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Worksheetsfinancial audit 2
Total questions: 173
Worksheet time: 1hrs 27mins
The auditor's primary concern relative to presentation and disclosure-related objectives is
accuracy.
existence.
completeness.
occurrence.
Which of the following is an accurate statement regarding presentation and disclosure?
Auditors generally set the risk as low that all required information may not be completely disclosed in the footnotes.
Audit tests performed in earlier audit phases provides sufficient appropriate evidence about contingent liabilities and subsequent events.
Auditors do not conduct tests of controls related to disclosures when the initial assessment of control risk is below maximum.
In phase IV (completing the audit), auditors evaluate whether the overall presentation of the financial statements and related footnotes complies with accounting standards.
Which of the following departments is most likely responsible for pay rate changes and changes in deductible amounts for employees?
general accounting department
human resources department
treasurer
controller
The primary concern in determining whether retained earnings is correctly disclosed on the balance sheet is
correct calculation of the net income or loss for the year.
correct calculation of dividend payments for the year.
whether prior-period adjustments have been made correctly.
whether there are any restrictions on the payment of dividends.
When verifying if capital stock is accurately recorded,
the ending balance in the account does not need to verified.
the number of shares outstanding at the balance sheet date is verified by examining the corporate minutes.
the recorded par value can be determined by multiplying the number of shares by the market price of the stock.
a confirmation from the transfer agent is the simplest way to verify the number of shares outstanding at the balance sheet date.
Which of the following statements is correct regarding the audit of dividends?
The emphasis is on the ending balance in the dividends account.
When auditors verify that the dividends are paid to stockholders that exist, they are concerned with the completeness objective.
If the client uses a transfer agent to disburse dividends, the total can be traced to a cash disbursement entry to the agent and also confirmed.
All of the above are correct statements.
When conducting the audit of stockholders' equity, it is normal practice to verify all capital stock transactions
only when the client is small.
that are in excess of a material amount.
if there aren't very many during the year.
regardless of the controls in existence, because of their materiality and permanence in the records.
If a company employs a capital stock registrar and/or transfer agent, the registrar or agent, or both, should be requested to confirm directly to the auditor the number of shares of each class of stock
surrendered and canceled during the year.
authorized at the balance sheet date.
issued and outstanding at the balance sheet date.
sold at a price above par during the year.
An imprest petty cash fund would least likely be used to pay for which of the following items?
minor office supplies
monthly interest expense
stamps for small mailings
small contributions to a local charity
An imprest petty cash fund
is a bank account.
is used for large, unusual purchases.
is usually reimbursed at least once a week for good internal control.
is being replaced by pre-approved purchase cards in many companies.
Which of the following misstatements is most likely to be uncovered during an audit of a client's bank reconciliation?
duplicate payment of a vendor's invoice
billing a customer at a lower price than indicated by company policy
failure to record a collection of a note receivable by the bank on the client's behalf
payment to an employee for more than the hours actually worked
Which of the following is likely to be detected as part of the audit of the bank reconciliation?
failure to bill a customer
duplicate payment of a vendor invoice
cash received by the client after year-end, but included in cash receipts in the current year
an embezzlement of cash by intercepting cash receipts from customers before they are recorded
Which of the following would normally be discovered as part of the audit of the bank reconciliation?
failure to bill a customer
failure to include a deposit in transit on the bank reconciliation
duplicate payment of a vendor's invoice
payment to an employee for more hours than she worked
The general cash account is considered a significant account in almost all audits
where the ending balance is material.
even when the ending balance is immaterial.
except those of not-for-profit organizations.
where either the beginning or ending balance is material.
Which of the following is an accurate statement regarding cash?
The amount of cash flowing into and out of the cash account is often larger than that for any other account in the financial statements.
The susceptibility of cash to embezzlement is greater than that for other types of assets.
Auditors must verify whether recorded cash in the general ledger correctly reflects all cash transactions that took place during the year.
All of the above are accurate statements.
Which of the following cycles does not affect cash in bank?
capital acquisitions cycle
inventory and warehousing
payroll and personnel cycle
acquisitions and disbursements
The test of details of balances procedure that requires the auditor to trace the book balance on the reconciliation to the general ledger is an attempt to satisfy the audit objective of
detail tie-in.
existence.
completeness.
accuracy.
Which of the following statements is correct?
Auditors must obtain bank confirmations for audits of nonpublic entities.
Auditors are required to obtain bank confirmations under international auditing standards.
Auditing standards do not address specific requirements regarding bank confirmations.
Auditing standards do not require bank confirmations.
A partial-period bank statement and the related copies of or digital access to cancelled checks, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the CPA firm's office, is called
a four-column proof of cash.
a year-end bank statement.
a cutoff bank statement.
a short-period bank statement.
In addition to confirming bank balances of your audit client, a bank confirmation would normally contain
the client's bank loans with due date, interest rate, and collateral requested.
the client's credit history as regards to paying back loans.
the client's managements bank account information.
the client's business prospects.
Which of the following balance-related audit objectives typically is assessed as having high inherent risk for cash?
existence
cutoff
detail tie-in
presentation and disclosure
Because cash is the most desirable asset for people to steal, it has a higher
control risk.
inherent risk.
detection risk.
liquidity risk.
The starting point for the verification of the balance in the general bank account is to obtain
a bank reconciliation from the client.
the client's cash account from the general ledger.
a cutoff bank statement directly from the bank.
the client's year-end bank statement.
Which of the following procedures and methods are important in assessing a company's ability to continue as a going concern?
Discussions with management regarding potential financial difficulties (Yes ) Evaluation of management's plans to avoid bankruptcy (Yes)
Discussions with management regarding potential financial difficulties (No) Evaluation of management's plans to avoid bankruptcy (No)
Discussions with management regarding potential financial difficulties (Yes) Evaluation of management's plans to avoid bankruptcy (No)
Discussions with management regarding potential financial difficulties (No) Evaluation of management's plans to avoid bankruptcy
( Yes)
When should auditors generally assess a client's ability to continue as a going concern?
upon completion of the audit
during the planning stages of the audit
throughout the entire audit process
during testing and completion phases of the audit
Auditing standards require that the auditor evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least
one quarter beyond the balance sheet date.
one quarter beyond the date of the auditor's report.
one year beyond the balance sheet date.
one year beyond the date of the auditor's report.
Auditing standards require auditors to evaluate whether there is substantial doubt about a client's ability to continue as a going concern. One of the most important audit procedures to perform to assess the going concern question is
analytical procedures.
confirmations from creditors.
statistical sampling procedures.
tests of internal controls.
Which of the following statements regarding the letter of representation is not correct?
It is prepared on the client's letterhead.
It is addressed to the CPA firm.
It is signed by high-level corporate officials, usually the president and chief financial officer.
It is optional, not required, that the auditor obtain such a letter from management.
Refusal by a client to prepare and sign the representation letter would require the auditor to issue a(n)
qualified opinion or a disclaimer of opinion.
adverse opinion or a disclaimer of opinion.
qualified or an adverse opinion.
unqualified opinion with an explanatory paragraph.
A management representation letter is
prepared on the CPA's letterhead.
addressed to the client.
signed by high-level corporate officials.
dated as of the balance sheet date.
Which of the following is correct regarding supplementary information?
The auditor must express an opinion on the supplementary information.
When reporting on supplementary information, the auditor uses a different materiality threshold from that used in forming an opinion on the basic financial statements.
If the auditor's report on the audited financial statements contains an adverse opinion, the auditor can still issue an unqualified opinion on the supplementary information.
The auditor can issue a separate report on the supplementary information; it does not need to be part of the report on the financial statements.
Which of the following is not one of the categories of items included in the letter of representation?
subsequent events
completeness of information
recognition, measurement, and disclosure
materiality
Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern?
review compliance with the terms of debt agreements
confirmation of accounts receivable from principal customers
reconciliation of interest expense with debt outstanding
confirmation of bank balances
Which of the following statements is correct?
A letter of representation is documentation of management's acceptance of responsibility for the financial statements and is deemed to be reliable evidence.
A letter of representation is not deemed to be reliable evidence because of the potential incompetence of management.
A letter of representation is not deemed to be reliable evidence because it is a written statement from a nonindependent source.
A letter of representation is documentation of the CPA's acceptance of responsibility for the audit of the financial statement and is deemed to be reliable.
The ________ has the responsibility for approving the number of hours worked for each employee.
employee's supervisor
human resources department
chief financial officer
budgeting supervisor
Verifying that an adequate chart of accounts is used is a key internal control for the transaction-related objective of
classification.
accuracy.
existence.
occurrence.
The auditor's independent estimate of interest expense from notes payable uses average interest rates and
average notes payable outstanding.
year-end notes payable outstanding.
only notes payable above the level of materiality.
only notes payable to major lenders.
The tests of details of balances procedure which requires the auditor to trace the totals of the notes payable list to the general ledger satisfies the audit objective of
accuracy.
existence.
detail tie-in.
completeness.
The audit objective to determine that notes payable in the schedule actually exist is verified by the test of details of balances procedure to
foot the notes payable list.
confirm notes payable.
recalculate interest expense.
examine the balance sheet for proper disclosure of noncurrent portions.
Actual interest expense is significantly higher than the auditor's estimate. This would most likely lead the auditor to conclude that the client has not
recorded all long-term interest bearing debt in the accounting records.
recorded all interest expense paid or accrued.
properly accounted for the discount of bonds payable account.
properly recorded interest income.
You are auditing the long-term notes payable account for a client. Which of the following audit procedures would you most likely employ?
Compare interest expense recorded by the client with the notes payable account for reasonableness.
Confirm bonds payable with individual bond holders.
Perform analytical procedures on the bond discount or premium account.
The two most important balance-related audit objectives for notes payable are
completeness and detail tie-in.
completeness and valuation.
accuracy and valuation.
accuracy and completeness.
Which of the following audit tests would provide evidence regarding the balance-related audit objective of existence for an audit of notes payable?
Examine due dates on duplicate copies of notes.
Examine balance sheet for proper presentation and disclosure of notes payable.
Examine corporate minutes for loan approval.
Foot the notes payable list for notes payable and accrued interest.
The audit objective that requires the auditor to determine that notes payable on the notes payable schedule are properly classified can be tested by performing the procedure to
confirm notes payable.
examine corporate minutes for loan approval.
examine notes, minutes, and bank confirmations for restrictions.
review the notes to determine whether any are with related parties.
During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditor to suspect that
long-term debt is understated.
discount on bonds payable is overstated.
long-term debt is overstated.
premium on bonds payable is understated.
To determine if notes payable are included in the proper period, the auditor should
trace the cash received from the issuance to the accounting records.
examine duplicate copies of notes to determine whether the notes were dated on or before the balance sheet date.
examine duplicate copies of notes for principal and interest rates.
trace the individual notes payable to the master file.
The audit procedure which requires the auditor to record the last check number used on the last day of the year and subsequently trace to the outstanding checks and the cash disbursements records is performed to satisfy the audit objective of
detail tie-in.
existence.
completeness.
cutoff.
The direct receipt of a confirmation from every bank with which the client does business is
required by auditing standards for every audit.
not necessary unless material fraud is suspected.
recommended but not required by auditing standards.
necessary for every audit except when there are an unusually large number of active accounts.
Which of the following items would not normally appear on bank reconciliations?
balance per bank
list of deposits in transit
outstanding deposits
outstanding checks
If a bank does not respond to a bank confirmation request, the auditor would most likely
Perform alternative procedures (NO)
Send a second request (YES)
Ask the client to communicate with the bank to ask them to complete and return the confirmation (YES)
Perform alternative procedures (NO)
Send a second request (NO)
Ask the client to communicate with the bank to ask them to complete and return the confirmation (YES)
Perform alternative procedures (YES)
Send a second request (NO)
Ask the client to communicate with the bank to ask them to complete and return the confirmation (YES)
PPerform alternative procedures (YES)
Send a second request (YES)
Ask the client to communicate with the bank to ask them to complete and return the confirmation (NO)
The bank reconciliation
must be done on a daily basis if the client uses electronic banking.
should be performed by someone independent of the handling or recording of cash receipts.
should be performed by someone who handles cash disbursements.
ensures that no cash has been embezzled.
The auditors test the client's monthly bank reconciliation to verify whether the client's recorded bank balance is the same amount as the actual cash in the bank. Which of the following would not explain a difference between the company's cash balance and the bank's balance for the client?
deposits in transit
Checks are written by the client in the same month the checks clear the bank.
other reconciling items
outstanding checks
When assessing risks affecting cash,
if a business defers preparing bank reconciliations for long periods, the value of the control is reduced and may affect the auditor's assessment of control risk for cash.
most companies are likely to have significant client business risks affecting their cash balances.
there is a low inherent risk for the existence and completeness objectives for cash.
all of the above are accurate statements.
Auditors are likely to prepare a proof of cash when the client has
material internal control weaknesses in cash.
material internal control weaknesses in accounts receivable and revenue.
material internal control weaknesses in accounts payable and inventory.
material internal control weaknesses in payroll.
The auditor uses a proof of cash to determine whether
All recorded cash disbursements were paid by the bank. (YES)
All amounts that were paid by the bank were recorded. (YES)
All recorded cash disbursements were paid by the bank. (NO)
All amounts that were paid by the bank were recorded. (NO)
All recorded cash disbursements were paid by the bank. (YES)
All amounts that were paid by the bank were recorded. (NO)
All recorded cash disbursements were paid by the bank. (NO)
All amounts that were paid by the bank were recorded. (YES)
A proof of cash represents
a test of controls and substantive test of transactions.
a substantive test of transactions.
a substantive test of transactions and test of details of balances.
a test of details of balances
A major consideration in the audit of the general cash balance is the possibility of fraud. The auditor must extend his or her procedures in the audit of year-end cash to determine the possibility of a material fraud when there are
large cash balances at the end of the year.
large cash receipts and disbursements during the year.
no imprest accounts used for payroll.
inadequate internal controls.
The audit and accounting concern addressed in a monthly proof of cash is with
adjusting account balances.
reconciling the amounts recorded in the books with the amounts included in the bank statement.
determining the month-end balance.
identifying cash transfers.
A proof of cash is effective at identifying which of the following misstatements?
checks written for an improper amount
checks issued to invalid vendors
fraudulent checks
checks recorded in the books for an amount different from that on the check
The process of transferring money from one bank account to another and improperly recording the transaction is referred to as
kiting.
lapping.
scamming.
embezzling.
Which of the following is a correct statement?
The proof of cash receipts is a test of the balance in the cash account at a point in time.
The proof of cash disbursements is effective for discovering a check written for the incorrect amount for which the dollar amount in cash disbursements is also incorrect.
It is extremely difficult for an auditor to detect thefts of cash, especially omitted transactions and account balances.
Segregation of duties is not an important control procedure for cash in a small business.
Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?
loss of a plant as a result of a flood
sale of long-term debt or capital stock
settlement of litigation in excess of the recorded liability
major purchase of a business that is expected to double the sales volume
In auditing debits and credits to retained earnings, other than net income and dividends, the auditors first concern is
whether the transactions should have been included in retained earnings.
whether the transactions have been accurately recorded.
whether the transactions are classified correctly in the footnotes.
whether the transactions existed as of the balance sheet date.
Which of the following is an important source of information for determining whether the presentation and disclosure-related objectives for capital stock activities are satisfied?
the corporate charter
the minutes of board of directors meetings
the auditor's analysis of capital stock transactions
all of the above
Which of the following audit objectives is least important in the audit of capital stock and paid-in-capital in excess of par?
completeness
accuracy
rights and obligations
presentation and disclosure
The primary concern in determining whether retained earnings is correctly disclosed on the balance sheet is
correct calculation of the net income or loss for the year.
correct calculation of dividend payments for the year.
whether prior-period adjustments have been made correctly.
whether there are any restrictions on the payment of dividends.
When verifying if capital stock is accurately recorded,
the ending balance in the account does not need to verified.
the number of shares outstanding at the balance sheet date is verified by examining the corporate minutes.
the recorded par value can be determined by multiplying the number of shares by the market price of the stock.
a confirmation from the transfer agent is the simplest way to verify the number of shares outstanding at the balance sheet date.
What type of audit test will auditors use when testing to see if the amounts of capital stock transactions are accurately recorded?
Tests of details of balances Substantive tests of transactions
Tests of controls
No Yes Yes
Tests of details of balances Substantive tests of transactions
Tests of controls
Yes No Yes
Tests of details of balances Substantive tests of transactions
Tests of controls
No Yes No
Tests of details of balances Substantive tests of transactions
Tests of controls
Yes No No
Which of the following statements is correct regarding the audit of dividends?
The emphasis is on the ending balance in the dividends account.
When auditors verify that the dividends are paid to stockholders that exist, they are concerned with the completeness objective.
If the client uses a transfer agent to disburse dividends, the total can be traced to a cash disbursement entry to the agent and also confirmed.
All of the above are correct statements.
When conducting the audit of stockholders' equity, it is normal practice to verify all capital stock transactions
only when the client is small.
that are in excess of a material amount.
if there aren't very many during the year.
regardless of the controls in existence, because of their materiality and permanence in the records.
If a company employs a capital stock registrar and/or transfer agent, the registrar or agent, or both, should be requested to confirm directly to the auditor the number of shares of each class of stock
surrendered and canceled during the year.
authorized at the balance sheet date.
issued and outstanding at the balance sheet date.
sold at a price above par during the year.
An auditor's decision concerning whether or not to dual date an audit report is primarily based on the auditor's decision to
extend appropriate audit procedures.
assume responsibility for events after the date of the auditor's report.
assume responsibility for event from fiscal year-end to the date of the audit report.
roll the dice and hope for a successful outcome.
The auditor's responsibility for 'reviewing the subsequent events' of a public company that is about to issue new securities is normally limited to the period of time
beginning with the balance sheet date and ending with the date of the auditor's report.
beginning with the start of the fiscal year under audit and ending with the balance sheet date.
beginning with the start of the fiscal year under audit and ending with the date of the auditor's report.
beginning with the balance sheet date and ending with the date the registration statement becomes effective.
Subsequent events affecting the realization of assets ordinarily will require an adjustment of the financial statements under examination because such events typically represent
the culmination of conditions that existed at the balance sheet date.
additional new information related to events that were in existence on the balance sheet date.
final estimates of losses relating to casualties occurring in the subsequent events period.
preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.
An auditor's decision concerning whether or not to 'dual date' the audit report is based upon the auditor's willingness to
extend auditing procedures and assume responsibility for a greater period of time.
accept responsibility for subsequent events.
permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor's report.
assume responsibility for events subsequent to the issuance of the auditor's report.
Auditors of accelerated filer public companies
are responsible for reviewing subsequent events for a period of up to six months after the balance sheet date.
must always dual-date their audit reports.
must inquire about and consider any information about subsequent events that materially affects the effectiveness of internal control over financial reporting.
must perform all of the above procedures.
A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events might result in adjustment of the December 31 financial statements?
sale of a major subsidiary
adoption of accelerated depreciation methods
write-off of a substantial portion of inventory as obsolete
collection of 90% of the accounts receivable existing at December 31
It would be appropriate for the payroll department to be responsible for which of the following functions?
approval of employee time records
maintain records of employment, firings, and raises
temporary retention of unclaimed employee paychecks
preparation of governmental reports as to employees' earnings and withholding taxes
Which of the following statements is correct regarding the capital acquisition and payment cycle?
Bonds are frequently issued by companies in small amounts.
There are relatively few transactions and each transaction is typically highly material.
A primary emphasis in auditing debt is on existence.
Audit procedures for notes payable and interest income are often performed simultaneously.
The capital acquisition and repayment cycle does not include
payment of interest.
payment of dividends.
payment of vendor invoices.
acquisition of capital through interest-bearing debt.
Which of the following statements regarding the capital acquisition and repayment cycle is most correct?
A relatively few transactions affect the cycle, and most are smaller amounts.
A large numbers of transactions affect the cycle, and most are smaller amounts.
A relatively few transactions affect the cycle, and most are highly material.
A large number of transaction affect the cycle, and most are highly material.
Assessed control risk and results of substantive tests of transactions are normally unimportant for designing tests of details of balances for which of the following accounts?
accounts receivable
inventory
accounts payable
notes payable
The audit procedure which requires the auditor to record the last check number used on the last day of the year and subsequently trace to the outstanding checks and the cash disbursements records is performed to satisfy the audit objective of
detail tie-in.
existence.
completeness.
cutoff.
The direct receipt of a confirmation from every bank with which the client does business is
required by auditing standards for every audit.
not necessary unless material fraud is suspected.
recommended but not required by auditing standards.
necessary for every audit except when there are an unusually large number of active accounts.
The reason for testing the client's bank reconciliation is to verify whether the client's recorded bank balance is the same amount as the actual cash in bank, except for deposits in transit, checks outstanding, and other reconciling items. The information needed to complete the tests of the reconciliation is provided by the
client's records and ledgers for the year under audit.
cutoff bank statement.
client's records and ledgers for the subsequent year.
canceled checks for the year under audit.
Which of the following items would not normally appear on bank reconciliations?
balance per bank
list of deposits in transit
outstanding deposits
outstanding checks
If a bank does not respond to a bank confirmation request, the auditor would most likely
Perform alternative procedures
Send a second request
Ask the client to communicate with the bank to ask them to complete and return the confirmation
No Yes Yes
Perform alternative procedures
Send a second request
Ask the client to communicate with the bank to ask them to complete and return the confirmation
No No Yes
Perform alternative procedures
Send a second request
Ask the client to communicate with the bank to ask them to complete and return the confirmation
Yes No No
The most important balance-related audit objectives in the audit of cash include all except which of the following?
existence
accuracy
completeness
occurrence
The bank reconciliation
must be done on a daily basis if the client uses electronic banking.
should be performed by someone independent of the handling or recording of cash receipts.
should be performed by someone who handles cash disbursements.
ensures that no cash has been embezzled.
________ is an automated fraud detection tool offered by most banks.
A bank confirmation
Fraud buster
Check matching
Which of the following balance-related objectives applies to auditing the general cash account?
Rights
Classification
Realizable value
Yes No Yes
Rights
Classification
Realizable value
No Yes No
Rights
Classification
Realizable value
Yes Yes yes
Rights
Classification
Realizable value
No No No
The standard bank confirmation form has been agreed upon by the
SEC and FASB.
AICPA and the SEC.
SEC and the American Bankers' Association.
AICPA and the American Bankers' Association.
The auditors test the client's monthly bank reconciliation to verify whether the client's recorded bank balance is the same amount as the actual cash in the bank. Which of the following would not explain a difference between the company's cash balance and the bank's balance for the client?
deposits in transit
Checks are written by the client in the same month the checks clear the bank.
other reconciling items
outstanding checks
If an auditor waits until the subsequent period bank statement is available to verify reconciling items, it is primarily a test for
errors.
omissions.
kiting.
intentional misstatements.
Which of the following verifications would generally not be performed by the auditor in the month subsequent to the balance sheet date?
Foot the lists of all canceled checks, debit memos, deposits, and credit memos.
Verify the bank statement balances when the footed totals are used.
Verify the book statement balances tie to the cash receipts and disbursements journals for the year under audit.
Review the items included in the footings to make sure that they were cancelled by the bank.
When assessing risks affecting cash,
if a business defers preparing bank reconciliations for long periods, the value of the control is reduced and may affect the auditor's assessment of control risk for cash.
most companies are likely to have significant client business risks affecting their cash balances.
there is a low inherent risk for the existence and completeness objectives for cash.
all of the above are accurate statements.
All corporations must have
preferred stock.
capital stock.
paid-in capital in excess of par.
dividends payable.
When a company maintains its own records of stock transactions and outstanding stock, internal controls must be adequate to ensure that
actual owners are recorded in the bylaws.
the correct amount of dividends is paid to stockholders owning the stock on the dividend record date.
the correct amount of dividends is paid to stockholders owning the stock on the declaration date.
actual owners are recorded in the minutes.
The amount of time spent verifying owners' equity is frequently minimal for closely held corporations because
these companies are so small that it is not necessary to audit the capital section.
the few owners all have access to the books so the auditor spends more time on accounts like liabilities, which affect outsiders.
there are few if any transactions during the year for the capital stock accounts, except for earnings and dividends.
there is no public interest in these companies.
Which of the following types of owners' equity transactions would require authorization by the board of directors?
issuance of capital stock
repurchase of capital stock
declaration of dividends
all of the above
The record of the issuance and repurchase of capital stock for the life of the corporation is maintained in the
shareholders' capital stock master file.
capital stock certificate record.
schedule of stock owners.
corporate directory.
The record of the outstanding shares at any given time is maintained in the
corporate directory.
stock certificate books.
schedule of stock owners.
shareholders' capital stock master file.
When a dividend is declared by the board of directors, the source for determining who should receive dividend checks is the
shareholders' capital stock master file.
stock certificate books.
common stock account in the general ledger.
corporate directory.
The authorization of an issuance of capital stock normally includes all but which of the following?
type of stock to be issued
number of shares to be issued
date shares are to be issued
amount of dividend to be paid on shares issued
Any company with stock listed on a securities exchange is required to engage a(n)
equity analyst.
stock transfer agent.
independent registrar.
equity placement specialist.
ted on a securities exchange is required to engage a(n)
equity analyst.
stock transfer agent.
independent registrar.
equity placement specialist.
All of the following are owners' equity accounts except for
common stock.
paid-in-capital in excess of par.
sales.
retained earnings.
Factors that impact inherent risk of financial instruments do not include
management's objectives related to investment activity.
the complexity of the securities.
the cost of the securities.
the company's prior experience with certain investments.
The majority of financial instruments are valued using
cost.
fair value estimates.
lower of cost or market.
realizable value.
When an audit client uses a service organization to manage their investment activity,
the auditor can always rely on the internal controls of the service organization.
the auditor must state in their audit opinion that the client uses a service organization.
the auditor can rely on the internal controls of the service organization if the service organization's auditor issues a report on their internal control.
the auditor must rely on the service organization to determine the fair level 1, 2, and 3 estimates.
As part of their internal control procedures, management needs to have procedures in place to properly classify financial instruments as trading, available-for-sale, or held-to-maturity, based on
cost.
intent.
maturity.
probable future gain or loss.
The auditor is responsible for communicating significant internal control deficiencies to the audit committee, or those charged with governance. This communication
may be oral or written.
must be oral.
must be written.
must be oral via direct communication.
Which of the following statements is most correct about an auditor's required communication with management and those charged with corporate governance?
The auditor is required to inform those charged with governance about significant errors discovered and subsequently corrected by management.
Any significant matter reported to those charged with governance must also be communicated to management.
Communication is required before the audit report is issued.
The auditor does not have any requirement to communicate with anyone other than the company's senior management.
While there is no professional requirement to do so on audit engagements, CPAs frequently issue a formal 'management' letter to clients. The primary purpose of this letter is to provide
evidence indicating whether the auditor is reasonably certain that internal accounting control is operating as prescribed.
a permanent record of the internal accounting control work performed by the auditor during the course of the engagement.
the client with the CPA's recommendations for improving any part of the client's business.
a summary of the auditor's observations that resulted from the auditor's special study of internal control.
When communicating with the audit committee and management,
only material fraud and illegal acts are required by auditing standards to be communicated.
all internal control deficiencies are required by auditing standards to be communicated.
the communications should be made in a timely manner to allow those charged with governance to take appropriate actions.
all communications with the audit committee and management must be in writing.
Auditing standards require the auditor to communicate all management frauds and illegal acts to the audit committee
only if the act is immaterial.
only if the act is material.
only if the act is highly material.
regardless of materiality.
The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the statements being audited. The procedures required to verify these transactions are commonly referred to as the review for
contingent liabilities.
subsequent year's transactions.
late unusual occurrences.
subsequent events.
Which type of subsequent event requires consideration by management and evaluation by the auditor?
Subsequent events that have a direct effect on the financial statements and require adjustment (YES)
Subsequent events that do not have a direct effect on the financial statements but for which disclosure may be required ( Yes)
Subsequent events that have a direct effect on the financial statements and require adjustment (NO)
Subsequent events that do not have a direct effect on the financial statements but for which disclosure may be required (No)
Subsequent events that have a direct effect on the financial statements and require adjustment (YES)
Subsequent events that do not have a direct effect on the financial statements but for which disclosure may be required (no)
Subsequent events that have a direct effect on the financial statements and require adjustment (NO)
Subsequent events that do not have a direct effect on the financial statements but for which disclosure may be required ( yes)
Whenever subsequent events are used to evaluate the amounts included in the statements, care must be taken to distinguish between conditions that existed at the balance sheet date and those that come into being after the balance sheet date. The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation
took place before the balance sheet date.
did not take place until after the balance sheet date.
occurred both before and after the balance sheet date.
are reimbursable through insurance policies.
An auditor has the responsibility to actively search for subsequent events that occur subsequent to the
balance sheet date.
date of the auditor's report.
balance sheet date, but prior to the audit report.
date of the management representation letter.
Which of the following subsequent events is most likely to result in an adjustment to a company's financial statements?
merger or acquisition activities
bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance
issuance of common stock
an uninsured loss of inventories due to a fire
After the balance sheet date, but prior to the issuance of the audit report, the client suffers an uninsured loss of their inventory as a result of a fire. The amount of the loss is material. The auditor should
adjust the financial statements for the year under audit.
add a paragraph to the audit report.
advise the client to disclose the event in the notes to the financial statements.
advise the client to delay issuing the financial statements until the economic loss can be determined.
The auditor has completed her assessment of subsequent events. The proper accounting for subsequent events that have a direct effect on the financial statements is to
adjust the financial statements for the year under audit.
disclose in the notes to financial statement the amount of the adjustment.
duly note in the audit workpapers that next year's financial statements need to be adjusted.
make no adjustment of the financial statements for the year under audit.
The audit procedures for the subsequent events review can be divided into two categories: (1) procedures integrated as a part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is in the first category?
Inquire of client regarding contingent liabilities.
Obtain a letter of representation written by client.
Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate.
Review journals and ledgers of year 2 to determine the existence of any transactions related to year 1.
The audit procedures for the subsequent events review can be divided into two categories: (1) procedures normally integrated as a part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is in the second category?
Correspond with attorneys.
Test the collectability of accounts receivable by reviewing subsequent period cash receipts.
Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate.
Compare the subsequent-period purchase price of inventory with the recorded cost as a test of lower of cost or market valuation.
Which of the following would be a subsequent discovery of facts which would not require a response by the auditor?
discovery of the inclusion of material nonexistent sales
discovery of the failure to write off material obsolete inventory
discovery of the omission of a material footnote
discovery of management's intent to increase selling prices in the future
In connection with the annual audit, which of the following is not a 'subsequent events' procedure?
Prepare any necessary closing journal entries.
Examine the minutes of stockholders and directors meetings subsequent to the balance sheet date.
Review journals and ledgers.
Obtain a letter of representation.
An auditor performs interim work at various times throughout the year. The auditor's subsequent events work should be extended to the date of
the auditor's report.
a post-dated footnote.
the next scheduled interim visit.
the final billing for audit services rendered.
Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor's report would not require disclosure in the financial statements?
sale of a bond or capital stock issue
loss of plant or inventories as a result of fire or flood
a significant decline in the market price of the corporation's stock
a merger or acquisition
If the auditor determines that a subsequent event that affects the current period financial statements occurred after fieldwork was completed but before the audit report was issued, what date(s) may the auditor use on the report?
The date of the original last day of fieldwork only.
The date of the subsequent event only.
The date on which the last day of fieldwork occurred along with the date of the subsequent event
( YES YES NO )
The date of the original last day of fieldwork only.
The date of the subsequent event only.
The date on which the last day of fieldwork occurred along with the date of the subsequent event
( NO YES YES)
The date of the original last day of fieldwork only.
The date of the subsequent event only.
The date on which the last day of fieldwork occurred along with the date of the subsequent event
( NO YES NO )
The date of the original last day of fieldwork only.
The date of the subsequent event only.
The date on which the last day of fieldwork occurred along with the date of the subsequent event
( NO YES YES)
An auditor's decision concerning whether or not to dual date an audit report is primarily based on the auditor's decision to
extend appropriate audit procedures.
assume responsibility for events after the date of the auditor's report.
assume responsibility for event from fiscal year-end to the date of the audit report.
roll the dice and hope for a successful outcome.
The auditor's responsibility for 'reviewing the subsequent events' of a public company that is about to issue new securities is normally limited to the period of time
beginning with the balance sheet date and ending with the date of the auditor's report.
beginning with the start of the fiscal year under audit and ending with the balance sheet date.
beginning with the start of the fiscal year under audit and ending with the date of the auditor's report.
beginning with the balance sheet date and ending with the date the registration statement becomes effective.
Subsequent events affecting the realization of assets ordinarily will require an adjustment of the financial statements under examination because such events typically represent
the culmination of conditions that existed at the balance sheet date.
additional new information related to events that were in existence on the balance sheet date.
final estimates of losses relating to casualties occurring in the subsequent events period.
preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.
An auditor's decision concerning whether or not to 'dual date' the audit report is based upon the auditor's willingness to
extend auditing procedures and assume responsibility for a greater period of time.
accept responsibility for subsequent events.
permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor's report.
assume responsibility for events subsequent to the issuance of the auditor's report.
Auditors of accelerated filer public companies
are responsible for reviewing subsequent events for a period of up to six months after the balance sheet date.
must always dual-date their audit reports.
must inquire about and consider any information about subsequent events that materially affects the effectiveness of internal control over financial reporting.
must perform all of the above procedures.
A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events might result in adjustment of the December 31 financial statements?
sale of a major subsidiary
adoption of accelerated depreciation methods
write-off of a substantial portion of inventory as obsolete
collection of 90% of the accounts receivable existing at December 31
The auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is best expressed by which of the following statements?
The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of fieldwork.
The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.
The auditor's responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred.
The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date.
When auditing financial instruments, analytical procedures can be used to
test the reasonableness of interest and dividend income.
test the year-end balance.
determine if the financial instruments were properly valued.
determine if the gain or loss on the sales were properly computed.
A schedule of investment activity will include all of the following except
the purchases and sales.
ending balances.
the gains and losses.
the opinion of management as to the suitability of the investment to the company.
When auditing financial instruments, a confirmation is sent to the broker-dealer
only if the client has poor internal controls.
to confirm interest and dividends.
to provide assurance on realizable value.
to confirm year-end holdings.
The auditor is testing for the balance-related audit objective of detail tie-in when they
prove the schedule of investment activity as to additions and subtractions.
perform a physical inspection of the security.
verify the quoted market prices.
test management's assumptions related to valuation.
When the auditor sends a confirmation to the broker-dealer, they are testing the balance-related audit objective of
detail tie-in.
existence.
cutoff.
rights.
When dealing with financial instruments, the most difficult balance-related audit objective to test is
existence.
accuracy.
rights.
realizable value.
An auditor is reviewing the minutes of board meetings to determine whether any securities are pledged as collateral. This test of the detail of balances relates to the audit objective of
rights.
cutoff.
realizable value.
classification.
Determining if the financial instruments included in the schedule of investment activity at year-end are stated at appropriate amounts in accordance with accounting standards is the balance-related audit objective of
materiality.
realizable value.
consistency.
classification.
An auditor is reconciling the amounts included in the long-term debt footnotes to the information examined and supported in the audit files for long-term debt. Which audit objective is being satisfied?
accuracy and valuation
occurrence and rights and obligations
completeness
classification and understandability
Which of the following is an accurate statement regarding presentation and disclosure?
Auditors generally set the risk as low that all required information may not be completely disclosed in the footnotes.
Audit tests performed in earlier audit phases provides sufficient appropriate evidence about contingent liabilities and subsequent events.
Auditors do not conduct tests of controls related to disclosures when the initial assessment of control risk is below maximum.
In phase IV (completing the audit), auditors evaluate whether the overall presentation of the financial statements and related footnotes complies with accounting standards.
A commitment is best described as
an agreement to commit the firm to a set of fixed conditions in the future.
an agreement to commit the firm to a set of fixed conditions in the future that depends on company profitability.
an agreement to commit the firm to a set of fixed conditions in the future that depends on current market conditions.
a potential future obligation to an outside party for an as yet to be determined amount.
Which of the following groups has the responsibility for identifying and deciding the appropriate accounting treatment for recording or disclosing contingent liabilities?
auditors
legal counsel
management
management and the auditors
You are auditing Rodgers and Company. You are aware of a potential loss due to noncompliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to
accrue a $4 million liability.
disclose a liability and provide a range of outcomes.
since there is less than a 50% chance of occurrence, ignore.
since there is greater that a remote chance of occurrence, accrue the $10 million.
________ is normally characterized as a difficult and complex account to audit.
Property, plant and equipment
Cash
Inventory
Prepaid insurance
Inventory is a complex area to audit for all except which of the following reasons?
Inventory is often in different locations.
There are several acceptable valuation methods and some entities use different methods for different types of inventory.
Inventory is often the largest account on the balance sheet.
Inventory valuation includes few estimates.
In most manufacturing companies, the inventory and warehousing cycle begins with the
receipt of a customer's order.
completion of production of a customer's order.
initiation of production of a customer's order.
acquisition of raw materials for production.
________ accumulate costs by individual jobs as material is issued into production and labor costs are incurred.
Just-in-time production systems
Job cost systems
Process cost systems
Manufacturing systems
In the flow of inventory and costs, when work-in-progress is credited, ________ is (are) debited.
raw materials
cost of goods sold
finished goods
direct labor
A common inventory observation procedure is to be alert for items that are damaged, rust- or dust-covered, or located in inappropriate places. The balance-related audit objective being achieved by this procedure is
classification.
cutoff.
realizable value.
rights.
An auditor must inquire about consigned or customer inventory included on the client's premises to satisfy the balance-related audit objective of
cutoff.
classification.
rights.
completeness.
If an auditor were concerned with obtaining evidence about the appropriateness of the value of inventory, which of the following tests would be most appropriate?
compilation tests
price tests
confirmation of inventory held by outside parties
physical examination of the inventory
The first step in verifying the valuation of purchased inventory is in determining the valuation method used by the client. The next step is
determining that all inventory that is purchased is expensed through cost of goods sold.
determining which costs should be included in the valuation of an item of inventory.
determining that all inventory on hand reconciles to the perpetual inventory records.
determining that cut-off procedures have been adhered to prior to counting inventory.
The auditor is responsible for communicating significant internal control deficiencies to the audit committee, or those charged with governance. This communication
may be oral or written.
must be oral.
must be written.
must be oral via direct communication.
Which of the following statements is most correct about an auditor's required communication with management and those charged with corporate governance?
The auditor is required to inform those charged with governance about significant errors discovered and subsequently corrected by management.
Any significant matter reported to those charged with governance must also be communicated to management.
Communication is required before the audit report is issued.
The auditor does not have any requirement to communicate with anyone other than the company's senior management.
While there is no professional requirement to do so on audit engagements, CPAs frequently issue a formal 'management' letter to clients. The primary purpose of this letter is to provide
evidence indicating whether the auditor is reasonably certain that internal accounting control is operating as prescribed.
a permanent record of the internal accounting control work performed by the auditor during the course of the engagement.
the client with the CPA's recommendations for improving any part of the client's business.
a summary of the auditor's observations that resulted from the auditor's special study of internal control.
When communicating with the audit committee and management,
only material fraud and illegal acts are required by auditing standards to be communicated.
all internal control deficiencies are required by auditing standards to be communicated.
the communications should be made in a timely manner to allow those charged with governance to take appropriate actions.
all communications with the audit committee and management must be in writing.
Auditing standards require the auditor to communicate all management frauds and illegal acts to the audit committee
only if the act is immaterial.
only if the act is material.
only if the act is highly material.
regardless of materiality.
The audit firm issues an audit report for its client. The auditors have no obligation to make further inquiries with respect to the client's audited financial statements unless
a development occurs that may affect the company's long-term viability as a company.
final resolution was made on disclosed contingency for which no liability needed to be accrued.
new information comes to the auditor's attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion.
a lawsuit, in which the risk of loss was considered remote, was resolved in the company's favor.
Which of the following is not a correct statement regarding business risk and financial instruments?
Business risks associated with financial instruments will vary depending of the aggressiveness of a company's investing activity.
Business risk will be higher for companies investing in less liquid securities.
Financial services firms are exposed to very little risk with their financial instruments.
Business risk for a company will be higher when investments represent a greater proportion of total assets.
Factors that impact inherent risk of financial instruments do not include
management's objectives related to investment activity.
the complexity of the securities.
the cost of the securities.
the company's prior experience with certain investments.
The use of unobservable inputs such as a pricing model or discounted cash flow is an example of a level ________ estimate.
1
2
3
1 and 3
The majority of financial instruments are valued using
cost.
fair value estimates.
lower of cost or market.
realizable value.
When an audit client uses a service organization to manage their investment activity,
the auditor can always rely on the internal controls of the service organization.
the auditor must state in their audit opinion that the client uses a service organization.
the auditor can rely on the internal controls of the service organization if the service organization's auditor issues a report on their internal control.
the auditor must rely on the service organization to determine the fair level 1, 2, and 3 estimates.
As part of their internal control procedures, management needs to have procedures in place to properly classify financial instruments as trading, available-for-sale, or held-to-maturity, based on
cost.
intent.
maturity.
probable future gain or loss.
Prices in an active market for identical assets is a level ________ fair value estimate.
1
2
3
4
When auditing financial instruments,
the auditor usually performs more extensive substantive testing to reduce reliance on controls.
B) analytical procedures are critical in assessing the year-end balances for financial instruments.
C) the auditor relies on statements and broker's advices from investment managers to test purchases and sales as long as controls were deemed effective.
D) tests of transactions are generally not performed.
