Since 1977

AUDITING THEORY L. R. CABARLES/J.M. D. MAGLINAO

AT.2812—Performing Further Audit Procedures (FAP) MAY 2020

LECTURE NOTES
Cash
Primary relevant assertion Substantive procedures
1. Existence and rights and 1. Count cash on hand
obligations 2. Test bank reconciliations, including bank confirmations
3. Prepare proof of cash (when controls over cash are weak or in cases of fraud)
2. Valuation (foreign currency) 4. Test closing exchange rate(s) to published records and translation.
3. Cutoff 5. Test bank transfer schedules

Performing Cash Count Procedure

1. Count or have entity personnel, independent of custodian, count cash
2. Incorporate element of surprise
3. Conduct with presence of custodian
4. Resolve any shortage or overage
5. If unable to attend the count, obtain a copy of cash count sheets

Testing Bank Reconciliations

1. Agree balance per books to GL
2. Agree balance per bank to confirmation reply or bank statements
3. Test a sample of reconciling items to supporting documents (DIT/OC/bank errors to cut-off bank statement)
4. Foot amounts

Sending Bank Confirmations

1. Request client for the letters
2. Mail directly the letters
3. Bank replies directly to auditor
4. Send second request for no replies
5. Agree replies to balance per bank
6. Reconcile exceptions

Testing Bank Transfer Schedules

1. Prepare, or client prepares, a bank transfer schedule near year-end
2. Examine correct recording of transfers
3. Examine recorded disbursements subsequent to year-end (kiting)

Receivables
Primary relevant assertion
1. Existence or occurrence and
rights and obligations
2. Valuation and allocation
3. Cutoff
Substantive procedures
1. Confirm receivables and perform alternative procedures for no responses
2. Test the adequacy of the allowance for bad debts
3. Test sales cutoff

Confirming Receivables and Alternatives

1. Types:
a. Positive: Blank or Not
b. Negative (less effective)
2. Alternatives:
a. Vouch subsequent collections
b. Inspect shipping documents

Testing Allowance for Bad Debts (Accounting Estimates)

1. Test entity’s methodology
2. Develop independent expectation
3. Retrospective review

Testing Sales Cutoff

1. Determine last shipping document used
2. Sample shipping documents a few days near before and after the year end
3. Trace to invoice and journal
4. May detect over and understatement

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Investments
Primary relevant assertion Substantive procedures
1. Existence or occurrence and 1. Inspect securities on hand
rights and obligations 2. Confirm securities held by others
3. Review documentation
2. Valuation and allocation 4. Test fair value or amortized cost measurement
3. Classification 5. Review board minutes of meetings

Inventories
Primary relevant assertion Substantive procedures
1. Existence or occurrence 1. Observe physical inventory count and perform vouching test counts
2. Rights and obligations 2. Examine ownership of inventories (e.g., held on consignment, sold
inventories)
3. Completeness 3. Perform tracing test counts
4. Valuation and allocation 4. Test inventory cost
5. Test adequacy of allowance for inventory write-down
5. Cutoff 6. Test sales and purchases cutoff

Observing Physical Count and Performing Test Counts

1. Determine locations and timing
2. Evaluate count instructions
3. Observe count procedures
4. Perform inventory test counts
5. Confirm or perform alternative for inventories held by other entities
6. Test inventory compilation
7. Reconciling changes in inventory, if interim count date

Properties
Primary relevant assertion
1. Existence or occurrence
2. Rights and obligations
3. Completeness
4. Valuation and allocation
Substantive procedures
1. Inspect properties or additions
2. Verify ownership by examining supporting documents
3. Analyze appropriateness of repairs and maintenance
4. Test depreciation/amortization/depletion by recalculation and analytical
procedures
5. Determine correctness of cost capitalized
6. Evaluate reasonableness of useful life and depreciation method

Liabilities
Primary relevant assertion Substantive procedures
1. Completeness 1. Search for unrecorded liabilities
2. Classification 2. Determine proper classification of debts

Search for Unrecorded Liabilities

1. Test of subsequent disbursements and purchases
2. Examine unpaid vendor invoices or other evidence of liabilities
3. Send out confirmation letters (samples from supporting evidence)
4. Examine bank confirmations for loans

Equity
Primary relevant assertion Substantive procedures
1. Existence and rights and 1. Inspect stock records held by the entity
obligations 2. Confirm stock record held by independent agent
3. Read minutes of meetings and inspecting supporting documents of
transactions

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DISCUSSION QUESTIONS
FAP: Cash Which of the following checks indicates kiting?
Tests of Controls a. 101 c. 103
1. Cash receipts should be deposited on the day of receipt b. 102 d. 104
or the following business day. Select the most
appropriate audit procedure to determine that cash is 7. The emphasis in verifying petty cash is normally on
promptly deposited. which of the following?
a. Review the functions of cash receiving and a. Year-end balance
disbursing for proper separation of duties. b. Controls over petty cash
b. Review cash register tapes prepared for each sale. c. Transactions for the period
c. Review the functions of cash handling and d. Balance sheet classifications
maintaining accounting records for proper
segregation of duties. FAP: Receivables
d. Compare the daily cash receipts totals with the Tests of Controls
bank deposits 8. To gather audit evidence about the proper credit
approval of sales (valuation assertion), the auditor
2. To provide assurance that each voucher is submitted would select a sample of documents from the
and paid only once, an auditor most likely would population represented by the
examine a sample of paid vouchers and determine a. Subsidiary customers' accounts ledger.
whether each voucher is b. Sales invoice file.
a. Supported by a vendor's invoice. c. Customer order file.
b. Stamped "paid" by the check signer. d. Bill of lading file.
c. Prenumbered and accounted for.
d. Approved for authorized purchases. 9. To determine whether internal control operates
effectively to minimize errors of failure to bill a
Substantive Procedures customer for a shipment (completeness assertion), the
3. The following statements relate to performing cash auditor would select a sample of transactions from the
count as a substantive procedure in auditing material population represented by the
cash on hand. Which is incorrect? a. Shipping records or bill of lading file
a. It is used to gather evidence regarding existence. b. Customer order file
b. It is performed with an element of surprise. c. Sales invoice
c. It is conducted without a client representative, d. Subsidiary customer accounts ledger
especially the custodian.
d. It is planned and controlled to avoid substitution as Substantive Procedures
cash short or over may be detected. 10. Confirmation is most likely to be a relevant form of
evidence with regard to assertions about accounts
4. The starting point for the verification of the balance in receivable when the auditor has concerns about the
the general bank account is to obtain: receivables'
a. a bank reconciliation from the client. a. Valuation.
b. the client’s cash account from the general ledger. b. Classification.
c. a cutoff bank statement directly from the bank. c. Existence.
d. the client’s year-end bank statement and reconcile d. Completeness.
it.
11. Three common types of confirmations used by auditors
5. Which of the following sets of information does an are (1) negative confirmations, (2) blank form positive
auditor usually confirm in one form? confirmations, and (3) positive confirmations with
a. Cash in bank and collateral for loans information included. Place the confirmations in order
b. Accounts payable and purchase commitments of reliability from highest to lowest.
c. Accounts receivable and accrued interest a. 1, 2, 3. c. 2, 3, 1.
receivable b. 3, 2, 1. d. 3, 1, 2.
d. Accounts receivable and accrued interest
receivable 12. Under which of the following circumstances would the
use of the blank form of confirmations of accounts
6. Check kiting refers to fraudulent overstatement of cash receivable most likely be preferable to positive
by transfer money from one bank account to another confirmations?
but recording only in the current year the deposit to a. The recipients are likely to sign the confirmations
another account and recording next year the without devoting proper attention to them.
disbursement from the first account. In relation to the b. Subsequent cash receipts are unusually difficult to
audit of cash of a client, the client personnel prepared verify.
the following bank transfer schedules. c. Analytical procedures indicate that few exceptions
Alpha Company are expected.
Bank Transfer Schedule d. The combined assessed level of inherent risk and
December 31, 2018 control risk is low.
No. From To Value Payments Receipts
Per Per Per Per 13. Negative accounts receivable confirmations are not
Books Bank Books Bank appropriate when:
101 A B P5,000 12/31 1/5◆ 12/31 1/3▲ a. There is a reason to believe that a substantial
102 C D 2,000 12/31 1/4◆ 12/31 1/3▲ number of accounts may be in dispute.
103 E F 1,000 1/3 1/5 1/2 1/6 b. Control risk is low.
104 G H 4,000 1/5 1/5◆ 12/30 1/3▲ c. Accounts receivable consists of many small
balances.
d. Consideration of recipients is likely.

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EXCEL PROFESSIONAL SERVICES, INC.
14. Which of the following statements would an auditor
most likely add to the negative form of confirmations
of accounts receivable to encourage timely
consideration by the recipients?
a. "This is not a request for payment; remittances
should not be sent to our auditors in the enclosed
envelope."
b. "Report any differences on the enclosed statement
directly to our auditors; no reply is necessary if
this amount agrees with your records."
c. "If you do not report any differences within fifteen
days, it will be assumed that this statement is
correct."
d. "The following invoices have been selected for
confirmation and represent amounts that are
overdue."
15. To reduce the risks associated with accepting fax
responses to requests for confirmations of accounts
receivable, an auditor most likely would
a. Examine the shipping documents that provide
evidence for the existence assertion.
b. Verify the sources and contents of the faxes in
telephone calls to the senders.
c. Consider the faxes to be nonresponses and
evaluate them as unadjusted differences.
d. Inspect the faxes for forgeries or alterations and
consider them to be acceptable if none are noted.
16. It is sometimes impracticable or impossible for an
auditor to use normal accounts receivable confirmation
procedures. In such situations, the best alternative
procedure the auditor might resort to would be
a. Examining subsequent receipts of year-end
accounts receivable.
b. Reviewing accounts receivable aging schedules
prepared at the balance sheet date and at a
subsequent date.
c. Requesting that management increase the
allowance for uncollectible accounts by an amount
equal to some percentage of the balance in those
accounts that cannot be confirmed.
d. Performing an overall analytic review of accounts
receivable and sales on a year-to-year basis.
17. Which of the following procedures do most auditors
perform when auditing the allowance for doubtful
accounts?
a. Send positive confirmations.
b. Inquire of the client’s credit manager.
c. Send negative confirmations.
d. Examine sales invoices.
18. Which of the following might be detected by sales
cutoff tests?
a. Overstated receivables
b. Overstated sales
c. Kiting
d. Misappropriated inventory
FAP: Investments
Tests of Controls
19. In reviewing and evaluating internal control over
marketable securities, the auditor would be specially
concerned about:
a. Recording of stock investments by the controller.
b. Approval of stock investment purchases by the
Board of Directors.
c. Access to stock certificates by the corporate
treasurer.
d. Access to stock certificates by the controller.
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Substantive Procedures
20. To establish the existence and ownership of a long-
term investment in the common stock of a publicly-
traded company, an auditor ordinarily performs a
security count or
a. Relies on the client’s internal accounting controls,
if the auditor’s procedures are being applied as
prescribed.
b. Confirms the number of shares owned that are
held by an independent custodian.
c. Determine the market price per share at the
balance sheet date from published quotation.
d. Confirms the number of shares owned with the
issuing company.
21. When an auditor is unable to inspect and count a
client’s investment securities until after the balance
sheet date, the bank where the securities are held in a
safe deposit box should be asked to
a. Verify any differences between the contents of the
box and the balances in the client’s subsidiary
ledger.
b. Provide a list of securities added and removed
from the box between the balance sheet and the
security-count date.
c. Confirm that there has been no access to the box
between the balance sheet date and the security-
count date.
d. Count the securities in the box so that the auditor
have an independent direct verification.
22. An auditor would most likely verify the interest earned
on bond investments by
a. Vouching the receipt and deposit of interest
checks.
b. Confirming the bond interest rate with the issuer of
the bonds
c. Recomputing the interest earned on the basis of
face amount, interest rate and period held.
d. Testing the internal controls over cash receipts.
23. To obtain evidence that bond and equity transactions
are recorded and classified properly, the auditor
should:
a. Review board minutes of meetings.
b. Examine sequence of prenumbered documents.
c. Examine list of authorized investments.
d. Review files of authorized signatures.
FAP: Inventories
Tests of Controls
24. How can an auditor test to determine whether
Receiving Department procedures, including physical
security controls over inventory by the entity, are
applied properly?
a. Test a sample of receiving documents.
b. Observe receiving procedures on a surprise basis.
c. Review procedures manuals.
d. Interview receiving personnel.
Substantive Procedures
25. The primary assertion satisfied by physically observing
the client’s inventory count is existence. The most
important part of the observation of inventory is to
determine whether:
a. all counts are accurate.
b. the inventory-takers are qualified.
c. obsolete inventory has been identified.
d. the physical count is being taken in accordance
with the client’s instructions.
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26. Which one of the following procedures would not be
appropriate for an auditor in discharging his
responsibilities concerning the client’s physical
inventories?
a. Confirmation of goods in the hands of public
warehouses.
b. Supervising the taking of the annual physical
inventory.
c. Carrying out physical inventory procedures at an
interim date.
d. Obtaining written representation from the client as
to the existence, quality, and amount of the
inventory.
27. A common inventory observation procedure is to select
a random sample of tag numbers and identify the tag
with that number attached to the actual inventory
item. The audit objective being achieved by this
procedure is:
a. inventory as recorded on tags actually exists
(existence).
b. existing inventory is counted and tagged
(completeness).
c. inventory is counted accurately (accuracy).
d. inventory is classified correctly (classification).
28. When a physical count of inventory is performed at an
interim date, the auditor observes it at that time and
tests the perpetual records for transactions:
a. throughout the year.
b. which are a representative sample of the period
under audit.
c. from the date of the count to year-end.
d. from the date of the count to the end of the audit
field work.
29. To best ascertain that a company has properly included
merchandise that it owns in its ending inventory, the
auditor should review and test the:
a. terms of the open purchase orders.
b. purchase cutoff procedures.
c. contractual commitments made by the purchasing
department.
d. purchase invoices received on or around year-end.
30. 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?
a. Compilation tests.
b. Price tests.
c. Confirmation of inventory held by outside parties.
d. Physical examination of the inventory.
FAP: PPE
Tests of Controls
31. When there are numerous property and equipment
transactions during the year, an auditor who plans to
assess control risk at a low level usually performs
a. Tests of controls and extensive tests of property
and equipment balances at the end of the year.
b. Analytical procedures for current year property and
equipment transactions.
c. Tests of controls and limited tests of current year
property and equipment transactions.
d. Analytical procedures for property and equipment
balances at the end of the year.
32. A test of controls to determine proper authorization for
the addition of a major piece of equipment would
include all of the following except
a. examination of purchase agreements.
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b. review of minutes of the board of directors'
meetings.
c. review of approvals by a capital budgeting
committee.
d. examination of the identification tags attached to
equipment.
Substantive Procedures
33. In testing plant and equipment balances, an auditor
may inspect new additions listed on the analysis of
plant and equipment. This procedure is designed to
obtain evidence concerning management's assertions
of
Existence or Presentation and
occurrence disclosure
a. Yes Yes
b. Yes No
c. No Yes
d. No No
34. An auditor analyzes repairs and maintenance accounts
primarily to obtain evidence in support of the audit
assertion that all
a. Noncapitalizable expenditures for repairs and
maintenance have been recorded in the proper
period.
b. Expenditures for property and equipment have
been recorded in the proper period.
c. Noncapitalizable expenditures for repairs and
maintenance have been properly charged to
expense.
d. Expenditures for property and equipment have not
been charged to expense.
35. Which of the following audit procedures would be least
likely to lead the auditor to find an unrecorded fixed
asset disposal?
a. Examination of insurance policies.
b. Review of repairs and maintenance expense.
c. Review of property tax files.
d. Scanning of invoices for fixed asset additions.
36. Which method might an auditor utilize in testing
depletion expense?
a. using analytical procedures.
b. observation of the physical count.
c. obtaining management representation.
d. estimating the useful life of the natural resource.
FAP: Intangible Assets and Prepayments
Tests of Controls
37. In addressing control procedures for prepaid insurance,
which of the following controls would not be relevant to
the auditor?
a. Controls over purchase cutoff
b. Controls over the acquisition of new policies
c. Controls over the disbursement of cash for
insurance premiums
d. Controls over the recording of expenses and
premium disbursements.
Substantive Procedures
38. Which of the following represents a primary audit
concern for errors in the recording of intangible assets?
a. Capitalized research and development costs.
b. Amortization of patents.
c. Capitalized costs to successfully defend a patent.
d. Amortization of franchise fees.
39. Which of the following procedures is an auditor least
likely to perform when auditing prepaid insurance?
a. Confirm policies with insurance carriers
b. Examine insurance policies
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c. Value insured property
d. Agree balances to the general ledger
40. Which type of audit procedure is often sufficient for
purposes of auditing prepaid expenses and deferred
charges?
a. Tests of controls.
b. Tests of transactions.
c. Tests of details of balances.
d. Analytical procedures.
FAP: Liabilities
Tests of Controls
41. Which of the following would be the best procedure to
determine whether purchases were properly
authorized?
a. Discuss authorization procedures with personnel in
the controller's and purchasing functions.
b. Review and evaluate a flowchart of purchasing
procedures.
c. Determine whether a sample of entries in the
purchase journal is supported by properly executed
purchase orders.
d. Vouch payments for selected purchases to
supporting receiving reports.
42. An auditor performs a test to determine whether all
merchandise for which the client was billed was
received. The population for this test consists of all:
a. merchandise received.
b. vendors’ invoices.
c. canceled checks.
d. receiving reports.
Substantive Procedures
43. Which of the following is the best procedure for
determining the existence of unrecorded liabilities at
year-end?
a. Examine a sample of invoices dated a few days
prior to and subsequent to year-end to ascertain
whether they have been properly recorded.
b. Examine a sample of cash disbursements in the
period subsequent to year-end.
c. Examine confirmation requests returned by
creditors whose accounts appear on a subsidiary
trial balance of accounts payable.
d. Examine unusual relationships between monthly
accounts payable balances and recorded
purchases.
44. 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.
45. When a CPA observes that the recorded interest
expense seems to be excessive in relation to the
balance in the bonds payable account, the CPA might
suspect that
a. Discount on bonds payable is understated.
b. Bonds payable are understated.
c. Bonds payable are overstated.
d. Premium on bonds payable is overstated.
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FAP: Equity
Tests of Controls
46. The auditor observes and inspects whether access to
certificates is physically controlled and restricted to
authorized personnel only. Which of the following
control activity has been tested by such procedures?
a. Proper approval of equity transactions.
b. Periodic inspection of securities by internal
auditors.
c. Physical control and restricted access to stock
certificates.
d. Segregation of duties.
Substantive Procedures
47. Verifying stockholders’ equity balances addresses:
a. Existence
b. Rights
c. Obligations
d. Presentation
48. When a client company does not maintain its own
stock records, the auditor should obtain written
confirmation from the transfer agent and registrar
concerning
a. Restrictions on the payment of dividends.
b. The number of shares issued and outstanding.
c. Guarantees of preferred stock liquidation value.
d. The number of shares subject to agreements to
repurchase.
49. An auditor usually obtains evidence of stockholders'
equity transactions by reviewing the entity's
a. Minutes of board of directors meetings.
b. Transfer agent's records.
c. Canceled stock certificates.
d. Treasury stock certificate book.
FAP: Presentation and Disclosures
50. The auditor’s substantive procedures shall include the
following audit procedures related to the financial
statement closing process, except:
a. Agreeing or reconciling the financial statements
with the underlying accounting record.
b. Examining material journal entries and other
adjustments made during the course of preparing
the financial statements.
c. Examining all journal entries and other
adjustments made during the course of preparing
the financial statements.
d. All of the above
51. Which of the following is a tool that is best used by the
audit team to determine completeness disclosures?
a. Representation letter. c. GAAS.
b. Inquiry of the CFO. d. Checklists.
52. Which of the following procedures would an auditor
most likely perform in auditing the statement of cash
flows?
a. Compare the amounts included in the statement of
cash flows to similar amounts in the prior year’s
statement of cash flows.
b. Reconcile the cut-off bank statements to verify the
accuracy of the year-end bank balances.
c. Vouch all bank transfers for the last week of the
year and first week of the subsequent year.
d. Reconcile the amounts included in the statement of
cash flows to the other financial statements’
balances and amounts.
- now do the DIY drill -
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DO-IT-YOURSELF (DIY) DRILL
1. An auditor suspects that a client's cashier is
misappropriating cash receipts for personal use by
lapping customer checks received in the mail. In
attempting to uncover this embezzlement scheme, the
auditor most likely would compare the
a. Dates checks are deposited per bank statements
with the dates remittance credits are recorded.
b. Daily cash summaries with the sums of the cash
receipts journal entries.
c. Individual bank deposit slips with the details of the
monthly bank statements.
d. Dates uncollectible accounts are authorized to be
written off with the dates the write-offs are
actually recorded.
2. Which of the following procedures would an auditor
most likely perform to test controls relating to
management's assertion about the completeness of
cash receipts for cash sales at a retail outlet?
a. Observe the consistency of the employees' use of
cash registers and tapes.
b. Inquire about employees' access to recorded but
undeposited cash.
c. Trace deposits in the cash receipts journal to the
cash balance in the general ledger.
d. Compare the cash balance in the general ledger
with the bank confirmation request.
3. An internal control questionnaire indicates that an
approved receiving report accompanies every check
request. To test this control, an auditor could select
and examine:
a. Receiving reports and determine that the selected
canceled checks are dated no earlier that the
receiving reports.
b. Receiving reports and determine that the related
canceled checks are dated no later than receiving
reports.
c. Canceled checks and determine that the related
receiving reports are dated no earlier than the
checks.
d. Canceled checks and determine that the related
receiving reports are dated no later than the
checks.
4. In testing controls over cash disbursements, an auditor
most likely would determine that the person who signs
checks also
a. Reviews the monthly bank reconciliation.
b. Returns the checks to accounts payable.
c. Is denied access to the supporting documents.
d. Is responsible for mailing the checks.
5. Which of the following procedures least likely provides
evidence about existence assertion?
a. Count cash on hand.
b. Send out bank confirmation letter.
c. Test bank reconciliation, especially additive bank
reconciling items.
d. Perform analytical procedures.
6. To gather evidence regarding the balance per bank in a
bank reconciliation, an auditor would examine all of
the following except the:
a. general ledger.
b. bank confirmation.
c. cutoff bank statement.
d. year-end bank statement.
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7. A partial-period bank statement and the related
canceled 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. a four-column proof of cash.
b. a year-end bank statement.
c. a cutoff bank statement.
d. a short-period bank statement.
8. A proof of cash, which could also satisfy the
completeness of transactions and balances of cash,
represents:
a. a test of controls and substantive test of
transactions.
b. a substantive test of transactions.
c. a substantive test of transactions and test of
details of balances.
d. a test of details of balances.
9. A proof of cash is not an effective procedure for
identifying which of the following types of
misstatements?
a. All recorded disbursements were paid by the bank.
b. All recorded cash receipts were deposited.
c. All amounts that were paid by the bank were
recorded.
d. Some checks were written for incorrect amounts.
10. Which of the following is likely to be determined first
when performing tests of details for accounts
receivable?
a. Recorded accounts receivable exist.
b. Accounts receivable in the aged trial balance agree
with related master file amounts, and the total is
correctly added and agrees with the general
ledger.
c. Accounts receivable are owned.
d. Existing accounts receivable are included.
11. To reduce the risks associated with accepting e-mail
responses to requests for confirmation of accounts
receivable, an auditor most likely would
a. Request the senders to mail the original forms to
the auditor.
b. Examine subsequent cash receipts for the accounts
in question.
c. Consider the e-mail responses to the confirmations
to be exceptions.
d. Mail second requests to the e-mail respondents.
12. If the auditor decides not to confirm accounts
receivable, the auditor should:
a. always use alternative procedures to audit the
accounts receivable.
b. include copies of customer statements in the audit
files.
c. document the reasons for such a decision in the
audit files.
d. include copies of customer sales invoices in the
audit files.
13. Which of the following audit procedures would not
likely detect a client’s decision to pledge or factor
accounts receivable?
a. A review of the minutes of the board of directors’
meetings.
b. Discussions with the client.
c. Confirmation of receivables.
d. Examination of correspondence files.
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14. An auditor generally tests the completeness of credit
sales transactions by:
a. Confirming receivables balances with debtors.
b. Reviewing the collectability of receivables
outstanding.
c. Inquiring of management.
d. Performing analytical procedures.
15. The most likely risk involved with a bill and hold
transaction at year-end is a(n)
a. Accrued liability may be overstated as of year-end.
b. Buyer may have made an absolute purchase
commitment.
c. Sale may inappropriately have been recorded as of
year-end.
d. Buyer may have assumed the risk and reward of
the purchased product.
16. In the audit of marketable equity securities, which of
the following procedures is an auditor likely to perform
for equities acquired?
a. Examine management’s investment policies
b. Examine brokers’ advices
c. Confirm with companies issuing securities
d. Examine dividend rates
17. An auditor usually tests the reasonableness of dividend
income from investments in publicly held companies by
computing the amounts that should have been
received by referring to
a. Dividend record books produced by investment
advisory services.
b. Stock indentures published by corporate transfer
agents.
c. Stock ledgers maintained by independent
registrars.
d. Annual audited financial statements issued by the
investee companies.
18. In testing long-term investments, an auditor ordinarily
would use analytical procedures to ascertain the
reasonableness of the
a. Completeness of recorded investment income.
b. Classification between current and noncurrent
portfolios.
c. Valuation of marketable equity securities.
d. Existence of unrealized gains or losses in the
portfolio.
19. Inventory is a complex area to audit for all but which
of the following reasons?
a. Inventory is often in different locations.
b. There are several acceptable valuation methods
and some entities use different methods for
different types of inventory.
c. Inventory is often the largest account in working
capital.
d. Inventory valuation includes few estimates.
20. An auditor's tests of a client's cost accounting system
are designed primarily to determine that
a. Quantities on hand have been computed based on
acceptable methods that reasonably approximate
actual quantities on hand.
b. Physical inventories substantially agree with book
inventories.
c. The system complies with generally accepted
accounting principles and functions as planned.
d. Costs have been assigned properly to finished
goods, work in process, and cost of goods sold.
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21. An auditor most likely would inspect loan agreements
under which an entity's inventories are pledged to
support management's financial statement assertion of
a. Presentation and disclosure.
b. Valuation or allocation.
c. Existence or occurrence.
d. Completeness.
53. For several years, a client’s physical inventory count
has been lower than what was shown on the books at
the time of the count. Contributing to the inventory
problem could be weaknesses in internal control that
led to the failure to adjust the accounting records for
some:
a. purchases returned to vendors.
b. sales returns received.
c. sales discounts allowed.
d. cash purchases.
22. In rare cases, the auditor may believe it is necessary
that a complete physical inventory of fixed assets be
taken to make sure they actually exist. If an inventory
is taken, the auditor normally:
a. takes the inventory.
b. requires client to take the inventory and provide
documentation to the auditor.
c. observes the count.
d. requires that it be done by an outside, independent
third party.
23. When there are few property and equipment
transactions during the year, the continuing auditor
makes a
a. Complete review of the related internal accounting
controls and performs compliance test of controls
being relied upon.
b. Complete review of the related internal accounting
controls and performs analytical review tests to
verify the current year additions to property and
equipment.
c. Preliminary review of the related internal
accounting controls and performs a thorough
examination of the balance at the beginning of the
year.
d. Preliminary review of the related internal
accounting controls and performs extensive tests
of current year property and equipment
transactions.
24. The auditor is most likely to seek information from the
plant manager with respect to the
a. Adequacy of the provision for uncollectible
accounts.
b. Appropriateness of physical inventory observation
procedures.
c. Existence of obsolete machinery.
d. Deferral of procurement of certain necessary
insurance coverage.
25. When auditing prepaid insurance, an auditor discovers
that the original insurance policy on plant equipment is
not available for inspection. The policy's absence most
likely indicates the possibility of a(n)
a. Insurance premium due but not recorded.
b. Deficiency in the coinsurance provision.
c. Lien on the plant equipment.
d. Understatement of insurance expense.
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EXCEL PROFESSIONAL SERVICES, INC.
26. In evaluating control risk and effectiveness for
intangible assets, controls should be designed for
numerous purposes. Which of the following is not a
usual control for intangible assets?
a. ensure that decisions are appropriately made as to
when to capitalize or expense research and
development expenditures.
b. develop amortization schedules that reflect the
remaining useful life of patents or copyrights
associated with the assets.
c. identify and account for intangible asset
impairment.
d. all of the above are usual controls for intangible
assets.
27. In auditing intangible assets, an auditor most likely
would review or recompute amortization and
determine whether the amortization period is
reasonable in support of management's financial
statement assertion of
a. Valuation or allocation. c. Completeness.
b. Rights and obligations. d. Existence.
28. In connection with a review of the prepaid insurance
account, auditors would typically not perform which of
the following procedures?
a. Recompute the portion of the premium that
expired during the year.
b. Prepare excerpts of insurance policies for audit
working papers.
c. Confirm premium rates with an independent
insurance broker.
d. Examine support for premium payments.
29. The primary concern in testing payroll-related liabilities
is to make sure that:
a. accruals are properly valued.
b. transactions are recorded in the proper period.
c. there are no understated or omitted accruals.
d. the accruals are not overstated.
30. Which of the following is the best way for an auditor to
determine that every name on a company’s payroll is
that of a bona fide employee presently on the job?
a. Examine personnel records for accuracy and
completeness.
b. Examine employees’ names listed on payroll tax
returns for agreement with payroll accounting
records.
c. Make a surprise observation of the company’s
regular distribution of paychecks.
d. Visit the working areas and confirm with
employees their badge or identification numbers.
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31. Verification of the legitimacy of year-end unpaid
bonuses to officers and employees can be
accomplished by comparing the recorded accrual to the
amount:
a. in the expense account.
b. used in the prior period.
c. authorized in the minutes of the board.
d. paid in the subsequent period.
32. 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 bond holders at
year-end.
33. The auditor’s independent estimate of interest expense
from notes payable uses average interest rates and:
a. average notes payable outstanding.
b. year-end notes payable outstanding.
c. only notes payable above the level of materiality.
d. only notes payable to major lenders.
34. An auditor most likely would perform substantive tests
of details 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.
35. Which of the following procedures to test the adequacy
of presentation and disclosures will the auditor perform
in order to obtain evidence about the accuracy and
valuation?
a. Review of contracts for any collateral, liens on
entity assets, mortgages, commitments, etc.
b. Use disclosures checklists in reviewing
completeness of disclosures in accordance with the
applicable financial reporting framework.
c. Review of financial statements to determine proper
classification of items and terminologies used.
d. Reconcile amounts in the financial statements with
audit working papers and check accuracy of cross-
referencing.
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AT.2812