Audit Exam 3 Review

When performing confirmation of cash balances with a bank, the auditor is primarily gathering evidence related to which financial statement assertion?

• Existence

• Completeness

• Valuation

• Presentation

Immediately upon receipt of cash, a responsible employee should

• Record the amount in the cash receipts journal.

• Update the subsidiary accounts receivable records.

• Prepare a control listing of incoming cash receipts

• Prepare a deposit slip in triplicate.

Which of the following control activities would best protect against the preparation of improper or inaccurate cash disbursements?

• All checks must be sequentially numbered and accounted for by internal auditors.

• All signed checks must be reviewed and compared with supporting documentation by the treasurer before mailing.

• All checks must be signed by an officer designated by the board of directors.

• All checks must be perforated or otherwise effectively canceled when they are returned with the bank statement.

Which of the following is least indicative of fraudulent activity?

• Bank reconciliation has no outstanding checks or deposits older than 15 days.

• Internal auditors cannot locate several credit memos to support reductions of customers’ balances.

• Three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later.

• Numerous cash refunds have been made to different people at the same post office box address.

An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that:

• Sales invoices represent bona fide sales.

• All sales have been recorded.

• Entries in the accounts receivable subsidiary ledger were properly invoiced.

• All sales invoices have been properly posted to customer accounts.

A client has a separate sales group for its largest “preferred” customers, a select group of customers who normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform?

• Send out negative confirmations on a large sample of these customers.

• Send out positive confirmations on a large sample of these customers.

• Inquire of the sales manager regarding the accounts receivable terms.

• Prepare a schedule of purchases and payments for these customers.

In the audit of accounts receivable, the most important emphasis should be on the

• Existence assertion.

• Presentation and disclosure assertion.

• Completeness assertion.

• Rights and obligations assertion.

Which of the following would not overstate current-period net income?

• Capitalizing an expenditure that should be expensed.

• Failing to record a liability as an expense.

• Failing to record a check paying an item in Vouchers Payable.

• All of the choices would overstate net income.

A client’s purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes auditors’ primary concern with respect to liabilities resulting from the purchasing system?

• Authority to incur liabilities is restricted to one designated person.

• Acquisition of materials is not made from one vendor or one group of vendors.

• Commitments for all purchases are made only after established competitive bidding procedures are followed.

• Accounts payable are not materially understated.

An audit team would most likely examine the detail support for charges to which of the following accounts?

• Payroll expense.

• Legal expense.

• Cost of goods sold.

• Supplies expense.