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1. What evidence is appropriate to determine whether recorded
1. What evidence is appropriate to determine whether recorded purchase transactions are valid and the vendors charged the correct prices? A. Purchase requisitions and accounts payable entries B. Receiving reports and purchase orders C. Purchase requisitions and purchases orders D. Purchase orders and bid quotes 2. For the copy of the purchase order that goes to the receiving department, it is best to A. Leave off the description of the goods ordered B. Leave off the quantity of the goods ordered C. Leave off the name of the vendor D. Have the receiving department forward all copies of the purchase order to accounts payable 3. When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be A. Vendors with whom the entity has previously done business B. Amounts recorded in the accounts payable subsidiary ledger C. Payees of checks drawn in the month after the year-end D. Invoices filed in the entity's open invoice file 4. Which of the following situations indicates a potential material weakness in internal control over acquisition and expenditure? A. Purchase orders are not prepared for services acquired directly under authorization of department heads B. Voucher packages are authorized and checks are signed by the same person C. Unacceptable goods are not scheduled on receiving reports D. The same person signs checks and stamps vouchers "paid." 5. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to obtain evidence that A. All goods purchased before year end are received before the physical inventory count B. No goods held on consignment for customers are included in the inventory balance C. No goods observed during the physical count are pledged or sold D. All goods owned at year end are included in the inventory balance 6. In determining the effectiveness of an entity's policies and procedures relating to the occurrence assertion for payroll transactions, an auditor most likely would inquire about and A. Observe the separation of duties concerning personnel responsibilities and payroll disbursement B. Inspect evidence of accounting for prenumbered payroll checks C. Recompute the payroll deductions for employee fringe benefits D. Verify the preparation of the monthly payroll account bank reconciliation 7. The auditor decided to test accounts payable by sending open ended (blank) confirmations to selected vendors. The auditor's best approach in selecting the vendor accounts to confirm is to A. Select vendor accounts with large balances B. Select vendor accounts at random in order to apply a statistical sampling procedure C. Select vendor accounts based on the number of purchases from vendors during the year D. Select vendor accounts that are past due 8. Which of the following is not a major control risk in the payroll cycle? A. Paying fictitious "employees." B. Overpaying for time or production C. Losing employees to competitors D. Incorrect accounting for costs or expenses 9. To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is A. Supported by a vendor's invoice B. Stamped "paid" by the check signer C. Prenumbered and accounted for D. Approved for authorized purchases 10. Which of the following client control procedures is not usually performed in the vouchers payable (accounts payable) department? A. Determining the mathematical accuracy of the vendors' invoices B. Writing checks for the treasurer's signature to take advantage of purchase discounts C. Controlling the mailing of the check and remittance advice D. Checking the prices on the vendor's invoice 11. 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 12. Vouchers should be stamped PAID to A. Prevent duplicate payment B. Generate a new purchase order C. Indicate posting in the voucher register D. Facilitate preparation of the bank reconciliation 13. Auditors may conclude that depreciation charges are too small by noting A. Insured values much larger than book values B. Large numbers of fully depreciated assets C. Frequent trade-ins of relatively new assets D. Large and frequent losses on assets retired 14. Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries? A. Personnel B. Treasurer C. Controller D. Payroll 15. "All purchase orders are supported by requisitions from proper persons" is a specific example of which transaction assertion? A. Occurrence B. Completeness C. Cutoff D. Classification 16. Which of the following personnel department procedures reduces the risk of payroll fraud and represents an appropriate responsibility for the department? A. Distributing paychecks B. Authorizing overtime hours C. Authorizing the addition or deletion of employees from the payroll D. Collecting and retaining unclaimed paychecks 17. Improperly capitalizing an expense item results in. A. Understatement of profit in the current year and overstatement in future years B. Understatement of profit in the current year and in future years C. Overstatement of profit in the current year and understatement in future years D. Overstatement of profit in the current year and in future years 18. Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment account are not understated? A. Depreciation expense B. Gain on disposal of equipment C. Accounts payable D. Repairs and maintenance expense 19. An auditor most likely would assess control risk at the maximum if the payroll department supervisor is responsible for A. Examining authorization forms for new employees B. Comparing payroll registers with original batch transmittal data C. Distribute payroll checks to all employees D. Hiring all subordinate payroll department employees 20. Which of the following procedures would an auditor most likely perform in searching for unrecorded payables? A. Reconcile receiving reports with related cash payments made just prior to year-end B. Contrast the ratio of accounts payable to purchases with the prior year's ratio 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 21. Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? A. Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file B. Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance C. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices D. Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions 22. The permanent reference files (master files) in a personnel and payroll database ordinarily do not include which of the following? A. Deduction table B. Payroll master C. Compensation table D. Employee earning record 23. When auditing PP&E, the auditor's approach is generally to A. Examine evidence supporting the amounts in the ending balance B. Examine evidence supporting additions during the year C. Follow a reliance strategy, testing internal controls and analytical procedures D. Concentrate on finding unrecorded assets 24. An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal. The purpose of this substantive audit procedure most likely was to A. Identify usually large purchases that should be investigated further B. Verify that cash disbursements were for goods actually received C. Determine that purchases were properly recorded D. Test whether payments were for goods actually ordered 25. The usual source for journal entries posted to the general ledger to record the purchase of inventory is A. Sales invoices updated with cost data from the inventory records department B. Purchase invoices updated with cost data from the inventory records department C. Receiving reports updated with cost data from the accounts payable department D. Vouchers payable journal from the accounts payable department 26. An auditor most likely would extend substantive tests of payroll when A. Payroll is extensively audited by the state government B. Payroll expense is substantially higher than in the prior year C. Overpayments are discovered in performing tests of controls D. Employees complain to management about too much overtime 27. An entity's internal control structure 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. Purchase orders B. Canceled checks C. Receiving reports D. Approved vouchers 28. The sampling unit in a test of controls pertaining to the existence or occurrence of payroll transactions ordinarily is a (an) A. Clock card or time ticket B. Employee Form W-2 C. Employee personnel record D. Payroll register (journal) entry 29. Cash disbursements are authorized by A. Purchase orders B. Invoices C. Receiving reports D. Vouchers 30. Which of the following situations represents an internal control weakness in the payroll department? A. Payroll department personnel are rotated in their duties B. Paychecks are distributed by the employees' immediate supervisor C. Payroll records are reconciled with quarterly tax reports D. The timekeeping function is independent of the payroll department 31. Purchase cutoff procedures should be designed to produce evidence of whether merchandise is included in the inventory of the client company if the company A. Has paid for the merchandise B. Has physical possession of the merchandise C. Holds legal title to the merchandise D. Holds the shipping documents for the merchandise issued in the company's name 32. Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of A. Valuation or allocation B. Existence or occurrence C. Completeness D. Rights and obligations 33. A liability for a long term purchase contract should generally be recognized when A. The contract is signed B. The goods are shipped C. The goods are received D. The goods are sold to match the cost 34. 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. Separation of duties exists between the preparation and distribution of the payroll D. Internal controls relating to unclaimed payroll checks are operating effectively 35. Which of the following audit procedures is best for identifying unrecorded accounts payable? A. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period B. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports 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 36. Small Corporation uses a Wages Clearing Account for its payroll disbursements. At the end of February, a reasonably large debit balance remained in this account. The most likely reason for this is that A. More labor cost had been assigned to the expense accounts than had been paid B. Some labor cost had not been properly classified in the expense accounts C. Some employees had not yet cashed their checks D. Not enough cash had been transferred to the bank account 37. Which of the following would detect the understatement of a purchase discount? A. Verify the arithmetic accuracy of the purchases journal B. Compare purchase disbursement records and checks with invoice terms C. Compare approved purchase orders to receiving reports D. Verify the receipt of items ordered and invoiced 38. Which of the following would be an indicator of potential fraud? A. Photocopies of invoices in the voucher file B. Vendor invoices in numerical order C. Vendors with only post office box addresses D. All of the above indicate potential fraud 39. Which of the following expense accounts would not normally be tested by listing all debits and examining any significant items? A. Legal expense B. Miscellaneous expense C. Repairs and Maintenance D. Payroll expense 40. When confirming accounts payable, emphasis should be put on what kind of accounts? A. Accounts with small or zero balances B. All accounts should be equally emphasized C. Accounts with large balances D. Accounts listed in the accounts payable subsidiary 41. A weakness in internal control over recording retirements of equipment may cause an auditor to A. Inspect certain items of equipment in the plant and trace those items to the accounting records B. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year C. Trace additions to the "other assets" account to search for equipment that is still on hand but no longer being used D. Select certain items of equipment from the accounting records and locate them in the plant 42. Which of the following would not be included in the supporting documents for a voucher? A. Purchase order B. Vendor invoice C. Receiving report D. Blank check 43. An auditor most likely would perform substantive procedures on payroll transactions and balances when A. Cutoff tests indicate a substantial amount of accrued payroll expense B. The assessed level of control risk relative to payroll transactions is low C. Analytical procedures indicate unusual fluctuations in recurring payroll entries D. Accrued payroll expense consists primarily of unpaid commissions 44. To test the transaction assertion of occurrence in the area of payroll, the auditor most likely would A. Select a sample of personnel files and trace the pay rate to union contracts or other rate rights and obligations B. Select a sample of personnel files and trace the pay rate to payroll department files used in payroll preparation C. Select a sample of payroll register entries and recalculate gross pay, deductions, and net pay D. Select a sample of payroll register entries and vouch hours worked to clock time cards 45. Which of the following fraud detection steps could not be performed by CAATs? A. Look for photocopies in invoice files B. Look for vendor invoices in numerical order C. Look for vendor invoices slightly below the approval threshold D. Look for duplicate vendor numbers 46. Failure to record a liability generally results in A. An understatement of profit B. An understatement of current ratio C. An overstatement of profit D. An overstatement of assets 47. An auditor wishes to perform tests of controls on a client's purchasing procedures. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by A. Confirmation and observation B. Observation and inquiry C. Analytical procedures and confirmation D. Inquiry and analytical procedures 48. "Recorded vouchers (accounts payable entries) in the voucher register (e.g., purchases journal) supported by completed voucher documentation" is a specific example of which management assertion? A. Classification B. Occurrence C. Completeness D. Cutoff 49. The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the A. Human resources function from the controllership function B. Administrative controls from the internal accounting controls C. Authorization of transactions from the custody of related assets D. Operational responsibility from the record keeping responsibility 50. A voucher is used to A. Document receipt of inventory B. Document completion of services C. Document a purchase contract D. Provide a source document for recording the purchase of a good or service 51. Counting inventory on the warehouse floor and tracing the count to the inventory compilation provides evidence to support which management assertion (PCAOB assertion)? A. Existence or occurrence B. Completeness C. Rights and obligations D. Valuation or allocation 52. An auditor selected a product maintained in the finished goods warehouse. The auditor counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor most likely testing? A. Existence B. Completeness C. Rights and obligations D. Valuation 53. Your client plans to count inventory at several locations on the same day. No location is material in amount, but the total of inventory is quite material. How is an auditor likely to plan his/her observation? A. Observe all counts at all locations by using the require number of auditors B. Insist the inventory be counted on separate days so the auditor can be present at all locations C. Work with the client to determine which locations to observe D. Observe a sample of locations on a surprise basis 54. Selecting a sample of cost accounting reports for labor and vouching it to time records is a procedure designed to test the ASB transaction assertion of A. Occurrence B. Valuation C. Completeness D. Presentation and disclosure 55. An auditor selected an invoice for a large inventory purchase and vouched the invoice to the receiving report. Which ASB transaction assertion is the auditor most likely testing? A. Occurrence B. Completeness C. Rights and obligations D. Valuation 56. Martinez, CPA, was auditing his client, Marvelous Retail Company. He selected a sample of inventory items from the perpetual records and vouched additions to receiving reports. This procedure was intended to satisfy which POCAOB assertion? A. Rights and obligations B. Completeness C. Existence or occurrence D. Valuation or allocation 57. If overhead is miscalculated so that it is under absorbed, the result if the error is not corrected will be that A. Inventory will be understated and net income will be overstated B. Inventory and net income will be overstated C. Inventory will be overstated and net income will be understated D. Inventory and net income will be understated 58. The audit procedures used in an observation of the client's physical inventory-taking are designed primarily to A. Test and observe the client's physical count of inventory B. Verify independently the physical counts obtained by the client C. Assist the client in taking test counts of year-end inventory D. Determine whether or inventory contains obsolete goods 59. 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 60. A company's cost accountant periodically reconciles job cost sheets to the work-in-process inventory accounts. This reconciliation is most likely performed to provide assurance that A. Recorded production transactions are valid and documented B. Valid production transactions are recorded and none omitted C. Production accounting and posting is complete D. Production transactions are recorded in the proper period 61. Which of the following is not an acceptable method of determining inventory cost under GAAP? A. FIFO B. LIFO C. Standard Cost D. All the above are acceptable 62. If an auditor wished to test for the existence or occurrence of inventory, he or she would most likely select a sample of inventory item perpetual records and A. Trace additions to the general ledger B. Vouch additions to receiving reports C. Vouch additions to sales invoices D. Trace receipts to receiving reports 63. An auditor selected an inventory item on the warehouse floor, test counted it, and traced the count to the final inventory compilation. The auditor most likely was testing the following PCAOB assertion: A. Existence assertion B. Valuation assertion C. Completeness assertion D. Rights and obligations assertion 64. Which of the following steps would not normally be included in a program for a physical inventory observation? A. Vouch unit prices to vendors' invoices or other cost records B. Obtain client's inventory counting instructions and review for completeness C. Inspect tags used and unused and record tag numbers used D. Obtain number of last five receiving reports and last five shipping documents 65. An auditor selected a product recorded in the finished goods perpetual inventory subsidiary account. The auditor went to the warehouse and counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor most likely testing? A. Existence B. Completeness C. Rights and obligations D. Valuation 66. An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion (PCAOB assertion) of A. Valuation or allocation B. Rights and obligations C. Existence or occurrence D. Presentation and disclosure 67. An auditor's tests of controls over the issuance of raw materials to production would most likely include A. Reconciling raw materials and work in process perpetual inventory records to general ledger balances B. Inquiring of the custodian about the procedures followed when defective materials are received from vendors C. Observing that raw materials are stored in secure areas and that storeroom security is supervised by a responsible individual D. Examining material requisitions and reperforming client controls designed to process and record issuances 68. Generally accepted accounting principles require that inventory be recorded at A. The Lower of Cost or Fair Market Value B. The Lower of Cost or Net Realizable Value C. The Higher of Cost or Net Realizable Value less a normal profit (floor) D. None of the above 69. Periodic or cycle counts of selected inventory items are made at various times during the year rather than a single inventory count a year end. Which of the following is necessary if the auditor plans to observe inventories at interim dates? A. Complete recounts by independent teams are performed B. Perpetual inventory records are maintained C. Unit cost records are integrated with production accounting records D. Inventory balances are rarely at low levels 70. Mary Monitor, CPA, noted that ABC Co. received goods prior to year-end that were included in physical inventory but had not been recorded. In this case, which of the following adjustments should be made? A. Debit Purchases/credit Cost of Goods Sold B. No adjustment is necessary C. Debit Inventory/credit Accounts Payable D. Debit Cost of Goods Sold/credit Accounts Payable 71. Counting different parts of inventory at different times of the year is called. A. LIFO inventory B. Inventory cut-off C. Cycle counting D. Just-in-time inventory 72. To test the control assertion of completeness in the area of work-in-process inventory, the auditor most likely would A. Select a sample of open and closed production cost reports and recalculate all costs entered B. Select a sample of issue slips from the raw materials stores file and trace materials-used reports into production cost reports C. Select a sample of open and closed production cost reports and vouch overhead charges to overhead analysis schedules D. Select a sample of production orders and determine whether the production orders were authorized 73. While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record A. Purchase discounts B. Purchase returns C. Sales D. Sales returns 74. Inventory count tags are controlled A. To prevent counting errors B. To test cut-off C. To prevent subsequent addition of goods to the inventory D. For all the above reasons 75. A client's physical count of inventories was higher than the inventory quantities shown in the perpetual records. This situation could be the result of the failure to record A. Sales B. Sales discounts C. Purchases D. Purchase discounts 76. Auditors record the last bill of lading used at the time of the inventory count to A. Search for unrecorded sales B. Test cut-off C. Verify ownership D. All of the above 77. In Case 10.4 (No Treasure in this Treasure Planet), Disney overvalued net assets by capitalizing unrecoverable production costs. The lesson for the auditors in this case was: A. Always recalculate the client's figures, regardless of how simple they appear B. Maintain professional skepticism when evaluating clients' estimates C. Always look into the background of the client before accepting an engagement D. None of the above 78. ABC Company has issued a bond that pays 5% interest semi-annually to bond holders on record June 30 and December 30. Payments are made on July 15 and January 15. ABC Company has a December 31 fiscal year end. The auditor vouches the January 15, 2009 payment to the liabilities recorded on the December 31, 2008 balance sheet. Which of the following ASB balance assertions if the auditor testing? A. Existence B. Rights and obligations C. Completeness D. Valuation 79. Tests of controls in the finance and investment cycle. A. Normally focus on tests of transactions B. Primarily involve observing physical security of assets C. Amount to inquiries and observations related to management involvement D. Can significantly reduce the extent of substantive tests 80. Loan covenants A. Describe the collateral of the loan B. Require the borrower to maintain certain financial characteristics C. Describe the lender's responsibilities D. Include all the above 81. Which of the following would not be a place in which owners' equity transactions would be documented? A. Capital budget B. Minutes of the meetings of the board of directors C. Proxy statements D. Securities offering registration statements 82. "Are interest payments and accruals monitored for due dates and financial statement dates?" is an internal control questionnaire item that is related to the ASB transaction assertion of A. Occurrence B. Completeness C. Cutoff D. Accuracy 83. Related party transactions A. Must be valued as if they were arm's length B. Must be assumed to be valued differently than if they were arm's length C. Must be disclosed in the financial statements D. Must be disclosed in the financial statements and the auditor's report 84. The typical business activity of the finance and investment cycle would not include A. Proposals for cash forecasts, capital budgets, and business expansion B. Analyses of excess cash funds C. Reconciliation of cash D. Sale of stocks, bonds, or notes 85. Which of the following management assertions for long-term liabilities is related to the ASB balance assertion of completeness? A. All material long term liabilities are recorded B. New long term liabilities and debt extinguishments are properly authorized C. Terms, conditions, and restrictions relating to noncurrent debt are adequately disclosed D. Disclosures of maturities for the next five years are accurate and adequate 86. The typical assertions related to investments and related accounts would not include the PCAOB assertion that A. Capitalized intangible costs relate to intangibles acquired in exchange transactions B. Amortization is properly calculated C. Research and development costs are properly classified D. Goodwill is valued at market value 87. In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of the ASB balance assertion of A. Valuation B. Existence C. Completeness D. Rights and obligations 88. 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 the ASB presentation and disclosure assertion of A. Occurrence B. Completeness C. Rights and Obligations D. Understandability 89. 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 ASB balance assertion of existence and A. Valuation B. Rights and obligations C. Completeness D. Accuracy 90. Selecting a sample of paid notes and tracing interest to the general ledger account is a test of the PCAOB assertion for A. Accounting B. Valuation or allocation C. Completeness D. Existence or occurrence 91. To determine whether facts support management's intent to hold securities to maturity, an auditor might A. Study the entity's cash flow forecasts B. Obtain published market quotations C. Compare fair value of the securities to cost D. Confirm that the securities are held by a broker 92. Which ASB balance assertion is of the most importance to auditors for long-term liabilities? A. Existence B. Completeness C. Rights and obligations D. Valuation 93. If it would be appropriate to confirm capital stock, the auditor would obtain the confirmation from A. Management B. The board of directors C. Stockholders D. An independent registrar 94. Derivative instruments include A. Stocks B. Preferred stocks C. Stock options D. All the above 95. Records of stock and bond certificates are usually maintained by the company's A. Treasurer B. Chief Financial Officer C. Transfer Agent D. Registrar 96. Documentation of a count of equity securities should include all of the following except A. Interest rate B. Serial numbers C. Number of shares D. Market value 97. In the audit of notes payable, an auditor testing the ASB balance assertion of accuracy and valuation most likely would A. Read directors' and finance committee's minutes for authorization of financing transactions B. Select a sample of paid notes and trace interest expense to the general ledger account C. Select a sample of paid notes and recalculate interest expense for the period under audit D. Select a sample of notes payable and vouch cash receipt to the bank statement 98. The focus of substantive tests in the finance and investment cycle is A. Reconciliation of detailed listings with general ledger amounts B. Proper cut-off C. Search for unrecorded items D. Gaining an understanding and verifying amounts and calculations 99. Compensating controls in the finance and investment cycle. A. Feature segregation of duties by upper management B. Feature involvement of two or more persons handling important responsibilities C. Include involvement by the external auditor D. Include all the above 100. A transfer agent A. Keeps the stockholder list and, from time to time, determines the shareholders eligible to received dividends B. Handles the exchange of shares, canceling the shares surrendered by sellers and issuing new certificates C. Records notes and bonds payable D. Makes investment decisions for an entity 101. A "big bath" refers to A. Overstating income B. Overstating revenues C. Understating income D. An economic downturn 102. The preferred method of determining fair value of transactions is. A. Market based values B. Reasonable management assumptions C. External auditor estimates D. Computations by outside experts 103. The decision of a company to have a transfer agent handle exchanges of shares is related primarily to which of the functional responsibilities? A. Rights and obligations B. Custody C. Recordkeeping D. Periodic reconciliation 104. Which of the following would not be a typical feature of management's control over the production of estimates? A. Accumulation of relevant, sufficient, and reliable data B. Preparation of estimates by qualified personnel C. Review by the independent auditor D. Consideration by management of whether particular accounting estimates are consistent with the company's operational plans 105. Keeping track of securities owners for payment of interest or dividends is usually done by the company's A. Treasurer B. Broker C. Transfer Agent D. Registrar 106. Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained? A. Direct access to securities in the safety deposit box is limited to only one corporate officer B. Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger C. The purchase and sale of investments are executed on the specific authorization of the board of directors D. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel 107. Which of the following is not an estimate required in the finance and investment cycle? A. Actuarial assumptions for pension accruals B. Residual values for leases C. Market value of publicly traded stocks D. All the above are estimates 108. A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will A. Request the bank to confirm to the auditor the contents of the safe deposit box at the balance sheet date B. Examine supporting evidence for transactions occurring during the year C. Count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the balance sheet date D. Request the client to have the bank seal the safe deposit box until the auditor can count the securities at a subsequent date 109. Which of the following is not an off-balance-sheet item? A. Purchase commitment B. Capitalized lease C. Loan commitment D. Synthetic lease 110. Which of the following questions would an auditor most likely include on an internal control questionnaire? A. Are assets that collateralize notes payable critically needed for the entity's continued existence? B. Are two or more authorized signatures required on checks that repay notes payable? C. Are the proceeds from notes payable used for the purchase of noncurrent assets? D. Are direct borrowings on notes payable authorized by the board of directors? 111. Which of the following is not a substantive audit procedure for estimates of management? A. Recalculating the mathematical estimate B. Observing whether estimates are prepared by qualified personnel C. Developing an independent estimate based on alternative assumptions D. Comparing the estimate to subsequent events before the end of fieldwork 112. Auditors count investment securities held by the client primarily to test the ASB balance assertion of A. Existence B. Rights and obligations C. Completeness D. Valuation 113. In auditing long term bonds payable, an auditor most likely would A. Perform analytical procedures on the bond premium and discount accounts B. Examine documentation of assets purchased with bond proceeds for liens C. Compare interest expense with the bond payable amount for reasonableness D. Confirm the existence of individual bondholders at year end 114. Which of the following is not a relevant aspect of controls over estimates? A. External auditor involvement in developing assumptions B. Adequate review by appropriate levels of authority C. Comparison of prior estimates with subsequent results D. All the above are relevant aspects 115. The focus of controls in the finance and investment cycle is on A. Proper authorizations and competent personnel B. Computer controls over transactions C. Physical security of assets D. Prenumbered documents 116. Appropriate audit inquiries regarding estimates include all of the following except A. Who prepares the estimates? B. Why are they prepared? C. What data are used? D. When are they prepared? 117. Independent auditors must consider whether the entity has the ability to continue as a going concern. If a substantial doubt exists but disclosure is adequate and no other basis exists for modifying the report, the auditors would normally A. Disclaim an opinion B. Express an adverse opinion C. Qualify the opinion D. Express an unqualified opinion with another paragraph describing the going-concern uncertainty 118. Restrictions imposed by an entity prohibited the observation of physical inventories, which accounted for 35% of all assets. Alternative auditing procedures were not feasible, although the auditors were able to examine satisfactory evidence for all other items in the financial statements. The auditors should express A. An "except for" qualified opinion on the entity's financial statements, referring to a departure from generally accepted accounting principles B. A disclaimer of opinion on the entity's financial statements C. An unqualified opinion on the entity's financial statements with a separate explanatory paragraph D. An unqualified opinion on the entity's financial statements with an explanation in the scope paragraph 119. Which of the following statements is not included in the scope paragraph of the standard report on the entity's financial statements? A. "Our responsibility is to express an opinion" B. "Standards require that we plan and perform the audit" C. "Our audit provides a reasonable basis for our opinion" D. "An audit includes examining, on a test basis, evidence of the amounts and disclosures" 120. Auditors who are reporting on financial statements that contain a material departure from generally accepted accounting principles should include a separate explanatory paragraph and A. Express a qualified or adverse opinion B. Not modify the opinion paragraph as long as the departure is adequately disclosed in a footnote C. Disclaim an opinion on the financial statements D. Express a qualified opinion or disclaimer of opinion 121. Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment as auditors and the start of field work made confirmation of accounts receivable by direct communication with the debtors ineffective. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditors' report most likely contained a(n) A. Unqualified opinion B. Unqualified opinion with an explanatory paragraph C. Qualified opinion due to a scope limitation D. Qualified opinion due to a departure from generally accepted auditing standards 122. In which of the following circumstances would auditors most likely add an explanatory paragraph to the standard report without affecting the unqualified opinion on the entity's financial statements? A. The auditors are asked to report on the balance sheet, but not on the other basic financial statements B. There is substantial doubt about the entity's ability to continue as a going concern C. Management's estimates of the effects of future events are unreasonable D. Certain transactions cannot be tested because of management's records retention policy 123. The auditors conclude that an entity's illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the materiality of the effect on the financial statements, the auditors should express either a(n) A. Adverse opinion or a disclaimer of opinion B. Qualified opinion or an adverse opinion C. Disclaimer of opinion or an unqualified opinion with a separate explanatory paragraph D. Unqualified opinion with a separate explanatory paragraph or a qualified opinion 124. Auditors should disclose the substantive reasons for expressing an adverse opinion on the entity's financial statements in an explanatory paragraph. A. Preceding the scope paragraph B. Preceding the opinion paragraph C. Following the opinion paragraph D. Within the footnotes to the financial statements 125. When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditors should A. Refer to the change in an explanatory paragraph B. Explicitly concur that the change is preferred C. Not refer to consistency in the report D. Refer to the change in the opinion paragraph 126. Suppose that the comparative financial statements include the financial statements of the prior year that were audited by predecessor auditors whose report on those financial statements is not presented. If the predecessor's report was qualified, the successor should A. Indicate in the auditors' report the substantive reasons for the qualification issued by the predecessor auditors B. Request the entity to reissue the predecessor's report on the prior-years' statements C. Issue an updated comparative auditors' report on the entity's financial statements, indicating the division of responsibility D. Express an opinion only on the current-year's financial statements and make no reference to the prior-years' financial statements or opinion 127. When disclaiming an opinion due to a client-imposed scope limitation, auditors should indicate in a separate paragraph why the audit did not comply with the standards of the PCAOB. The auditors should also omit the A. Scope Paragraph: No; Opinion Paragraph: Yes B. Scope Paragraph: Yes; Opinion Paragraph: Yes C. Scope Paragraph: No; Opinion Paragraph: No D. Scope Paragraph: Yes; Opinion Paragraph: No 128. The opinion paragraph of the auditors' report on the entity's financial statements either implicitly or explicitly incorporates all of the following standards, except that the A. Financial statements are presented in conformity with U.S. GAAP B. Informative disclosures are adequate unless otherwise stated C. Financial statements are management's responsibility D. Report identifies circumstances in which principles have not been consistently observed 129. When auditors qualify their opinion on the entity's financial statements because of inadequate disclosure, the auditors should describe the nature of the omission in a separate explanatory paragraph and modify the A. Introductory Paragraph: Yes; Scope Paragraph: Yes B. Introductory Paragraph: Yes; Scope Paragraph: No C. Introductory Paragraph: No; Scope Paragraph: Yes D. Introductory Paragraph: No; Scope Paragraph: No 130. In which of the following circumstances would auditors be most likely to express an adverse opinion? A. The chief executive officer refuses the auditors access to minutes of board of directors' meetings B. Tests of controls show that the entity's internal control is so ineffective that it cannot be relied upon C. The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases D. Information comes to the auditors' attention that raises substantial doubt about the entity's ability to continue as a going concern 131. In which of the following circumstances may auditors issue the standard report on the entity's financial statements? A. The entity changed accounting principles with an immaterial effect on financial position and results of operations B. The auditors wish to emphasize a matter regarding the financial statements C. The financial statements are affected by a departure from a generally accepted accounting principle explained and justified by Rule 203 of the AICPA code of professional conduct D. The auditors have not been able to audit a substantial portion of the balance sheet because of a circumstance-imposed scope limitation 132. Auditors most likely would issue a disclaimer of opinion on the entity's financial statements because of A. Inadequate disclosure of material information B. The omission of the statement of cash flows C. A material departure from generally accepted accounting principles D. Management's refusal to furnish written representations 133. The auditors conclude that there is a material inconsistency in the "other information" in an annual report to shareholders containing audited financial statements. If the auditors conclude that the financial statements do not require revision, but the entity refuses to revise or eliminate the material inconsistency, the auditors may A. Issue an "except for" qualified opinion on the entity's financial statements, citing a departure from generally accepted accounting principles B. Consider the matter closed since the other information is not in the audited financial statements C. Issue an adverse opinion on the entity's financial statements due to inadequate disclosure D. Revise the report on the entity's financial statements to include a separate explanatory paragraph describing the material inconsistency 134. If the auditors obtains sufficient appropriate evidence on the entity's accounts receivable balance by alternative procedures because it is impracticable to confirm accounts receivable, the opinion on the entity's financial statements should be unqualified and could be expected to A. Disclose the fact that alternative procedures were used due to client-imposed scope limitation B. Disclose in the opinion paragraph that confirmation of accounts receivable was impracticable C. Not mention the alternative procedures D. Include an explanatory paragraph that discloses the performance of alternative procedures 135. When an entity will not permit inquiry of outside legal counsel, the auditors' report on the entity's financial statements will ordinarily contain a (an) A. Disclaimer of opinion B. "Except for" qualified opinion regarding a departure from generally accepted accounting principles C. Unqualified opinion with a separate explanatory paragraph D. Adverse opinion 136. Auditors would not normally issue a qualified opinion on the entity's financial statements when A. An accounting principle at variance with GAAP is used B. The auditors lack independence with respect to the audited entity C. A scope limitation prevents the auditors from completing an important auditing procedure D. The auditors' report refers to the work of a specialist 137. Reference in a principal auditors' report to the fact that part of the audit was performed by other auditors most likely would be an indication of A. Division of responsibility between the auditors who conducted the audits of the components of the overall financial statements B. Lack of materiality of the portion of the financial statements audited by the other auditors C. Principal auditors' recognition of the other auditors' competence, reputation, and professional certification D. Different opinions the auditors are expressing on the components of the financial statements that each audited 138. Which of the following is an example of a material accounting change that requires recognition in an unqualified opinion on the entity's financial statements? A. A new accounting principle was adopted for a new class of assets acquired in the current year B. The entity has changed its form of reporting entity C. Management has changed from one generally accepted accounting principle to another but has not provided reasonable justification D. An accounting change made in the current year is expected to have a material effect only in the subsequent year 139. If management fails to provide adequate justification for a change from one generally accepted accounting principle to another, the auditors should A. Add an explanatory paragraph and express a qualified or an adverse opinion on the entity's financial statements for lack of conformity with generally accepted accounting principles B. Disclaim an opinion on the entity's financial statements because of uncertainty C. Disclose the matter in a separate explanatory paragraph but not modify the opinion paragraph on the entity's financial statements D. Neither modify the opinion on the entity's financial statements nor disclose the matter because both principles are generally accepted accounting principles 140. "As described in Note 5 to the financial statements, General Express changed its statistical method of computing product warranty expense for the year ended December 31, 2008..." is an illustration of a A. Consistency change requiring a qualified opinion B. Scope limitation C. Departure from GAAP D. Report with a consistency modification 141. Auditors would not express a qualified opinion on the entity's financial statements when A. A scope limitation prevents the auditors from completing an important auditing procedure B. The auditors' report refers to the work of a specialist C. An accounting principle at variance with generally accepted accounting principles is used D. The auditors lack independence with respect to the audited entity 142. The scope paragraph of the standard report on the entity's financial statements does not include the statement A. "In conformity with generally accepted accounting principles" B. "Audit provides a reasonable basis for an opinion" C. "An audit includes assessing the accounting principles used" D. "Perform the audit to obtain reasonable assurance" 143. The auditors include a separate paragraph in an otherwise unmodified report on the entity's financial statements to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph A. Is considered an "except for" qualification of the opinion B. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements C. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation" D. Is appropriate and would not otherwise affect the unqualified opinion 144. When auditors lack independence, which of the following is true about the report on the entity's financial statements that should be issued? A. The auditors should disclaim an opinion and should state specifically that they are not independent B. The auditors should disclaim an opinion but not mention that they are not independent C. The auditors should issue an unqualified opinion with an explanatory paragraph stating that they are not independent D. The auditors should issue a qualified opinion with an explanatory paragraph stating that they are not independent 145. Under which of the following circumstances would a disclaimer of opinion on the entity's financial statements not be appropriate? A. The financial statements fail to contain adequate disclosure of related-party transactions B. The entity refuses to permit its attorney to furnish information requested in an attorney letter C. The auditors are engaged after fiscal year end and are unable to observe physical inventories or apply alternative procedures to verify their balances D. The auditors are unable to determine the amounts associated with illegal acts committed by the entity's management 146. How would the auditors' opinion on the entity's financial statements be affected if a material weakness in internal control over financial reporting is identified? A. The auditors would need to disclaim an opinion on the entity's financial statements B. The auditors would need to issue either a qualified or adverse opinion on the entity's financial statements, depending on the significance of the material weakness C. The auditors' opinion on the entity's financial statements would not be affected by the material weakness, assuming sufficient appropriate evidence has been obtained D. The auditors would need to withdraw from the engagement and would not issue an opinion or other form of assurance on the financial statements 147. When auditors are engaged to examine an entity's financial statements but decide to issue a disclaimer of opinion, the report would not A. Explain any departures from GAAP B. Refer to any scope limitation C. Include the standard scope paragraph D. Discuss the fact that they were engaged to audit the financial statements 148. In which of the following situations would auditors ordinarily choose between expressing an "except for" qualified opinion or an adverse opinion on the entity's financial statements? A. The auditors did not observe the entity's physical inventory and are unable to become satisfied as to its balance by other auditing procedures B. The financial statements fail to disclose information that is required by GAAP C. The auditors are asked to report only on the entity's balance sheet and not on the other basic financial statements D. Events disclosed in the financial statements cause the auditors to have substantial doubt about the entity's ability to continue as a going concern 149. Auditors will issue an adverse opinion when A. A severe scope limitation has been imposed by the entity B. A violation of GAAP is sufficiently material that a qualified opinion is not justified C. A qualified opinion cannot be rendered because the auditors lack independence D. The entity's ability to continue as a going concern is subject to substantial doubt 150. When financial statements contain a departure from GAAP because, due to unusual circumstances, the statements would otherwise be misleading, the auditors should explain the unusual circumstances in a separate paragraph and express an opinion that is A. Unqualified B. Qualified C. Adverse D. Qualified or adverse, depending on materiality 151. Auditors' reporting decisions on financial statements depend primarily on the A. Four standards of reporting B. Sufficiency and appropriateness of evidence C. Application of GAAP D. Integrity of management 152. Auditors are required to make consistency references in the auditors' report when there are changes in A. Accounting estimates B. The format of the statement of cash flows C. The classification of financial statement amounts D. Accounting principles 153. If financial statements contain a material but "compartmentalized" departure from FASB pronouncements, the auditors should render a(n) A. Qualified "except for" opinion with reference to departure B. Adverse opinion with scope limitation reference C. Adverse opinion with reference to departure D. Disclaimer of opinion 154. An explanation of reliance on the reports of other auditors is an illustration of report departures referred to as A. Qualifications B. Divisions of responsibility C. Expansions of scope D. Scope limitations 155. The use of a disclaimer of opinion generally indicates A. The auditors are very uncertain with respect to an item and cannot form an opinion on the fairness of presentation of the financial statements as a whole B. The auditors are uncertain with respect to an isolated item that is material but not so material that the auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole C. The auditors have observed a departure from generally accepted accounting principles that has a material effect upon the fairness of presentation of financial statements but the departure is not material enough to justify a qualified opinion D. The auditors have observed a departure from generally accepted accounting principles that is so material that a qualified opinion is not justified 156. When reporting on comparative financial statements, auditors ordinarily should modify the previous opinion on the prior-year's financial statements if the A. Prior-year's financial statements are restated to conform with generally accepted accounting principles B. Auditors were predecessors who have been requested by a former client to reissue the previous report C. Prior-year's opinion was unqualified and the opinion on the current-year's financial statements is modified due to a lack of consistency D. Prior-year's financial statements are restated following an acquisition in the current year 157. The auditors' report on the entity's financial statements included an additional paragraph disclosing a difference of opinion between the auditors and the entity for which the auditors believed an adjustment to the financial statements should be made. The opinion paragraph of the auditors' report should express a(n) A. Unqualified opinion B. Qualified opinion citing a departure from generally accepted accounting principles C. Qualified opinion citing a scope limitation and lack of specific evidence D. Disclaimer of opinion 158. Which of the following auditing procedures most likely would assist auditors in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? A. Inspecting title documents to verify whether any assets are pledged as collateral B. Confirming with third parties the details of arrangements to maintain financial support C. Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation D. Comparing the entity's depreciation and asset capitalization policies to other entities in the industry 159. Which of the following phrases would auditors most likely include in their report when expressing a qualified opinion on the entity's financial statements because of inadequate disclosure? A. "Subject to the departure from generally accepted accounting principles, as described above" B. "With the foregoing explanation of these omitted disclosures" C. "Except for the omission of the information discussed in the preceding paragraph" D. "Does not present fairly in all material respects" 160. When audited financial statements are presented in a document containing other information, the auditors should A. Perform inquiry and analytical procedures to ascertain whether the other information is reasonable B. Add an explanatory paragraph to the auditors' report without modifying the opinion on the financial statements C. Perform the appropriate substantive procedures to corroborate the other information D. Read the other information to determine that it is consistent with the audited financial statements
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