2009 a 4 class questions preview

Auditing and Attestation 4

Class Questions

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1. CPA-02595

Which of the following procedures concerning accounts receivable would an auditor most likely perform to obtain audit evidence supporting the effective operation of controls? a. Observing an entity's employee prepare the schedule of past due accounts receivable. b. Sending confirmation requests to an entity's principal customers to verify the existence of accounts

receivable. c. Inspecting an entity's analysis of accounts receivable for unusual balances. d. Comparing an entity's uncollectible accounts expense to actual uncollectible accounts receivable. CPA-02595

Choice "a" is correct. In order to obtain audit evidence supporting the effective operation of controls, an auditor must obtain evidence regarding how controls were applied, the consistency with which controls were applied, and by whom or by what means controls were applied. Observing preparation of the schedule of past due accounts receivable provides some of this evidence.

Choice "b" is incorrect. Sending confirmation requests is a substantive test, not a test of the operating effectiveness of controls.

Choice "c" is incorrect. Inspecting an entity's analysis of accounts receivable for unusual balances is a substantive test, not a test of the operating effectiveness of controls.

Choice "d" is incorrect. Comparing an entity's uncollectible accounts expense to actual uncollectible accounts receivable is a substantive test, not a test of the operating effectiveness of controls.

2. CPA-02625

Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the: a. Internal auditor to investigate the listing for unusual transactions. b. Treasurer to compare the listing with the monthly bank statement. c. Accounts receivable bookkeeper to update the subsidiary accounts receivable records. d. Entity's bank to compare the listing with the cashier's deposit slip. CPA-02625

Choice "c" is correct. A copy of the remittance listing is sent to the accounts receivable clerk and used to update the subsidiary accounts receivable records.

Choice "a" is incorrect. A copy of each remittance listing would not be sent to the internal audit staff.

Choice "b" is incorrect. The bank statement is typically reconciled by an employee having no part in authorizing or recording cash transactions, not by the treasurer.

Choice "d" is incorrect. The bank only receives a copy of the deposit slip, not the remittance listing.


Class Questions


3. CPA-02680

An auditor tests an entity's control of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of: a. Valuation and allocation. b. Completeness. c. Existence. d. Rights and obligations. CPA-02680

Choice "a" is correct. By ensuring that credit approval is obtained before goods are shipped to customers, the auditor is testing management's assertion that accounts receivable are collectible (valuation or allocation).

Choice "b" is incorrect. Ensuring that credit approval is obtained before goods are shipped does not support the completeness assertion.

Choice "c" is incorrect. Ensuring that credit approval is obtained before goods are shipped does not support the existence assertion.

Choice "d" is incorrect. Ensuring that credit approval is obtained before goods are shipped does not support the rights and obligations assertion.

4. CPA-02589

An auditor observed that a client mails monthly statements to customers. Subsequently, the auditor reviewed evidence of follow-up on the errors reported by the customers. This test of controls most likely was performed to support management's financial statement assertion(s) of: Classification and Rights and understandability obligations a. Yes Yes b. Yes No c. No Yes d. No No CPA-02589

Choice "c" is correct. Assertions about rights and obligations deal with whether assets are the rights of the entity and liabilities are the obligations of the entity. Errors reported by customers might indicate receivables for which the company has no right of collection.

Choices "a" and "b" are incorrect. Assertions about classification and understandability deal with whether financial information is appropriately presented and described, and disclosures are clearly expressed. Follow-up of errors reported by customers would not impact the proper presentation, description, and disclosure of accounts receivable in the financial statements.

Choice "d" is incorrect. Assertions about rights and obligations deal with whether assets are the rights of the entity and liabilities are the obligations of the entity. Errors reported by customers might indicate receivables for which the company has no right of collection.


Class Questions


5. CPA-02606

For effective internal control, the accounts payable department generally should: a. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed. b. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized

employee. 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. CPA-02606

Choice "d" is correct. Under an effective system of internal control, the accounts payable clerk should ensure that supporting documents (invoice, receiving report, and purchase order) are in agreement before the voucher is submitted for payment.

Choice "a" is incorrect. The supporting documentation should be canceled by the treasurer (not by the accounts payable department) after the check is mailed.

Choice "b" is incorrect. The purchasing department ascertains that the requisition is properly approved for price, quantity, and quality before the purchase order is prepared. The accounts payable department would not be involved until much later in the process, after the purchase has been made.

Choice "c" is incorrect. Sending the receiving department a copy of the purchase order that does not display the amount expected is a good control. However, it is the purchasing department (and not the accounts payable department) that would generally obliterate the quantity ordered before sending the purchase order to receiving.

6. CPA-02601

An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the: a. Dates checks are deposited per bank statements with the dates remittance credits are recorded. b. Daily cash summaries with the sums of the cash receipts journal entries. c. Individual bank deposit slips with the details of the monthly bank statements. d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually

recorded. CPA-02601

Choice "a" is correct. When lapping occurs, an employee uses current remittances to conceal remittances that have been stolen previously. Thus, a lag will exist from the time that this current payment is deposited until the current customer's account is actually credited. (The current payment is applied to the previous customer's account.)

Choice "b" is incorrect. The total of daily cash summaries will still agree with the total amount entered in the cash receipts journal if lapping is occurring (because the employee does not record as received the amount of cash stolen).

Choice "c" is incorrect. Individual deposit slips will still agree with the bank statements if lapping is occurring.

Choice "d" is incorrect. The date that write-offs are approved and actually occur will not be affected by a lapping scheme.


Class Questions


7. CPA-02643

Audit documentation should: a. Not be permitted to serve as a reference source for the client. b. Not contain critical comments concerning management. c. Show that the accounting records agree or reconcile with the financial statements. d. Be considered the primary support for the financial statements being audited. CPA-02643

Choice "c" is correct. Audit documentation should show that the accounting records agree or reconcile with the financial statements.

Choice "a" is incorrect. Audit documentation may be permitted to serve as a reference source for the client.

Choice "b" is incorrect. Audit documentation may contain critical comments concerning management (e.g., documentation of disagreement with the opinions of management, such as accounts receivable valuation).

Choice "d" is incorrect. Audit documentation is not the support for the FS. The client's books and records are the support for the FS. Audit documentation should be the principal support for the work the auditor has done to support the auditor's report.

8. CPA-02342

Which of the following types of audit evidence is the most persuasive? a. Prenumbered client purchase order forms. b. Client work sheets supporting cost allocations. c. Bank statements obtained from the client. d. Client representation letter. CPA-02342

Choice "c" is correct. When audit evidence can be obtained from independent sources outside an entity, it provides greater assurance of reliability for the purposes of an independent audit than does evidence secured solely within the entity. While the bank statement was obtained from the client, it is still more persuasive than any of the other three items because it was not prepared by the client.

Choice "a" is incorrect. Prenumbered client purchase orders are client-generated documents; as such, they are not as persuasive as externally generated evidence received through a client.

Choice "b" is incorrect. Client work sheets supporting cost allocations are client-generated documents; as such, they are not as persuasive as externally generated evidence received through a client.

Choice "d" is incorrect. The client representation letter is a client-generated document; as such, it is not as persuasive as externally generated evidence received through a client.


Class Questions


9. CPA-02334

The objective of tests of details of transactions performed as substantive tests is to: a. Comply with generally accepted auditing standards. b. Attain assurance about the reliability of the information system relevant to financial reporting. c. Detect material misstatements in the financial statements. d. Evaluate whether management's controls operated effectively. CPA-02334

Choice "c" is correct. Substantive tests are concerned with dollar amounts and consist of tests of details of transactions and balances and analytical procedures. The objective of tests of details of transactions performed as substantive tests is to detect material (dollar) misstatements in the financial statements.

Choice "a" is incorrect. Tests of details of transactions (performed as substantive tests) are used to evaluate management's assertions. While tests of details of transactions do help the auditor comply with GAAS, such compliance is not the primary objective of the tests.

Choice "b" is incorrect. Attaining assurance about the reliability of the information system relevant to financial reporting is an objective of tests of controls rather than of substantive tests.

Choice "d" is incorrect. Evaluation of the operating effectiveness of management controls is an objective of tests of controls rather than of substantive tests.

10. CPA-02373

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence? a. Accounts receivable. b. Interest expense. c. Accounts payable. d. Travel and entertainment expense. CPA-02373

Choice "b" is correct. Relationships among income statement accounts tend to be more predictable than balance sheet accounts (accounts receivable, accounts payable) because they represent transactions over a period of time rather than at one point in time. In addition, relationships involving transactions subject to management discretion (travel and entertainment) are less predictable.

Choices "a", "c", and "d" are incorrect, per the above explanation.


Class Questions


11. CPA-04622

An auditor's analytical procedures performed during the overall review stage indicated that the client's accounts receivable had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor? a. The client liberalized its credit standards in the current year and sold much more merchandise to

customers with poor credit ratings. b. Twice as many accounts receivable were written off in the prior year than in the current year. c. A greater percentage of accounts receivable were currently listed in the "more than 90 days overdue"

category than in the prior year. d. The client opened a second retail outlet in the current year and its credit sales approximately equaled

the older, established outlet. CPA-04622

Choice "d" is correct. If a second, similar retail outlet were opened, one would expect sales and accounts receivable to double. As long as the collection rates for the new outlet's receivables were expected to be similar to those of the original outlet, however, the allowance for doubtful accounts as a percentage of accounts receivable would remain the same.

Choice "a" is incorrect. If the client sold more merchandise to customers with poor credit ratings, the allowance for doubtful accounts as a percentage of receivables should increase to reflect the greater level of estimated bad debts.

Choice "b" is incorrect. Write off of a specific account receivable reduces both the allowance and the receivable by the amount written off. If there were twice as many write offs in the previous year than in the current year (and this were the only difference), the allowance for doubtful accounts as a percentage of receivables would not stay the same.

Choice "c" is incorrect. If more receivables are potentially uncollectible in the current year (as opposed to the prior year), the allowance for doubtful accounts as a percentage of receivables should increase to reflect the greater level of estimated bad debts.

12. CPA-02354

In determining whether transactions have been recorded, the direction of the audit testing should be from the: a. General ledger balances. b. Adjusted trial balance. c. Original source documents. d. General journal entries. CPA-02354

Choice "c" is correct. To determine whether transactions have been recorded (completeness assertion), the auditor should test from the source documents to the accounting records (general ledger, trial balances, etc.).

Choices "a", "b", and "d" are incorrect. Testing from the accounting records to the source documents provides evidence of existence or occurrence, not completeness.


Class Questions


13. CPA-02314

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all: a. Cash disbursements. b. Approved vouchers. c. Receiving reports. d. Vendors' invoices. CPA-02314

Choice "a" is correct. Since the employee is destroying the invoices and related vouchers, the most obvious documentation remaining would be the file of all cash disbursements. The auditor would select items from this file and then attempt to trace from specific cash disbursements to the related invoices and approved vouchers. Missing documentation might be indicative of fraud.

Choices "b" and "d" are incorrect. Since the employee destroys the related invoices and vouchers, selecting items from the file of remaining invoices and vouchers would never identify the fraud.

Choice "c" is incorrect. Selecting items from the file of receiving reports will not identify fraudulent purchases that are shipped directly to the employees' home addresses.

14. CPA-02443

To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace: a. Inventory tags noted during the auditor's observation to items listed in the inventory-listing schedule. b. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors'

invoices. c. Items listed in the inventory-listing schedule to inventory tags and the auditor's recorded count sheets. d. Items listed in receiving reports and vendors' invoices to the inventory-listing schedule. CPA-02443

Choice "c" is correct. Tracing from the inventory schedule to the inventory tags and the auditor's record count sheets verifies the validity (existence) of the items.

Choice "a" is incorrect. Tracing from inventory tags to the inventory listing schedule verifies the completeness of the schedule, not the existence (or validity) of the items.

Choice "b" is incorrect. Tracing to receiving reports and to vendors' invoices from the inventory tags might be used to verify completeness of purchases or payables.

Choice "d" is incorrect. Tracing from receiving reports and vendors' invoices to the inventory listing are cut-off procedures used to verify completeness of the inventory listing.


Class Questions


15. CPA-04627

An auditor decides to use the blank form of accounts receivable confirmation rather than the positive form. The auditor should be aware that the blank form may be less efficient because: a. Subsequent cash receipts need to be verified. b. Statistical sampling may not be used. c. A higher assessed level of detection risk is required. d. More nonresponses are likely to occur. CPA-04627

Choice "d" is correct. Blank forms may result in lower response rates because a greater effort is required for response.

Choice "a" is incorrect. Use of the blank form does not necessarily imply that subsequent cash receipts will need to be verified. This is an alternative procedure that might be used to follow up on nonresponses.

Choice "b" is incorrect. The decision regarding whether or not to use statistical sampling is independent of the decision regarding what form of accounts receivable confirmation to use.

Choice "c" is incorrect. Blank forms provide a greater degree of assurance, since the recipient cannot simply sign off without checking the balance. A greater degree of assurance results in a lower assessed level of detection risk.

16. CPA-02430

In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of management's financial statement assertions of existence and: a. Valuation and allocation. b. Rights and obligations. c. Completeness. d. Classification and understandability. CPA-02430

Choice "b" is correct. A confirmation from an outside agent indicating that securities are being held in the client's name provides evidence with respect to both the existence assertion and the rights and obligations assertion.

Choice "a" is incorrect. The valuation and allocation assertion for securities is generally tested by reference to an outside source of price information such as the Wall Street Journal.

Choice "c" is incorrect. In order to test the completeness assertion with confirmations, the auditor would need to select from all possible agents rather than only agents that currently hold securities.

Choice "d" is incorrect. Confirmations do not provide evidence regarding the classification and understandability assertion.


Class Questions


17. CPA-02416

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that: a. Payments to employees are computed at authorized rates. b. Employees work the number of hours for which they are paid. c. Segregation of duties exists between the preparation and distribution of the payroll. d. Internal controls relating to unclaimed payroll checks are operating effectively. CPA-02416

Choice "b" is correct. By vouching to time card data, the auditor is testing the existence assertion for hours worked.

Choice "a" is incorrect. Vouching to approved clock card data would provide evidence about hours worked, not pay rates. Pay rates would be tested by comparing to personnel records.

Choice "c" is incorrect. Vouching to approved clock card data does not provide evidence about segregation of duties.

Choice "d" is incorrect. Vouching to approved clock card data does not provide evidence about internal controls related to unclaimed paychecks. The auditor would need to observe a payroll distribution to evaluate these controls.

18. CPA-02447

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would: a. Inspect the property ledger and the insurance and tax records, and then tour the client's facilities. b. Tour the client's facilities, and then inspect the property ledger and the insurance and tax records. c. Analyze the repair and maintenance account, and then tour the client's facilities. d. Tour the client's facilities, and then analyze the repair and maintenance account. CPA-02447

Choice "a" is correct. In a search for unrecorded disposals, the auditor would vouch a sample of assets on the property ledger to those on hand in the client's facility.

Choice "b" is incorrect. By touring the facility first, and then comparing assets found to those recorded on the property ledger, the auditor is testing the completeness of the property ledger, a procedure used to search for unrecorded additions.

Choice "c" is incorrect. Analysis of the repair and maintenance account is useful in identifying transactions that should have been capitalized versus expensed (i.e., unrecorded additions).

Choice "d" is incorrect. Analysis of the repair and maintenance account is useful in identifying transactions that should have been capitalized versus expensed (i.e., unrecorded additions).


Class Questions


19. CPA-02495

During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management's assertion of: a. Existence. b. Completeness. c. Valuation and allocation. d. Classification and understandability. CPA-02495

Choice "d" is correct. Restrictions on retained earnings are for contractual or legal appropriation of retained earnings. The purpose is to restrict dividends, and such restrictions should be disclosed in the financial statements.

Choice "a" is incorrect. Restrictions on retained earnings have no effect on the existence of retained earnings.

Choice "b" is incorrect. Completeness refers to the inclusion of all transactions and balances. Restrictions on retained earnings will not affect completeness.

Choice "c" is incorrect. Assertions about valuation and allocation deal with whether assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts. Restrictions on retained earnings do not affect valuation and allocation.

20. CPA-02536

Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions? a. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities. b. Vouching accounting records for recurring transactions recorded just after the balance sheet date. c. Reviewing confirmations of loans receivable and payable for indications of guarantees. d. Performing analytical procedures for indications of possible financial difficulties. CPA-02536

Choice "c" is correct. Reviewing confirmations of loans receivable and payable is useful for determining the existence of related party transactions because guarantees are commonly provided by or for related parties.

Choice "a" is incorrect. Detection of unreported contingent liabilities is not a procedure that would assist the auditor in identifying related party transactions.

Choice "b" is incorrect. Recurring transactions after year-end are a usual business occurrence. Related party transactions would most likely be nonrecurring.

Choice "d" is incorrect. While financial difficulties may be associated with related party transactions, it is unlikely that analytical procedures would assist the auditor in identifying such transactions.


Class Questions


21. CPA-02529

Which of the following is an audit procedure that an auditor most likely would perform concerning litigation, claims, and assessments? a. Request the client's lawyer to evaluate whether the client's pending litigation, claims, and

assessments indicate a going concern problem. b. Examine the legal documents in the client's lawyer's possession concerning litigation, claims, and

assessments to which the lawyer has devoted substantive attention. c. Discuss with management the controls adopted for evaluating and accounting for litigation, claims,

and assessments. d. Confirm directly with the client's lawyer that all litigation, claims, and assessments have been

recorded or disclosed in the financial statements. CPA-02529

Choice "c" is correct. The independent auditor's procedures with respect to litigation, claims, and assessments should include discussing with management the controls adopted for identifying, evaluating, and accounting for litigation, claims, and assessments.

Choice "a" is incorrect. The evaluation of going concern issues is the auditor's responsibility.

Choice "b" is incorrect. The auditor should examine documents in the client's possession concerning litigation, claims, and assessments, including correspondence and invoices from lawyers. The auditor does not generally examine documents held by the client's lawyer.

Choice "d" is incorrect. The client's lawyer would only know about matters that he or she has been engaged to handle, which might not include all litigation, claims, and assessments. In addition, it is the auditor's responsibility (not the lawyer's) to determine whether litigation, claims, and assessments have been adequately recorded or disclosed in the financial statements.

2009 a 4 class questions preview

Economy & Finance