation and disclosure. D. Audit risk and materiality.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Restrictions on retained earnings should be shown as appropriations in the financial statements. An auditor attempts to determine whether any such restrictions exist to verify that proper disclosures (i.e., retained earnings appropriations) have been made. Choices "a" and "b" are incorrect. Retained earnings appropriations restrict the company from paying dividends in excess of the unappropriated portion of retained earnings. This relates to presentation and disclosure, not to transactions, events, or balances.
Choice "d" is incorrect. Audit risk and materiality are not financial statement assertions.
QUESTION 184
Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
A. Examiningunusualrelationshipsbetweenmonthlyaccountspayablebalancesandrecordedcashpayments.
B. Reconcilingvendors'statementstothefileofreceivingreportstoidentifyitemsreceivedjustpriortothebalancesheetdate.
C. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
D. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Unrecorded trade accounts payable are best identified by reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
Choice "a" is incorrect. There is not usually a predictable relationship between accounts payable and cash payments, because management can pay cash or incur additional liabilities at its discretion. Choice "b" is incorrect. Reconciling vendors' statements to the file of receiving reports would not identify unrecorded payables, as the vendor statement would still agree with the receiving report even if the payable were not recorded.
Choice "d" is incorrect. Investigating payables already recorded would not help identify unrecorded trade payables.
QUESTION 185
An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all:
A. Purchaseorders.
B. Canceledchecks. C. Receiving reports. D. Approved vouchers.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. To determine whether checks are being issued for unauthorized expenditures, the auditor is most likely to select from the population of canceled checks. For each check, the auditor would then look for evidence supporting the payment, such as a purchase order, a receiving report, and an approved invoice.
Choice "a" is incorrect. If the auditor selected from the population of purchase orders, he or she would never find those check requests that were missing the purchase orders. Without purchase orders, the expenditures would be considered unauthorized.
Choice "c" is incorrect. If the auditor selected from the population of receiving reports, he or she would never find those check requests that were missing the receiving reports. Without receiving reports, the expenditures would be considered unauthorized.
Choice "d" is incorrect. If the auditor selected from the population of approved vouchers, he or she would never find those check requests that were missing the approved vouchers. Without approved vouchers, the expenditures would be considered unauthorized.
QUESTION 186
The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to: A. Detectkitingactivitiesthatmayotherwisenotbediscovered.
B. Corroborateinformationregardingdepositandloanbalances.
C. Provide the data necessary to prepare a proof of cash.
D. Request information about contingent liabilities and secured transactions.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The primary purpose of sending a standard confirmation request to financial institutions is to corroborate information regarding deposit and loan balances. Choice "a" is incorrect. The bank cut-off statement, not the standard bank confirmation form, is used to detect kiting activities that may otherwise not be discovered. Choice "c" is incorrect. The standard confirmation does not provide all of the information necessary to prepare a proof of cash (i.e., bank reconciliation) since it only confirms information at the end of a period, and not activity (e.g., deposits, checks, etc.) occurring during the period. Choice "d" is incorrect. The standard confirmation request seeks information on contingent liabilities and security agreements, but this is not the primary purpose of sending the confirmation.
QUESTION 187
To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all:
A. Paymentvouchers.
B. Receivingreports.
C. Purchase requisitions. D. Vendor's invoices.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. This test consists of tracing from receiving reports for inventory received before year-end to the accounts payable trial balance to determine whether the purchase has been properly recorded.
Choice "a" is incorrect. In testing for completeness of payables, the auditor tries to determine whether there are payables that have not been recorded. If the auditor selects from payment vouchers, he or she may be unlikely to select an unrecorded payable, since unrecorded payables that have not yet been paid would not have corresponding payment vouchers.
Choice "c" is incorrect. Purchase requisitions do not indicate when the inventory was received, and therefore they are not useful for testing the completeness of accounts payable. Choice "d" is incorrect. Vendor's invoices do not generally indicate when the inventory was received, and therefore they are not useful for testing the completeness of accounts payable.
QUESTION 188
Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
A. Reconcilereceivingreportswithrelatedcashpaymentsmadejustpriortoyear-end.
B. Contrasttheratioofaccountspayabletopurchaseswiththeprioryear'sratio.
C. Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.
D. Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. When performing a search for unrecorded payables, an auditor most likely would compare cash payments occurring after the balance sheet date with the accounts payable trial balance to determine that disbursements that pertain to the prior year's business (year under audit) have been properly accrued. This procedure is commonly known as an "out-of-period-search." Choice "a" is incorrect. If the cash payment is made just prior to year-end, then the related liability would have been paid/relieved as of the year-end balance sheet date. Choice "b" is incorrect. An analytical review procedure that contrasts the ratio of accounts payable to purchases with the prior year's ratio would not provide the best evidence, since payable balances are not predictable and may vary at management's discretion. Choice "c" is incorrect. Vouching a sample of creditor balances already recorded does not provide any evidence concerning unrecorded payables.
QUESTION 189
Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
A. Reviewingcashdisbursementsrecordedsubsequenttothebalancesheetdatetodeterminewhethertherelatedpayablesapplytothepriorperiod.
B. Investigatingpayablesrecordedjustpriortoandjustsubsequenttothebalancesheetdatetodeterminewhethertheyaresupportedbyreceivingreports. C. Examining unusual relationships between monthly accounts payable balances and recorded cash payments.
D. Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. When performing a search for unrecorded payables, an auditor most likely would examine cash disbursements recorded after the balance sheet date to determine whether the payables related to the prior period have been included in the accounts payable trial balance. Choice "b" is incorrect. Investigating payables already recorded does not provide any evidence concerning unrecorded payables.
Choice "c" is incorrect. While a high level of cash payments compared with a low level of payable balances may be indicative of unrecorded payables, comparing these amounts would not be the most effective method for identifying unrecorded payables.
Choice "d" is incorrect. Comparing vendor statements to receiving reports is an audit step not involving the accounts payable balances; this step, therefore, provides no information about accounts payable.
QUESTION 190
Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?
A. Accountsreceivable. B. Credit.
C. Accounts payable. D. Treasurer.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Proper authorization of write-offs of uncollectible accounts are approved by the treasurer, who is not involved in the record-keeping function or the initiation of the write-off. Choice "a" is incorrect. Proper segregation of duties requires that the authorization of the write-off be performed by individuals not involved with the accounts receivable department that records the original transactions.
Choice "b" is incorrect. The credit department should grant credit and approve credit limits before the sale is made. If the credit department also approved the write- offs of accounts, there would be a lack of appropriate segregation of duties.
Choice "c" is incorrect. Even though the accounts payable department is independent of the accounts receivable department, they are not particularly knowledgeable regarding the customers and therefore would not be the best candidates for authorizing the write-offs of accounts receivable.
QUESTION 191
An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the:
A. Prelistofindividualchecks. B. Monthlybankreconciliation. C. Dailydepositslip.
D. Remittance advices.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the daily deposit slip.
(That is his or her job).
Choice "a" is incorrect. The prelist of individual checks is prepared by a clerk in the mailroom upon opening the mail.
Choice "b" is incorrect. The monthly bank reconciliation is prepared by an internal auditor or someone else that is independent of the cash receipts and cash disbursements functions. Choice "d" is incorrect. The remittance advice is prepared by the customer and is mailed along with the check (remittance).
QUESTION 192
If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the:
A. Cashreceiptsjournaltothesalesjournal.
B. Salesjournaltothecashreceiptsjournal.
C. Source documents to the accounting records. D. Accounting records to the source documents.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. If the objective of a test of details is to detect overstatements of sales (existence assertion), the auditor should trace transactions from the accounting records (i.e., sales journal) to the source documents (e.g., customer order, sales order, shipping documents, etc.). Choices "a" and "c" are incorrect. Tracing from the supporting documents to the accounting records gives assurance as to the completeness assertion (all sales are properly included). Choice "b" is incorrect. Tracing from the sales journal to the cash receipts journal only shows whether cash has been received for the sale. Failure to find a related cash receipt may indicate simply that the sale was made on account.
QUESTION 193
Which of the following procedures most likely would not be an internal control procedure designed to reduce the risk of errors in the billing process? A. Comparingcontroltotalsforshippingdocumentswithcorrespondingtotalsforsalesinvoices.
B. Usingcomputerprogrammedcontrolsonthepricingandmathematicalaccuracyofsalesinvoices. C. Matching shipping documents with approved sales orders before invoice preparation.
D. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger would probably not reduce the risk of errors in the billing process, since any errors in billing would likely be included in both the sales and accounts receivable balances. Choice "a" is incorrect. Comparing control totals for shipping documents with corresponding totals for sales invoices is a procedure designed to determine that all shipments have been billed. Choice "b" is incorrect. Using computer-programmed controls on sales invoices would reduce the risk of errors in the billing process.
Choice "c" is incorrect. Matching shipping documents with approved sales orders before invoice preparation provides assurance that the quantity and terms of the invoice are correct.
QUESTION 194
An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period to detect whether:
A. Thecashreceiptsjournalwasheldopenforafewdaysaftertheyear-end.
B. Thelastchecksrecordedbeforetheyear-endwereactuallymailedbytheyear-end. C. Cash balances were overstated because of kiting.
D. Any unusual payments to or receipts from related parties occurred.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period (bank transfer test) to detect whether cash balances were overstated because of kiting (concealing a cash shortage by depositing in one bank an unrecorded check of another disbursement bank, effectively recording the same funds in both bank accounts). Choice "a" is incorrect. If the cash receipts journal were held open for a few days after the year- end, cash receipts from the subsequent year would be erroneously included in the current year's accounting records. A bank transfer test is not typically used to detect this situation. Choice "b" is incorrect. If the last checks recorded before the year-end were actually mailed by the yearend, appropriate cut-off has occurred. Bank transfer tests would not be required to evaluate this situation.
Choice "d" is incorrect. A bank transfer test is not generally used to detect unusual payments to or receipts from related parties.
QUESTION 195
Which of the following most likely would be detected by an auditor's review of a client's sales cut-off?
A. Shipmentslackingsalesinvoicesandshippingdocuments. B. Excessivewrite-offsofaccountsreceivable.
C. Unrecorded sales at year-end.
D. Lapping of year-end accounts receivable.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A sales cut-off test is used to detect unrecorded sales (shipments where no invoice has been generated) or sales allocated to the wrong period (January sales included in December by "holding the books open").
Choice "a" is incorrect. A sales cut-off test relies on shipping documents to test the "cut-off" of sales invoices. Shipping documents are selected and the corresponding sale is examined to determine whether it was recorded in the proper period. A cut-off test is unlikely to detect the omission of shipping documents, since transactions without such documentation would have no chance of being selected for testing.
Choices "b" and "d" are incorrect. Sales cut-off testing generally does not involve tests related to accounts receivable.
QUESTION 196
The information below was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ended December 31, 20X1. Assume all checks are dated and issued on December 30, 20X1.
Which of the following checks might indicate kiting?
A. #101and#303. B. #202and#404. C. #101 and #404. D. #202 and #303.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Kiting is concealing a cash shortage by depositing in one bank an unrecorded check of another disbursement bank, so that the deposit is recorded in both banks. An auditor would most likely detect kiting by reviewing the bank transfer schedule and following-up on all transfers for which the receipt date per bank is recorded in the accounting period before the disbursement date. Checks #202 and #404 both meet this criterion and therefore might indicate kiting. Choices "a", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 197
The information below was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ended December 31, 20X1. Assume all checks are dated and issued on December 30, 20X1.
Which of the following checks illustrate deposits/transfers in transit at December 31, 20X1?
A. #101and#202. B. #101and#303. C. #202 and #404. D. #303 and #404.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A deposit in transit is a disbursement recorded in one accounting period with the receipt occurring in the subsequent period. Assuming all checks were dated and issued on December 30, 20X1, any deposits with a receipt date in 20X2 would indicate a deposit in transit at December 31, 20X1. Checks #101 and #303 both meet this criterion and therefore illustrate deposits/transfers in transit at December 31, 20X1.
Choices "a", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 198
Tracing bills of lading to sales invoices provides evidence that:
A. Shipmentstocustomerswererecordedassales. B. Recordedsaleswereshipped.
C. Invoiced sales were shipped.
D. Shipments to customers were invoiced.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Tracing from a population of bills of lading (shipping documents) to sales invoices provides evidence that shipments to customers were invoiced. Choice "a" is incorrect. Tracing bills of lading to the sales invoice provides assurance that shipments to customers were invoiced, not that they were recorded as sales. Choice "b" is incorrect. Tracing from the sales journal to bills of lading provides evidence that recorded sales were shipped.
Choice "c" is incorrect. Tracing from a population of sales invoices to the bills of lading provides evidence that invoiced sales were shipped.
QUESTION 199
Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?
A. Employeesresponsibleforauthorizingsalesandbaddebtwrite-offsaredeniedaccesstocash.
B. Shippingdocumentsandsalesinvoicesarematchedbyanemployeewhodoesnothaveauthoritytowriteoffbaddebts.
C. Employees involved in the credit-granting function are separated from the sales function.
D. Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Sales personnel will have a tendency to maximize sales volume by selling to customers that may not be creditworthy, thereby resulting in high bad debt write-offs. To prevent sales to customers that may not be creditworthy, employees involved in the credit-granting function are separated from the sales function.
Choice "a" is incorrect. Employees responsible for authorizing sales and bad debt write-offs should be denied access to cash to prevent the embezzlement of cash, not to prevent them from maximizing sales volume at the expense of high bad debt write-offs.
Choice "b" is incorrect. This control does not affect the sales department or the tendency to maximize sales volume at the expense of high bad debt write-offs. Choice "d" is incorrect. This control does not affect the sales department or the tendency to maximize sales volume at the expense of high bad debt write-offs.
QUESTION 200
Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?
A. Thebillingdepartmentsupervisorsendscopiesofapprovedsalesorderstothecreditdepartmentforcomparisontoauthorizedcreditlimitsandcurrent customer account balances.
B. Theaccountingdepartmentsupervisorindependentlyreconcilestheaccountsreceivablesubsidiaryledgertotheaccountsreceivablecontrolaccountmonthly.
C. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.
D. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Selecting prenumbered shipping documents and matching them with entries in the sales journal is a control that would help ensure that all credit sales transactions are recorded. (Shipping documents without corresponding sales journal entries might indicate unrecorded sales). Choice "a" is incorrect. Sending copies of approved sales orders to the credit department for comparison to authorized credit limits and current account balances before the sale is made controls the risk of bad debts, not the proper recording of credit sales transactions. Choice "b" is incorrect. Reconciling the accounts receivable subsidiary ledger to the control account ensures that the accounts receivable balance in the general ledger is properly recorded, but would not necessarily identify unrecorded credit sales. (Unrecorded credit sales would be omitted from both places, and therefore the subsidiary ledger and control account would still agree). Choice "c" is incorrect. Controlling the mailing of monthly statements and investigating differences reported by the customers is not an effective control over the proper recording of credit sales transactions, since it is possible that customers would not complain if they were not billed.
QUESTION 201
An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using:
A. Employeefidelitybonds.
B. Independentlypreparedmailroomprelists. C. Daily check summaries.
D. A bank lockbox system.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E)
Explanation Explanation/Reference:
Explanation:
Choice "d" is correct. An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using a bank lockbox system. With this system the remittances are mailed directly to the bank where they are immediately deposited. The bank sends the remittances and deposit detail to the entity on a daily basis. Most larger companies use a lockbox system.
Choice "a" is incorrect. Employee fidelity bonds may cover some of the losses suffered by misappropriation, but they do nothing to prevent the embezzlement in the first place. Choices "b" and "c" are incorrect. Independently prepared mailroom prelists and daily check summaries are good controls over cash receipts, but they are not as effective at reducing the risk of employee misappropriation as a lockbox system. With a lockbox system, employees have no access to cash receipts and therefore no opportunity to misappropriate cash.
QUESTION 202
Which of the following internal control procedures most likely would deter lapping of collections from customers?
A. Independentinternalverificationofdatesofentryinthecashreceiptsjournalwithdatesofdailycashsummaries. B. Authorizationofwrite-offsofuncollectibleaccountsbyasupervisorindependentofcreditapproval.
C. Segregation of duties between receiving cash and posting the accounts receivable ledger.
D. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Lapping is a defalcation in which a cash shortage is concealed by applying later customer remittances to a receivable account from which money was stolen. Lapping can be deterred by appropriate segregation of duties between receiving cash and posting to the accounts receivable ledger.
This makes it more difficult for the employee who is stealing the cash to cover it up through inappropriate remittance credits.
Choice "a" is incorrect. Even with a lapping scheme, the dates of cash receipts journal entries and the dates of daily cash summaries would still agree, since the stolen funds would be excluded from both places and subsequent receipts would be included in both places. Choice "b" is incorrect. The authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval would not deter lapping, since lapping schemes do not involve write- offs.
Choice "d" is incorrect. Even with a lapping scheme, the daily cash summary would still agree with the sum of the cash receipts journal entries. Stolen funds would be excluded from both places and subsequent receipts would be included in both places.
QUESTION 203
Tracing shipping documents to prenumbered sales invoices provides evidence that: A. Noduplicateshipmentsorbillingsoccurred.
B. Shipmentstocustomerswereproperlyinvoiced.
C. Allgoodsorderedbycustomerswereshipped.
D. All prenumbered sales invoices were accounted for.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Tracing from shipping documents (source documents) to sales invoices provides evidence that shipments to customers are properly invoiced. Choice "a" is incorrect. Tracing shipping documents to sales invoices wouldn't necessarily identify duplicate shipments or billings. Duplicate shipments or billings could be identified by accounting for prenumbered shipping documents and sales invoices.
Choice "c" is incorrect. The auditor would compare the signed purchase order to shipping documents to determine if all goods ordered by the customer were shipped. Choice "d" is incorrect. To determine that all prenumbered sales invoices were accounted for, an auditor would review the consecutive numbering of invoices and then trace from the sales invoices into the sales journal.
QUESTION 204
Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?
A. Observetheconsistencyoftheemployees'useofcashregistersandtapes.
B. Inquireaboutemployees'accesstorecordedbutundepositedcash.
C. Trace the deposits in the cash receipts journal to the cash balance in the general ledger. D. Compare the cash balance in the general ledger with the bank confirmation request.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Observing the consistent use of cash registers and tapes by employees would provide evidence to the auditor regarding the controls over the completeness of cash receipts. Choices "b", "c", and "d" are incorrect. The completeness assertion relates to the recording of all transactions. Inquiries about access to recorded cash, tracing from the cash receipts journal, and testing the general ledger balance do not provide evidence regarding possible unrecorded transactions.
QUESTION 205
For effective internal accounting control, the accounts payable department should compare the information on each vendor's invoice with the:
A. Receivingreportandthepurchaseorder.
B. Receivingreportandthevoucher.
C. Vendor's packing slip and the purchase order. D. Vendor's packing slip and the voucher.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. For effective internal accounting control, the accounts payable department should compare the information on each vendor's invoice with the receiving report and the purchase order to assure that goods were received and that the purchase was properly authorized. Choices "b", "c", and "d" are incorrect. Vendor packing slips and internally generated vouchers do not provide assurance that goods were received and that the purchase was properly authorized.
QUESTION 206
Which of the following is the most effective control activity to detect vouchers that were prepared for the payment of goods that were not received?
A. Countgoodsuponreceiptinstoreroom.
B. Matchpurchaseorder,receivingreport,andvendor'sinvoiceforeachvoucherinaccountspayabledepartment. C. Compare goods received with goods requisitioned in receiving department.
D. Verify vouchers for accuracy and approval in internal audit department.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The most effective control activity to detect vouchers that were prepared for the payment of goods that were not received is to match the purchase order, receiving report, and vendor's invoice for each voucher in the accounts payable department. Choices "a" and "c" are incorrect. Controls that start with goods received would not be effective at detecting a situation where vouchers are prepared for goods that were not received. Choice "d" is incorrect. Verifying vouchers for accuracy and approval in the internal audit department might detect vouchers that were prepared for the payment of goods that were not received. However, this is not the most effective control, since it would likely occur subsequent to the processing of the transaction.
QUESTION 207
For effective internal control purposes, the vouchers payable department generally should:
A. Stamp,perforate,orotherwisecancelsupportingdocumentationafterpaymentismailed.
B. Ascertainthateachrequisitionisapprovedastoprice,quantityandqualitybyanauthorizedemployee. C. Obliterate the quantity ordered on the receiving department copy of the purchase order.
D. Establish the agreement of the vendor's invoice with the receiving report and purchase order.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. For effective internal control purposes, the vouchers payable department generally should establish the agreement of the vendor's invoice with the receiving report and purchase order.
Choice "a" is incorrect. The treasury or cash disbursement department should stamp, perforate, or otherwise cancel supporting documentation after payment is mailed. Choice "b" is incorrect. The purchasing department should verify that each requisition has been properly approved.
Choice "c" is incorrect. The purchasing department should obliterate the "quantity ordered" on the receiving department copy of the purchase order.
QUESTION 208
To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all:
A. Vendor'sinvoices. B. Purchaseorders. C. Receiving reports. D. Canceled checks.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The auditor is looking for situations where merchandise has been received but was not recorded. Such situations may be identified by selecting receiving reports and then determining whether the related payable was recorded.
Choice "a" is incorrect. Selecting from vendor's invoices might allow a purchase to be selected for which the goods have not yet been received.
Choice "b" is incorrect. Selecting from purchase orders might allow a purchase to be selected for which the goods have not yet been received.
Choice "d" is incorrect. Selecting from canceled checks will not result in testing of accounts payable, since the payable is eliminated once payment is made.
QUESTION 209
Which of the following control activities is not usually performed in the vouchers payable department?
A. Determiningthemathematicalaccuracyofthevendor'sinvoice. B. Havinganauthorizedpersonapprovethevoucher.
C. Controlling the mailing of the check and remittance advice.
D. Matching the receiving report with the purchase order.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Internal control is enhanced if check mailing is performed by the treasury (cash disbursements) department. Choice "a" is incorrect. Mathematical accuracy of the vendor's invoice is usually verified in the vouchers payable department.
Choice "b" is incorrect. Voucher approval by an authorized person is usually performed in the vouchers payable department.
Choice "d" is incorrect. Matching the receiving report with the purchase order is usually performed in the vouchers payable department.
QUESTION 210
Which of the following internal control procedures most likely addresses the completeness assertion for inventory?
A. Workinprocessaccountisperiodicallyreconciledwithsubsidiaryrecords.
B. Employeesresponsibleforcustodyoffinishedgoodsdonotperformthereceivingfunction.
C. Receiving reports are prenumbered and periodically reconciled.
D. There is a separation of duties between payroll department and inventory accounting personnel.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The internal control procedure of prenumbering receiving reports and periodically reconciling them to the inventory records most likely addresses the completeness assertion for inventory, because it allows the auditor to determine whether all goods received have been recorded as inventory. Choice "a" is incorrect. Reconciling the work in process account (per the general ledger) with subsidiary records (direct materials, direct labor, overhead) tests that those records are interfacing properly, but does not provide any information about the completeness assertion for inventory. Choice "b" is incorrect. Separation of
employees responsible for custody of finished goods from the receiving function addresses the safeguarding of assets, not the completeness of the inventory records. Choice "d" is incorrect. The separation of duties between the payroll department and inventory accounting personnel is related to the valuation (pricing) of inventory, not its completeness.
QUESTION 211
Which of the following controls would be most effective in assuring that recorded purchases are free of material errors?
A. Thereceivingdepartmentcomparesthequantityorderedonpurchaseorderswiththequantityreceivedonreceivingreports. B. Vendor'sinvoicesarecomparedwithpurchaseordersbyanemployeewhoisindependentofthereceivingdepartment.
C. Receiving reports require the signature of the individual who authorized the purchase.
D. Purchase orders, receiving reports, and vendor's invoices are independently matched in preparing vouchers.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The most effective control in assuring that recorded purchases are free of material errors is the independent matching of the purchase order, receiving report, and vendor's invoices in preparing the vouchers on which the disbursement check is based. Choice "a" is incorrect. The receiving department should not have access to the quantity ordered on the purchase order. This forces receiving department employees to actually perform an independent count. Choice "b" is incorrect. It is not enough to compare only vendor invoices and purchase orders, as this will still allow payment for goods that were not received. Choice "c" is incorrect. Requiring that receiving reports be authorized by the individual who authorized the purchase does not ensure that the invoice and the related payment will be properly recorded.
QUESTION 212
Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?
A. Isanauthorizedpurchaseorderrequiredbeforethereceivingdepartmentcanacceptashipmentorthevoucherspayabledepartmentcanrecordavoucher? B. Arepurchaserequisitionsprenumberedandindependentlymatchedwithvendorinvoices?
C. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions?
D. Arepurchaseorders,receivingreports,andvouchersprenumberedandperiodicallyaccountedfor?
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A question related to whether purchase orders, receiving reports and vouchers are prenumbered and periodically accounted for would most
likely be included in an internal control questionnaire concerning the completeness assertion for purchases. A gap in recorded purchase order numbers might indicate an unrecorded purchase.
Choice "a" is incorrect. Requiring an authorized purchase order before accepting a shipment would relate to whether the purchase was valid, not whether it was properly accounted for. Choice "b" is incorrect. Having prenumbered purchase requisitions independently matched with vendor invoices does not indicate whether all purchases are accounted for since these documents do not show that the purchase has been recorded.
Choice "c" is incorrect. Reconciling the unpaid voucher file with inventory records does not indicate whether all purchases are accounted for since these documents do not show that all purchases have been recorded.
QUESTION 213
When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the:
A. Unpaidvoucher. B. Debitmemo.
C. Vendor invoice. D. Credit memo.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When nonconforming goods are returned to a vendor, the purchasing department should send a debit memo to the accounting department to ensure that the accounts payable balance is reduced appropriately.
Choice "a" is incorrect. The unpaid voucher is sent from the accounts payable department to the treasurer's department for payment when conforming goods are received. Choice "c" is incorrect. The vendor invoice is sent to the accounting department when conforming goods are received.
Choice "d" is incorrect. A credit memo is generally used to reduce accounts receivable, not accounts payable.
QUESTION 214
The authority to accept incoming goods in receiving should be based on a (an):
A. Vendor'sinvoice.
B. Materialsrequisition.
C. Bill of lading.
D. Approved purchase order.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The authority to accept incoming goods in receiving should be based upon an approved purchase order.
Choice "a" is incorrect. A vendor's invoice does not serve as an authority to accept incoming goods since it is generated by the vendor, not a responsible employee in the purchasing department. Choice "b" is incorrect. A materials requisition, which is prepared by the ultimate user of the goods, does not serve as an authority to accept incoming goods since it has not been approved by the purchasing department.
Choice "c" is incorrect. A bill of lading does not serve as an authority to accept incoming goods since it is generated by the carrier, not a responsible employee in the purchasing department.
QUESTION 215
In a well designed internal control, employees in the same department most likely would approve purchase orders, and also:
A. Reconciletheopeninvoicefile. B. Inspectgoodsuponreceipt.
C. Authorize requisitions of goods. D. Negotiate terms with vendors.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. In a well designed internal control, employees in the purchasing department most likely would approve purchase orders and also negotiate terms with vendors. Choice "a" is incorrect. Personnel in the accounts payable department reconcile the open invoice file while the purchasing agent approves purchase orders.
Choice "b" is incorrect. Employees in the receiving department inspect goods upon receipt while the purchasing agent approves purchase orders.
Choice "c" is incorrect. The stores department (personnel in the raw materials inventory area) authorize requisition of goods while the purchasing agent approves purchase orders.
QUESTION 216
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:
A. Understandabilityandclassification. B. Existence.
C. Rights and obligations.
D. Valuation and allocation.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about valuation or allocation, which pertain to the presentation of assets, liabilities, and equity interests at appropriate amounts. The auditor is concerned with the proper valuation of those receivables. Choice "a" is incorrect. Understandability and classification deals with whether the components of the financial statements are properly presented, described, and disclosed, not whether they are properly valued.
Choice "b" is incorrect. Existence relates to whether assets, liabilities, and equity interests exist. Choice "c" is incorrect. Rights and obligations pertain to ownership of assets and liabilities, not to the valuation of those accounts.
QUESTION 217
An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of:
A. Occurrence. B. Classification. C. Cutoff.
D. Completeness.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. An entity's periodic accounting for the numerical sequence of shipping documents and invoices supports management's financial statement assertion of completeness of sales. A gap in recorded sequence numbers might indicate an unrecorded sale. Choice "a" is incorrect. An auditor would trace from the sales invoices or sales journal (accounting records) to the shipping documents (source document) to support management's assertion of occurrence.
Choice "b" is incorrect. An auditor would examine journal entries for a sample of shipping documents to determine whether the client has recorded the sales in the proper accounts. Choice "c" is incorrect. An auditor would review supporting documentation for shipping documents just before and just after year-end to determine whether appropriate cutoff has been achieved.
QUESTION 218
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of:
A. Existence.
B. Valuationandallocation. C. Completeness.
D. Rights and obligations.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support the assertion of valuation and allocation (i.e., to determine whether the allowance for doubtful accounts properly adjusts the receivables balance to net realizable value).
Choice "a" is incorrect. Evaluating the adequacy of the allowance for doubtful accounts does not pertain to existence. To support the assertion of existence, an auditor would most likely confirm accounts receivable.
Choice "c" is incorrect. An auditor would trace from shipping records to the sales journal and the accounts receivable ledger to determine if all shipments were properly recorded as sales (completeness assertion).
Choice "d" is incorrect. The assertion of rights and obligations relating to accounts receivable would be supported by examining appropriate supporting documentation, not by evaluating the allowance for doubtful accounts.
QUESTION 219
Symbol A most likely represents:
A. Remittanceadvicefile.
B. Receivingreportfile.
C. Accounts receivable master file.
D. Cash disbursements transaction file.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The accounts receivable master file is the file most likely to be affected by sales and cash receipts transactions, as noted immediately above symbol "A" in the flowchart. Choice "a" is incorrect. Remittance advices are used to update the accounts receivable file, but a separate "remittance advice file" generally is not created. Choice "b" is incorrect. The inventory/purchase/cash disbursements cycle would include a receiving report file, not the revenue cycle. Choice "d" is incorrect. Cash disbursements are not part of the revenue cycle.
QUESTION 220
Symbol B most likely represents:
A. Customerorders. B. Receivingreports. C. Customer checks. D. Sales invoices.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The two documents most likely to be generated by the revenue cycle application are credit memos (already identified in the flowchart) and sales invoices. Choice "a" is incorrect. Customer orders are input at the beginning of the process, as noted in the flowchart. Customer orders are not generated by the company's revenue cycle. Choice "b" is incorrect. Receiving reports are part of the inventory/purchasing/cash disbursements cycle.
Choice "c" is incorrect. Customer checks and remittances are entered into the application at the top of the flowchart. Customer checks are not an output of the revenue cycle.
QUESTION 221
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
During our audit we discovered evidence of the company's failure to safeguard inventory from loss, damage, and misappropriation.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "B" is correct. Failure to safeguard inventory from loss, damage, and misappropriation is a significant deficiency in the design or operation of internal control that could adversely affect the fairness of the financial statements.
QUESTION 222
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
The company considers the decline in value of equity securities classified as available-for-sale to be temporary.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: N
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "N" is correct. Management's discussion regarding the temporary nature of a decline in the value of equity securities provides information regarding recognition, measurement, and disclosure, and would be included in the management representation letter.
When a client company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning:
A. Restrictionsonthepaymentofdividends.
B. Thenumberofsharesissuedandoutstanding.
C. Guarantees of preferred stock liquidation value.
D. The number of shares subject to agreements to repurchase.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When a client company does not maintain its own stock records, the auditor should request the transfer agent and registrar to confirm the number of shares issued and outstanding. Choice "a" is incorrect. Restrictions on the payment of dividends should be in the board minutes, or possibly confirmed by the bank if the restrictions are due to outstanding loan(s). Choice "c" is incorrect. Guarantees of preferred stock liquidation value should be in the board minutes or the stock redemption agreement.
Choice "d" is incorrect. The number of shares subject to agreements to repurchase should be in the board minutes and in any repurchase agreements.
QUESTION 182
The primary responsibility of a bank acting as registrar of capital stock is to:
A. Ascertainthatdividendsdeclareddonotexceedthestatutoryamountallowableinthestateofincorporation.
B. Accountforstockcertificatesbycomparingthetotalsharesoutstandingtothetotalintheshareholderssubsidiaryledger.
C. Act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury stock. D. Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Large companies often use a registrar to provide registration services and maintain the stockholder list. The primary responsibility of the registrar is to verify that stock is issued only with proper authorization.
Choice "a" is incorrect. The company's board of directors bears responsibility for proper declaration of dividends, not the stock registrar.
Choice "b" is incorrect. Since the company's management is responsible for maintaining accurate accounting records, a responsible company employee (not the registrar) would periodically compare the recorded number of shares outstanding (per company records) with the total in the shareholders' subsidiary ledger (per the registrar).
Choice "c" is incorrect. A registrar does not have the described responsibility with respect to mergers, acquisitions, and the sale of treasury stock.
QUESTION 183
In auditing a client's retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate management's financial statement assertions with respect to:
A. Transactionsandevents.
B. Accountbalances.
C. Presentation and disclosure. D. Audit risk and materiality.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Restrictions on retained earnings should be shown as appropriations in the financial statements. An auditor attempts to determine whether any such restrictions exist to verify that proper disclosures (i.e., retained earnings appropriations) have been made. Choices "a" and "b" are incorrect. Retained earnings appropriations restrict the company from paying dividends in excess of the unappropriated portion of retained earnings. This relates to presentation and disclosure, not to transactions, events, or balances.
Choice "d" is incorrect. Audit risk and materiality are not financial statement assertions.
QUESTION 184
Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
A. Examiningunusualrelationshipsbetweenmonthlyaccountspayablebalancesandrecordedcashpayments.
B. Reconcilingvendors'statementstothefileofreceivingreportstoidentifyitemsreceivedjustpriortothebalancesheetdate.
C. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
D. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Unrecorded trade accounts payable are best identified by reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
Choice "a" is incorrect. There is not usually a predictable relationship between accounts payable and cash payments, because management can pay cash or incur additional liabilities at its discretion. Choice "b" is incorrect. Reconciling vendors' statements to the file of receiving reports would not identify unrecorded payables, as the vendor statement would still agree with the receiving report even if the payable were not recorded.
Choice "d" is incorrect. Investigating payables already recorded would not help identify unrecorded trade payables.
QUESTION 185
An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all:
A. Purchaseorders.
B. Canceledchecks. C. Receiving reports. D. Approved vouchers.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. To determine whether checks are being issued for unauthorized expenditures, the auditor is most likely to select from the population of canceled checks. For each check, the auditor would then look for evidence supporting the payment, such as a purchase order, a receiving report, and an approved invoice.
Choice "a" is incorrect. If the auditor selected from the population of purchase orders, he or she would never find those check requests that were missing the purchase orders. Without purchase orders, the expenditures would be considered unauthorized.
Choice "c" is incorrect. If the auditor selected from the population of receiving reports, he or she would never find those check requests that were missing the receiving reports. Without receiving reports, the expenditures would be considered unauthorized.
Choice "d" is incorrect. If the auditor selected from the population of approved vouchers, he or she would never find those check requests that were missing the approved vouchers. Without approved vouchers, the expenditures would be considered unauthorized.
QUESTION 186
The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to: A. Detectkitingactivitiesthatmayotherwisenotbediscovered.
B. Corroborateinformationregardingdepositandloanbalances.
C. Provide the data necessary to prepare a proof of cash.
D. Request information about contingent liabilities and secured transactions.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The primary purpose of sending a standard confirmation request to financial institutions is to corroborate information regarding deposit and loan balances. Choice "a" is incorrect. The bank cut-off statement, not the standard bank confirmation form, is used to detect kiting activities that may otherwise not be discovered. Choice "c" is incorrect. The standard confirmation does not provide all of the information necessary to prepare a proof of cash (i.e., bank reconciliation) since it only confirms information at the end of a period, and not activity (e.g., deposits, checks, etc.) occurring during the period. Choice "d" is incorrect. The standard confirmation request seeks information on contingent liabilities and security agreements, but this is not the primary purpose of sending the confirmation.
QUESTION 187
To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all:
A. Paymentvouchers.
B. Receivingreports.
C. Purchase requisitions. D. Vendor's invoices.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. This test consists of tracing from receiving reports for inventory received before year-end to the accounts payable trial balance to determine whether the purchase has been properly recorded.
Choice "a" is incorrect. In testing for completeness of payables, the auditor tries to determine whether there are payables that have not been recorded. If the auditor selects from payment vouchers, he or she may be unlikely to select an unrecorded payable, since unrecorded payables that have not yet been paid would not have corresponding payment vouchers.
Choice "c" is incorrect. Purchase requisitions do not indicate when the inventory was received, and therefore they are not useful for testing the completeness of accounts payable. Choice "d" is incorrect. Vendor's invoices do not generally indicate when the inventory was received, and therefore they are not useful for testing the completeness of accounts payable.
QUESTION 188
Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
A. Reconcilereceivingreportswithrelatedcashpaymentsmadejustpriortoyear-end.
B. Contrasttheratioofaccountspayabletopurchaseswiththeprioryear'sratio.
C. Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.
D. Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. When performing a search for unrecorded payables, an auditor most likely would compare cash payments occurring after the balance sheet date with the accounts payable trial balance to determine that disbursements that pertain to the prior year's business (year under audit) have been properly accrued. This procedure is commonly known as an "out-of-period-search." Choice "a" is incorrect. If the cash payment is made just prior to year-end, then the related liability would have been paid/relieved as of the year-end balance sheet date. Choice "b" is incorrect. An analytical review procedure that contrasts the ratio of accounts payable to purchases with the prior year's ratio would not provide the best evidence, since payable balances are not predictable and may vary at management's discretion. Choice "c" is incorrect. Vouching a sample of creditor balances already recorded does not provide any evidence concerning unrecorded payables.
QUESTION 189
Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
A. Reviewingcashdisbursementsrecordedsubsequenttothebalancesheetdatetodeterminewhethertherelatedpayablesapplytothepriorperiod.
B. Investigatingpayablesrecordedjustpriortoandjustsubsequenttothebalancesheetdatetodeterminewhethertheyaresupportedbyreceivingreports. C. Examining unusual relationships between monthly accounts payable balances and recorded cash payments.
D. Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. When performing a search for unrecorded payables, an auditor most likely would examine cash disbursements recorded after the balance sheet date to determine whether the payables related to the prior period have been included in the accounts payable trial balance. Choice "b" is incorrect. Investigating payables already recorded does not provide any evidence concerning unrecorded payables.
Choice "c" is incorrect. While a high level of cash payments compared with a low level of payable balances may be indicative of unrecorded payables, comparing these amounts would not be the most effective method for identifying unrecorded payables.
Choice "d" is incorrect. Comparing vendor statements to receiving reports is an audit step not involving the accounts payable balances; this step, therefore, provides no information about accounts payable.
QUESTION 190
Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?
A. Accountsreceivable. B. Credit.
C. Accounts payable. D. Treasurer.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Proper authorization of write-offs of uncollectible accounts are approved by the treasurer, who is not involved in the record-keeping function or the initiation of the write-off. Choice "a" is incorrect. Proper segregation of duties requires that the authorization of the write-off be performed by individuals not involved with the accounts receivable department that records the original transactions.
Choice "b" is incorrect. The credit department should grant credit and approve credit limits before the sale is made. If the credit department also approved the write- offs of accounts, there would be a lack of appropriate segregation of duties.
Choice "c" is incorrect. Even though the accounts payable department is independent of the accounts receivable department, they are not particularly knowledgeable regarding the customers and therefore would not be the best candidates for authorizing the write-offs of accounts receivable.
QUESTION 191
An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the:
A. Prelistofindividualchecks. B. Monthlybankreconciliation. C. Dailydepositslip.
D. Remittance advices.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the daily deposit slip.
(That is his or her job).
Choice "a" is incorrect. The prelist of individual checks is prepared by a clerk in the mailroom upon opening the mail.
Choice "b" is incorrect. The monthly bank reconciliation is prepared by an internal auditor or someone else that is independent of the cash receipts and cash disbursements functions. Choice "d" is incorrect. The remittance advice is prepared by the customer and is mailed along with the check (remittance).
QUESTION 192
If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the:
A. Cashreceiptsjournaltothesalesjournal.
B. Salesjournaltothecashreceiptsjournal.
C. Source documents to the accounting records. D. Accounting records to the source documents.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. If the objective of a test of details is to detect overstatements of sales (existence assertion), the auditor should trace transactions from the accounting records (i.e., sales journal) to the source documents (e.g., customer order, sales order, shipping documents, etc.). Choices "a" and "c" are incorrect. Tracing from the supporting documents to the accounting records gives assurance as to the completeness assertion (all sales are properly included). Choice "b" is incorrect. Tracing from the sales journal to the cash receipts journal only shows whether cash has been received for the sale. Failure to find a related cash receipt may indicate simply that the sale was made on account.
QUESTION 193
Which of the following procedures most likely would not be an internal control procedure designed to reduce the risk of errors in the billing process? A. Comparingcontroltotalsforshippingdocumentswithcorrespondingtotalsforsalesinvoices.
B. Usingcomputerprogrammedcontrolsonthepricingandmathematicalaccuracyofsalesinvoices. C. Matching shipping documents with approved sales orders before invoice preparation.
D. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger would probably not reduce the risk of errors in the billing process, since any errors in billing would likely be included in both the sales and accounts receivable balances. Choice "a" is incorrect. Comparing control totals for shipping documents with corresponding totals for sales invoices is a procedure designed to determine that all shipments have been billed. Choice "b" is incorrect. Using computer-programmed controls on sales invoices would reduce the risk of errors in the billing process.
Choice "c" is incorrect. Matching shipping documents with approved sales orders before invoice preparation provides assurance that the quantity and terms of the invoice are correct.
QUESTION 194
An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period to detect whether:
A. Thecashreceiptsjournalwasheldopenforafewdaysaftertheyear-end.
B. Thelastchecksrecordedbeforetheyear-endwereactuallymailedbytheyear-end. C. Cash balances were overstated because of kiting.
D. Any unusual payments to or receipts from related parties occurred.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period (bank transfer test) to detect whether cash balances were overstated because of kiting (concealing a cash shortage by depositing in one bank an unrecorded check of another disbursement bank, effectively recording the same funds in both bank accounts). Choice "a" is incorrect. If the cash receipts journal were held open for a few days after the year- end, cash receipts from the subsequent year would be erroneously included in the current year's accounting records. A bank transfer test is not typically used to detect this situation. Choice "b" is incorrect. If the last checks recorded before the year-end were actually mailed by the yearend, appropriate cut-off has occurred. Bank transfer tests would not be required to evaluate this situation.
Choice "d" is incorrect. A bank transfer test is not generally used to detect unusual payments to or receipts from related parties.
QUESTION 195
Which of the following most likely would be detected by an auditor's review of a client's sales cut-off?
A. Shipmentslackingsalesinvoicesandshippingdocuments. B. Excessivewrite-offsofaccountsreceivable.
C. Unrecorded sales at year-end.
D. Lapping of year-end accounts receivable.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A sales cut-off test is used to detect unrecorded sales (shipments where no invoice has been generated) or sales allocated to the wrong period (January sales included in December by "holding the books open").
Choice "a" is incorrect. A sales cut-off test relies on shipping documents to test the "cut-off" of sales invoices. Shipping documents are selected and the corresponding sale is examined to determine whether it was recorded in the proper period. A cut-off test is unlikely to detect the omission of shipping documents, since transactions without such documentation would have no chance of being selected for testing.
Choices "b" and "d" are incorrect. Sales cut-off testing generally does not involve tests related to accounts receivable.
QUESTION 196
The information below was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ended December 31, 20X1. Assume all checks are dated and issued on December 30, 20X1.
Which of the following checks might indicate kiting?
A. #101and#303. B. #202and#404. C. #101 and #404. D. #202 and #303.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Kiting is concealing a cash shortage by depositing in one bank an unrecorded check of another disbursement bank, so that the deposit is recorded in both banks. An auditor would most likely detect kiting by reviewing the bank transfer schedule and following-up on all transfers for which the receipt date per bank is recorded in the accounting period before the disbursement date. Checks #202 and #404 both meet this criterion and therefore might indicate kiting. Choices "a", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 197
The information below was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ended December 31, 20X1. Assume all checks are dated and issued on December 30, 20X1.
Which of the following checks illustrate deposits/transfers in transit at December 31, 20X1?
A. #101and#202. B. #101and#303. C. #202 and #404. D. #303 and #404.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A deposit in transit is a disbursement recorded in one accounting period with the receipt occurring in the subsequent period. Assuming all checks were dated and issued on December 30, 20X1, any deposits with a receipt date in 20X2 would indicate a deposit in transit at December 31, 20X1. Checks #101 and #303 both meet this criterion and therefore illustrate deposits/transfers in transit at December 31, 20X1.
Choices "a", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 198
Tracing bills of lading to sales invoices provides evidence that:
A. Shipmentstocustomerswererecordedassales. B. Recordedsaleswereshipped.
C. Invoiced sales were shipped.
D. Shipments to customers were invoiced.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Tracing from a population of bills of lading (shipping documents) to sales invoices provides evidence that shipments to customers were invoiced. Choice "a" is incorrect. Tracing bills of lading to the sales invoice provides assurance that shipments to customers were invoiced, not that they were recorded as sales. Choice "b" is incorrect. Tracing from the sales journal to bills of lading provides evidence that recorded sales were shipped.
Choice "c" is incorrect. Tracing from a population of sales invoices to the bills of lading provides evidence that invoiced sales were shipped.
QUESTION 199
Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?
A. Employeesresponsibleforauthorizingsalesandbaddebtwrite-offsaredeniedaccesstocash.
B. Shippingdocumentsandsalesinvoicesarematchedbyanemployeewhodoesnothaveauthoritytowriteoffbaddebts.
C. Employees involved in the credit-granting function are separated from the sales function.
D. Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Sales personnel will have a tendency to maximize sales volume by selling to customers that may not be creditworthy, thereby resulting in high bad debt write-offs. To prevent sales to customers that may not be creditworthy, employees involved in the credit-granting function are separated from the sales function.
Choice "a" is incorrect. Employees responsible for authorizing sales and bad debt write-offs should be denied access to cash to prevent the embezzlement of cash, not to prevent them from maximizing sales volume at the expense of high bad debt write-offs.
Choice "b" is incorrect. This control does not affect the sales department or the tendency to maximize sales volume at the expense of high bad debt write-offs. Choice "d" is incorrect. This control does not affect the sales department or the tendency to maximize sales volume at the expense of high bad debt write-offs.
QUESTION 200
Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?
A. Thebillingdepartmentsupervisorsendscopiesofapprovedsalesorderstothecreditdepartmentforcomparisontoauthorizedcreditlimitsandcurrent customer account balances.
B. Theaccountingdepartmentsupervisorindependentlyreconcilestheaccountsreceivablesubsidiaryledgertotheaccountsreceivablecontrolaccountmonthly.
C. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.
D. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Selecting prenumbered shipping documents and matching them with entries in the sales journal is a control that would help ensure that all credit sales transactions are recorded. (Shipping documents without corresponding sales journal entries might indicate unrecorded sales). Choice "a" is incorrect. Sending copies of approved sales orders to the credit department for comparison to authorized credit limits and current account balances before the sale is made controls the risk of bad debts, not the proper recording of credit sales transactions. Choice "b" is incorrect. Reconciling the accounts receivable subsidiary ledger to the control account ensures that the accounts receivable balance in the general ledger is properly recorded, but would not necessarily identify unrecorded credit sales. (Unrecorded credit sales would be omitted from both places, and therefore the subsidiary ledger and control account would still agree). Choice "c" is incorrect. Controlling the mailing of monthly statements and investigating differences reported by the customers is not an effective control over the proper recording of credit sales transactions, since it is possible that customers would not complain if they were not billed.
QUESTION 201
An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using:
A. Employeefidelitybonds.
B. Independentlypreparedmailroomprelists. C. Daily check summaries.
D. A bank lockbox system.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E)
Explanation Explanation/Reference:
Explanation:
Choice "d" is correct. An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using a bank lockbox system. With this system the remittances are mailed directly to the bank where they are immediately deposited. The bank sends the remittances and deposit detail to the entity on a daily basis. Most larger companies use a lockbox system.
Choice "a" is incorrect. Employee fidelity bonds may cover some of the losses suffered by misappropriation, but they do nothing to prevent the embezzlement in the first place. Choices "b" and "c" are incorrect. Independently prepared mailroom prelists and daily check summaries are good controls over cash receipts, but they are not as effective at reducing the risk of employee misappropriation as a lockbox system. With a lockbox system, employees have no access to cash receipts and therefore no opportunity to misappropriate cash.
QUESTION 202
Which of the following internal control procedures most likely would deter lapping of collections from customers?
A. Independentinternalverificationofdatesofentryinthecashreceiptsjournalwithdatesofdailycashsummaries. B. Authorizationofwrite-offsofuncollectibleaccountsbyasupervisorindependentofcreditapproval.
C. Segregation of duties between receiving cash and posting the accounts receivable ledger.
D. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Lapping is a defalcation in which a cash shortage is concealed by applying later customer remittances to a receivable account from which money was stolen. Lapping can be deterred by appropriate segregation of duties between receiving cash and posting to the accounts receivable ledger.
This makes it more difficult for the employee who is stealing the cash to cover it up through inappropriate remittance credits.
Choice "a" is incorrect. Even with a lapping scheme, the dates of cash receipts journal entries and the dates of daily cash summaries would still agree, since the stolen funds would be excluded from both places and subsequent receipts would be included in both places. Choice "b" is incorrect. The authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval would not deter lapping, since lapping schemes do not involve write- offs.
Choice "d" is incorrect. Even with a lapping scheme, the daily cash summary would still agree with the sum of the cash receipts journal entries. Stolen funds would be excluded from both places and subsequent receipts would be included in both places.
QUESTION 203
Tracing shipping documents to prenumbered sales invoices provides evidence that: A. Noduplicateshipmentsorbillingsoccurred.
B. Shipmentstocustomerswereproperlyinvoiced.
C. Allgoodsorderedbycustomerswereshipped.
D. All prenumbered sales invoices were accounted for.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Tracing from shipping documents (source documents) to sales invoices provides evidence that shipments to customers are properly invoiced. Choice "a" is incorrect. Tracing shipping documents to sales invoices wouldn't necessarily identify duplicate shipments or billings. Duplicate shipments or billings could be identified by accounting for prenumbered shipping documents and sales invoices.
Choice "c" is incorrect. The auditor would compare the signed purchase order to shipping documents to determine if all goods ordered by the customer were shipped. Choice "d" is incorrect. To determine that all prenumbered sales invoices were accounted for, an auditor would review the consecutive numbering of invoices and then trace from the sales invoices into the sales journal.
QUESTION 204
Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?
A. Observetheconsistencyoftheemployees'useofcashregistersandtapes.
B. Inquireaboutemployees'accesstorecordedbutundepositedcash.
C. Trace the deposits in the cash receipts journal to the cash balance in the general ledger. D. Compare the cash balance in the general ledger with the bank confirmation request.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Observing the consistent use of cash registers and tapes by employees would provide evidence to the auditor regarding the controls over the completeness of cash receipts. Choices "b", "c", and "d" are incorrect. The completeness assertion relates to the recording of all transactions. Inquiries about access to recorded cash, tracing from the cash receipts journal, and testing the general ledger balance do not provide evidence regarding possible unrecorded transactions.
QUESTION 205
For effective internal accounting control, the accounts payable department should compare the information on each vendor's invoice with the:
A. Receivingreportandthepurchaseorder.
B. Receivingreportandthevoucher.
C. Vendor's packing slip and the purchase order. D. Vendor's packing slip and the voucher.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. For effective internal accounting control, the accounts payable department should compare the information on each vendor's invoice with the receiving report and the purchase order to assure that goods were received and that the purchase was properly authorized. Choices "b", "c", and "d" are incorrect. Vendor packing slips and internally generated vouchers do not provide assurance that goods were received and that the purchase was properly authorized.
QUESTION 206
Which of the following is the most effective control activity to detect vouchers that were prepared for the payment of goods that were not received?
A. Countgoodsuponreceiptinstoreroom.
B. Matchpurchaseorder,receivingreport,andvendor'sinvoiceforeachvoucherinaccountspayabledepartment. C. Compare goods received with goods requisitioned in receiving department.
D. Verify vouchers for accuracy and approval in internal audit department.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The most effective control activity to detect vouchers that were prepared for the payment of goods that were not received is to match the purchase order, receiving report, and vendor's invoice for each voucher in the accounts payable department. Choices "a" and "c" are incorrect. Controls that start with goods received would not be effective at detecting a situation where vouchers are prepared for goods that were not received. Choice "d" is incorrect. Verifying vouchers for accuracy and approval in the internal audit department might detect vouchers that were prepared for the payment of goods that were not received. However, this is not the most effective control, since it would likely occur subsequent to the processing of the transaction.
QUESTION 207
For effective internal control purposes, the vouchers payable department generally should:
A. Stamp,perforate,orotherwisecancelsupportingdocumentationafterpaymentismailed.
B. Ascertainthateachrequisitionisapprovedastoprice,quantityandqualitybyanauthorizedemployee. C. Obliterate the quantity ordered on the receiving department copy of the purchase order.
D. Establish the agreement of the vendor's invoice with the receiving report and purchase order.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. For effective internal control purposes, the vouchers payable department generally should establish the agreement of the vendor's invoice with the receiving report and purchase order.
Choice "a" is incorrect. The treasury or cash disbursement department should stamp, perforate, or otherwise cancel supporting documentation after payment is mailed. Choice "b" is incorrect. The purchasing department should verify that each requisition has been properly approved.
Choice "c" is incorrect. The purchasing department should obliterate the "quantity ordered" on the receiving department copy of the purchase order.
QUESTION 208
To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all:
A. Vendor'sinvoices. B. Purchaseorders. C. Receiving reports. D. Canceled checks.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The auditor is looking for situations where merchandise has been received but was not recorded. Such situations may be identified by selecting receiving reports and then determining whether the related payable was recorded.
Choice "a" is incorrect. Selecting from vendor's invoices might allow a purchase to be selected for which the goods have not yet been received.
Choice "b" is incorrect. Selecting from purchase orders might allow a purchase to be selected for which the goods have not yet been received.
Choice "d" is incorrect. Selecting from canceled checks will not result in testing of accounts payable, since the payable is eliminated once payment is made.
QUESTION 209
Which of the following control activities is not usually performed in the vouchers payable department?
A. Determiningthemathematicalaccuracyofthevendor'sinvoice. B. Havinganauthorizedpersonapprovethevoucher.
C. Controlling the mailing of the check and remittance advice.
D. Matching the receiving report with the purchase order.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Internal control is enhanced if check mailing is performed by the treasury (cash disbursements) department. Choice "a" is incorrect. Mathematical accuracy of the vendor's invoice is usually verified in the vouchers payable department.
Choice "b" is incorrect. Voucher approval by an authorized person is usually performed in the vouchers payable department.
Choice "d" is incorrect. Matching the receiving report with the purchase order is usually performed in the vouchers payable department.
QUESTION 210
Which of the following internal control procedures most likely addresses the completeness assertion for inventory?
A. Workinprocessaccountisperiodicallyreconciledwithsubsidiaryrecords.
B. Employeesresponsibleforcustodyoffinishedgoodsdonotperformthereceivingfunction.
C. Receiving reports are prenumbered and periodically reconciled.
D. There is a separation of duties between payroll department and inventory accounting personnel.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The internal control procedure of prenumbering receiving reports and periodically reconciling them to the inventory records most likely addresses the completeness assertion for inventory, because it allows the auditor to determine whether all goods received have been recorded as inventory. Choice "a" is incorrect. Reconciling the work in process account (per the general ledger) with subsidiary records (direct materials, direct labor, overhead) tests that those records are interfacing properly, but does not provide any information about the completeness assertion for inventory. Choice "b" is incorrect. Separation of
employees responsible for custody of finished goods from the receiving function addresses the safeguarding of assets, not the completeness of the inventory records. Choice "d" is incorrect. The separation of duties between the payroll department and inventory accounting personnel is related to the valuation (pricing) of inventory, not its completeness.
QUESTION 211
Which of the following controls would be most effective in assuring that recorded purchases are free of material errors?
A. Thereceivingdepartmentcomparesthequantityorderedonpurchaseorderswiththequantityreceivedonreceivingreports. B. Vendor'sinvoicesarecomparedwithpurchaseordersbyanemployeewhoisindependentofthereceivingdepartment.
C. Receiving reports require the signature of the individual who authorized the purchase.
D. Purchase orders, receiving reports, and vendor's invoices are independently matched in preparing vouchers.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The most effective control in assuring that recorded purchases are free of material errors is the independent matching of the purchase order, receiving report, and vendor's invoices in preparing the vouchers on which the disbursement check is based. Choice "a" is incorrect. The receiving department should not have access to the quantity ordered on the purchase order. This forces receiving department employees to actually perform an independent count. Choice "b" is incorrect. It is not enough to compare only vendor invoices and purchase orders, as this will still allow payment for goods that were not received. Choice "c" is incorrect. Requiring that receiving reports be authorized by the individual who authorized the purchase does not ensure that the invoice and the related payment will be properly recorded.
QUESTION 212
Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?
A. Isanauthorizedpurchaseorderrequiredbeforethereceivingdepartmentcanacceptashipmentorthevoucherspayabledepartmentcanrecordavoucher? B. Arepurchaserequisitionsprenumberedandindependentlymatchedwithvendorinvoices?
C. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions?
D. Arepurchaseorders,receivingreports,andvouchersprenumberedandperiodicallyaccountedfor?
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A question related to whether purchase orders, receiving reports and vouchers are prenumbered and periodically accounted for would most
likely be included in an internal control questionnaire concerning the completeness assertion for purchases. A gap in recorded purchase order numbers might indicate an unrecorded purchase.
Choice "a" is incorrect. Requiring an authorized purchase order before accepting a shipment would relate to whether the purchase was valid, not whether it was properly accounted for. Choice "b" is incorrect. Having prenumbered purchase requisitions independently matched with vendor invoices does not indicate whether all purchases are accounted for since these documents do not show that the purchase has been recorded.
Choice "c" is incorrect. Reconciling the unpaid voucher file with inventory records does not indicate whether all purchases are accounted for since these documents do not show that all purchases have been recorded.
QUESTION 213
When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the:
A. Unpaidvoucher. B. Debitmemo.
C. Vendor invoice. D. Credit memo.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When nonconforming goods are returned to a vendor, the purchasing department should send a debit memo to the accounting department to ensure that the accounts payable balance is reduced appropriately.
Choice "a" is incorrect. The unpaid voucher is sent from the accounts payable department to the treasurer's department for payment when conforming goods are received. Choice "c" is incorrect. The vendor invoice is sent to the accounting department when conforming goods are received.
Choice "d" is incorrect. A credit memo is generally used to reduce accounts receivable, not accounts payable.
QUESTION 214
The authority to accept incoming goods in receiving should be based on a (an):
A. Vendor'sinvoice.
B. Materialsrequisition.
C. Bill of lading.
D. Approved purchase order.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The authority to accept incoming goods in receiving should be based upon an approved purchase order.
Choice "a" is incorrect. A vendor's invoice does not serve as an authority to accept incoming goods since it is generated by the vendor, not a responsible employee in the purchasing department. Choice "b" is incorrect. A materials requisition, which is prepared by the ultimate user of the goods, does not serve as an authority to accept incoming goods since it has not been approved by the purchasing department.
Choice "c" is incorrect. A bill of lading does not serve as an authority to accept incoming goods since it is generated by the carrier, not a responsible employee in the purchasing department.
QUESTION 215
In a well designed internal control, employees in the same department most likely would approve purchase orders, and also:
A. Reconciletheopeninvoicefile. B. Inspectgoodsuponreceipt.
C. Authorize requisitions of goods. D. Negotiate terms with vendors.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. In a well designed internal control, employees in the purchasing department most likely would approve purchase orders and also negotiate terms with vendors. Choice "a" is incorrect. Personnel in the accounts payable department reconcile the open invoice file while the purchasing agent approves purchase orders.
Choice "b" is incorrect. Employees in the receiving department inspect goods upon receipt while the purchasing agent approves purchase orders.
Choice "c" is incorrect. The stores department (personnel in the raw materials inventory area) authorize requisition of goods while the purchasing agent approves purchase orders.
QUESTION 216
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:
A. Understandabilityandclassification. B. Existence.
C. Rights and obligations.
D. Valuation and allocation.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about valuation or allocation, which pertain to the presentation of assets, liabilities, and equity interests at appropriate amounts. The auditor is concerned with the proper valuation of those receivables. Choice "a" is incorrect. Understandability and classification deals with whether the components of the financial statements are properly presented, described, and disclosed, not whether they are properly valued.
Choice "b" is incorrect. Existence relates to whether assets, liabilities, and equity interests exist. Choice "c" is incorrect. Rights and obligations pertain to ownership of assets and liabilities, not to the valuation of those accounts.
QUESTION 217
An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of:
A. Occurrence. B. Classification. C. Cutoff.
D. Completeness.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. An entity's periodic accounting for the numerical sequence of shipping documents and invoices supports management's financial statement assertion of completeness of sales. A gap in recorded sequence numbers might indicate an unrecorded sale. Choice "a" is incorrect. An auditor would trace from the sales invoices or sales journal (accounting records) to the shipping documents (source document) to support management's assertion of occurrence.
Choice "b" is incorrect. An auditor would examine journal entries for a sample of shipping documents to determine whether the client has recorded the sales in the proper accounts. Choice "c" is incorrect. An auditor would review supporting documentation for shipping documents just before and just after year-end to determine whether appropriate cutoff has been achieved.
QUESTION 218
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of:
A. Existence.
B. Valuationandallocation. C. Completeness.
D. Rights and obligations.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support the assertion of valuation and allocation (i.e., to determine whether the allowance for doubtful accounts properly adjusts the receivables balance to net realizable value).
Choice "a" is incorrect. Evaluating the adequacy of the allowance for doubtful accounts does not pertain to existence. To support the assertion of existence, an auditor would most likely confirm accounts receivable.
Choice "c" is incorrect. An auditor would trace from shipping records to the sales journal and the accounts receivable ledger to determine if all shipments were properly recorded as sales (completeness assertion).
Choice "d" is incorrect. The assertion of rights and obligations relating to accounts receivable would be supported by examining appropriate supporting documentation, not by evaluating the allowance for doubtful accounts.
QUESTION 219
Symbol A most likely represents:
A. Remittanceadvicefile.
B. Receivingreportfile.
C. Accounts receivable master file.
D. Cash disbursements transaction file.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The accounts receivable master file is the file most likely to be affected by sales and cash receipts transactions, as noted immediately above symbol "A" in the flowchart. Choice "a" is incorrect. Remittance advices are used to update the accounts receivable file, but a separate "remittance advice file" generally is not created. Choice "b" is incorrect. The inventory/purchase/cash disbursements cycle would include a receiving report file, not the revenue cycle. Choice "d" is incorrect. Cash disbursements are not part of the revenue cycle.
QUESTION 220
Symbol B most likely represents:
A. Customerorders. B. Receivingreports. C. Customer checks. D. Sales invoices.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The two documents most likely to be generated by the revenue cycle application are credit memos (already identified in the flowchart) and sales invoices. Choice "a" is incorrect. Customer orders are input at the beginning of the process, as noted in the flowchart. Customer orders are not generated by the company's revenue cycle. Choice "b" is incorrect. Receiving reports are part of the inventory/purchasing/cash disbursements cycle.
Choice "c" is incorrect. Customer checks and remittances are entered into the application at the top of the flowchart. Customer checks are not an output of the revenue cycle.
QUESTION 221
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
During our audit we discovered evidence of the company's failure to safeguard inventory from loss, damage, and misappropriation.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "B" is correct. Failure to safeguard inventory from loss, damage, and misappropriation is a significant deficiency in the design or operation of internal control that could adversely affect the fairness of the financial statements.
QUESTION 222
This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item.
The company considers the decline in value of equity securities classified as available-for-sale to be temporary.
A. Practitioner'sreportonmanagement'sassertionaboutanentity'scompliancewithspecifiedrequirements.
B. Auditor'scommunicationsonsignificantdeficienciesininternalcontrol.
C. Auditinquirylettertolegalcounsel.
D. Lawyer's response to audit inquiry letter.
E. Communicationfromthosechargedwithgovernancetotheauditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Requestforbankcutoffstatement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessorauditor'scommunicationwithsuccessorauditor.
Correct Answer: N
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "N" is correct. Management's discussion regarding the temporary nature of a decline in the value of equity securities provides information regarding recognition, measurement, and disclosure, and would be included in the management representation letter.