1.

Which of the following statements is correct concerning the use of negative confirmation
request?
a. Negative confirmation requests are effective when detection risk is low.
b. Unreturned negative confirmation requests rarely provide significant explicit evidence.
c. Unreturned negative confirmation requests indicate that alternative procedures are
necessary.
d. Negative confirmation requests are effective when understatements of account balances
are suspected.

2. To gain assurance that all inventory items in a client’s inventory listing schedule are valid, an
auditor most likely would trace
a. Inventory tags noted during the auditor’s observation to items listed in the inventory
listing schedule.
b. Inventory tags noted during the auditor’s observation to items listed in receiving reports
and vendor’s invoices.
c. Items listed in the inventory listing schedule to inventory tags and the auditor’s recorded
count sheets.
d. Items listed in receiving reports and vendors’ invoices to the inventory listing schedule.

3. The physical count of inventory of a retailer was higher than shown by the perpetual records.
Which of the following could explain the difference?
a. Inventory items had been counted but the tags placed on the items had not been taken
off the items and added to the inventory accumulation sheets
b. No journal entry had been made on the retailers books for several items returned to its
suppliers
c. Credit memos for several items returned by customers had not been recorded
d. An item purchased “FOB shipping point” had not arrived at the date of the inventory
count and had not been reflected in the perpetual records

4. 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 so that downward adjustments to the inventory account were
required. Contributing to the inventory problem could be weaknesses in internal control that led
to the failure to record some
a. Sales discounts allowed.
b. Purchases returned to vendors.
c. Sales returns received.
d. Cash purchases.

5. In which of the following circumstances would the use of the positive form of accounts receivable
confirmation most likely be justified?
a. A small number of accounts may be in dispute and the accounts receivable balance arises
from sales to a few major customers.
b. A substantial number of accounts may be in dispute and the accounts receivable balance
arises from sales to a few major customers.
c. A substantial number of accounts may be in dispute and the accounts receivable balance
arises from sales to many customers with small balances.
d. A small number of accounts may be in dispute and the accounts receivable balance arises
from sales to many customers with small balances.
6. A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the
auditor is unable to count the securities at the balance sheet date, the auditor most likely will
a. Request the bank to confirm to the auditor the contents of the safe deposit box at the
balance sheet date.
b. Count the securities at a subsequent date and confirm with the bank that there has been
no access to the box since the balance sheet date.
c. Examine supporting evidence for transactions occurring during the year.
d. Count the securities at a subsequent date and confirm with the bank whether securities
were added or removed since the balance sheet date.

7. Which of the following is the most effective audit procedure for verification of dividends earned
on investments in marketable securities?
a. Comparing the amounts received with preceding year dividends received.
b. Reconciling the amounts received with published dividend records.
c. Tracing deposit of dividend checks to cash receipts book.
d. Recomputing selected transactions extensions and footings of dividend schedules and
comparing totals to the general ledger.

8. An auditor who has confirmed accounts receivable may discover that the sales journal was held
open past year-end if
a. Positive confirmations sent to debtors are not returned.
b. Negative confirmations sent to debtors are not returned.
c. Most of the returned negative confirmations indicate that the debtor owes a larger balance
than the amount being confirmed.
d. Most of the returned positive confirmations indicate that the debtor owes a smaller balance
than the amount being confirmed.

9. In performing tests of the carrying amount of available for sale securities, the auditor would
usually:
a. Ask management to estimate the market value of the securities.
b. Refer to the quoted market prices of the securities.
c. Value the securities at cost regardless of their market prices.
d. Count the securities.

10. An auditor confirms a representative number of open accounts receivable as of December 31,
2022, and investigates respondents’ exceptions and comments. By this procedure the auditor
would be most likely to learn of which of the following?
a. One of the cashiers has been covering a personal embezzlement by lapping.
b. One of the sales clerks has not been preparing charge slips for credit sales to family and
friends.
c. One of the EDP control clerks has been removing all sales invoices applicable to his
account from the data file.
d. The credit manager has misappropriated remittances from customers whose accounts
have been written off.