Unit X Compilance and Substantive Audit Procedures

UNIT X
COMPLIANCE AND SUBSTANTIVE PROCESURES
AUDIT OF THE REVENUE CYCLE

Sales and Cash Receipts
1. The overall objective in the audit of the sales and collection cycle is to evaluate whether
a. The sales account and the accounts receivable account are free of errors.
b. The sales account and the accounts receivable account are free of material errors.
c. The sales account and the accounts receivable account are presented fairly in
accordance with generally accepted accounting principles.
d. The account balances affected by the cycle are fairly presented in accordance with
generally accepted accounting principles.
2. For the most part, the audit of the sales and collection cycle
a. Cannot be performed until the audit of cash is completed.
b. Can be performed independently of the audit of other cycles.
c. Must be performed simultaneously with the audit of the purchases and
disbursements cycle.
d. Must be performed first so that the audit of the other cycles can rely on the data.
3. For the most part, the evidence gathered during the audit of the sales and collection cycle
can be subjectively combined with the other parts of the audit
a. As the evidence accumulation process proceeds.
b. Only when all fieldwork processes of the engagement are completed.
c. Only after the audit of the sales and collection cycle is concluded.
d. After the conclusive of both the cash cycle and the sales and collection cycle.
4. Which one of the following is not typically included in the sales and collection cycle?
a. Sales returns and allowances.
b. Bad debt expenses.
c. Allowance for uncollectible accounts.
d. Cash credits from the cash disbursements journal.
5. The customer’s request for merchandise, the customer order, would be in the form of
a. An oral request.
b. A written request on customer’s letterhead.
c. A written request on a pre-printed form.
d. Any of the above three formats.
6. A document for recording the description, quantity, and related information for goods
ordered by a customer is the
a. Customer order.
b. Sales order.
c. Shipping document.
d. Remittance advice.
7. The document used to indicate to the customer the amount of a sale and due date of the
payment is the
a. Sales order.
b. Shipping document.
c. Bill of lading.
d. Sales invoice.
8. The document used as the basis for recording sales transactions and updating the
accounts receivable master file is the
a. Sales order.
b. Bill of lading.
c. Sales journal.
d. Sales invoice.
9. A document prepared to initiate shipment of the goods sold is the

a. Sales order.
b. Bill of lading.
c. Sales invoice.
d. Customer order.
10. When posting the Sales Journal, details of a journal are posted to “X” and journal are
posted to “Y”
a. X = the sales account, Y = the general ledger.
b. X = the accounts receivable master file, Y = the general ledger.
c. X = the sales account, Y = the accounts receivable subsidiary ledger.
d. X = the accounts receivable account in the general ledger, Y = the sales account in
the general ledger.
11. The report which typically includes information analyzed by key components as sales
person, product, and territory is the
a. Remittance advice.
b. Summary sales report.
c. Accounts receivable master life.
d. Monthly statement.
12. The document which supports reductions in accounts receivable is the

a. Remittance advice.
b. Credit memo.
c. Sales invoice.
13. The document which accompanies the customer’s payment is the

a. Credit memo.
b. Remittance advice.
c. Sales invoice.
14. The document which is used to permit the immediate deposit of cash and to improve the
control over the custody of assets is the
a. Sales invoice.
b. Credit memo.
c. Remittance advice.
d. Cash receipts journal.
15. The daily entries in the cash receipts journal are supported by the
a. Sales invoices.
b. Shipping documents.
c. Remittance advices.
d. Credit memos.
16. A file for recording individual sales, cash receipts, and sales returns and allowances for
each customer is the
a. Sales journal.
b. Cash receipts journal.
c. General ledger.
d. Accounts receivable subsidiary ledger.
17. The total of the individual account balances in the accounts receivable master file equals
the
a. Total sales for the period.
b. Total sales less the total cash received for the period.
c. Balance of the accounts receivable account in the general ledger.
d. Balance of the sales account in the general ledger.
18. A listing of the amount owed by cash customer which shows how long each component
part has been due is the
a. Trial balance.
b. Working trial balance.
c. Accounts receivable trial balance.
d. Aged accounts receivable trial balance.
19. A document sent to each customer showing their beginning account receivable balance
and the amount and date of each sale, cash payment received, credit memo issued, and
the ending accounts receivable balance is the
a. Accounts receivable subsidiary ledger.
b. Monthly statement.
d. Sales invoice.
20. Before goods are shipped on account, a properly authorized person must
a. Prepare the sales invoice.
b. Approve the journal entry.
c. Approve credit.
d. Verify that the unit price is accurate.
21. For most firms, the function of indicating credit approval is recorded on the
a. Customer order.
b. Sales order.
d. Sales invoice.
22. Most companies recognize sales when

a. A customer order is received.
b. The merchandise is shipped.
c. The merchandise is received by the customer.
d. Cash is received on account.
23. Which one of the following would the auditor be concerned with when examining the
billing function of client?
a. All shipments made have been billed.
b. No shipment has been billed more than once.
c. Each shipment has been billed for the proper amount.
d. All three are of concern.
24. Proper auditing requires that an account receivable must be charged off by client when
a. Client company concludes that an amount is no longer collectible.
b. Customer files for bankruptcy.
c. A collection agency cannot inspire customer to pay the debt.
d. The account is at least six months old.
25. If the internal control structure is deemed to be effective during the obtaining an
understanding phase, the tests of transactions will usually be planned to be performed
a. At the balance sheet date.
b. At an interim date.
c. At the beginning of client’s fiscal period.
d. After the tests of balances are completed.
26. If the controls necessary to satisfy any one of the objectives are inadequate, the likelihood
of errors related to that objective
a. Is increased, regardless of the controls for the other objectives.
b. May be increased if the controls for other objectives don’t mitigate it.
c. May be decreased if management is aware of the poor controls.
d. Is indeterminate.
27. Which one of the following statements is true? In deciding on substantive tests of
transactions,
a. Some procedures are commonly employed on every audit regardless of the
circumstances.
b. All procedures are dependent on the adequacy of the controls and the result of the
tests of controls.
c. Results obtained in the prior year’s audit will not affect the procedures used this
year.
d. The materiality of the item will not influence the choice of procedures used.
28. After the appropriate audit procedures for a given set of circumstances have been
designed, they must be performed. To do the audit procedures as they are stated in the
design format likely to be
a. Easy.
b. Efficient.
c. Inefficient.
d. Difficult.
29. The use of prenumbered documents is meant to prevent

a. The failure to bill or records sales.
b. Duplicate billings and recordings of sales.
c. Both a and b above.
d. Neither a nor b above.
30. A common test is to account for a sequence of various types of documents, such as
duplicate sales invoices selected from the sales journal, watching for omitted and
duplicate numbers or invoices outside the normal sequence. The test provides evidence of
a. Validity.
b. Completeness.
c. Both a and b.
d. Neither a nor b.
31. Which one of the following is not an auditor’s concern about a key authorization point in
the sales/collection cycle?
a. The Receiving Room must have authorization before releasing items to Inventory
Control.
b. Credit must be authorized before the sale.
c. Goods must be shipped after the authorization.
d. Prices must be authorized.
32. The appropriate test of controls for separation of duties is

a. Documentation.
b. Confirmation.
c. Examination.
d. Observation.
33. To test for recorded sales for which there were no actual shipments, the auditor traces
from the
a. Bill of lading to the sales journal.
b. Sales journal to the bill of lading.
c. Sales journal to the accounts receivable subsidiary ledger.
d. Bill of lading to the supporting customer order and sales order.
34. To test for the possibility of a shipment to a fictitious customer, the auditor traces from
the
a. Bill of lading to the credit authorization.
b. Credit authorization to the bill of lading.
c. Accounts receivable ledger to the bill of lading.
d. Sales journal to the accounts receivable ledger.
35. Procedures to test whether the client’s pricing policies are being followed normally
a. Skipped unless fraud is suspected.
b. Superfluous during substantive testing.
c. Necessary, regardless of the quality of the controls.
d. Necessary only if the controls are weak.
36. In many audits of sales transactions, no substantive tests of transactions are made for the
completeness objective on the ground that
a. Overstatements of assets and income are a greater concern than understatements.
b. Understatements of assets and income are a greater concern than overstatements.
c. It doesn’t matter if income is understated because the saving on income tax
offsets the reduced revenue and net income is correct.
d. The reduced sales causes a reduction of accounts receivable, therefore the ratios
of the two financial statements will not be misleading.
37. An affective procedure to test for unbilled shipments is to trace from the
a. Sales journal to the shipping documents.
b. Shipping documents to the sales journal.
c. Sales journal to the accounts receivable ledger.
d. Sales journal to the general ledger sales account.
38. The auditor traces items from the source documents to the journals in order to satisfy the
a. Validity objective.
b. Completeness objective.
c. Ownership objective.
d. Valuation objective.
39. The auditor traces items from the journals back to the source documents in order to
satisfy the
b. Completeness objective.
c. Ownership objective.
d. Valuation objective.
40. When designing audit procedures, the direction of tests is a crucial step in satisfying the
a. Valuation objective.
b. Cutoff objective.
c. Completeness objective.
d. Classification objective.
41. It is common to test sales for proper classification as part of testing for
a. Cutoff.
b. Mechanical accuracy.
c. Valuation.
d. Completeness.
42. In every audit it is necessary to perform some clerical accuracy tests by footing the
journals and tracing the totals to the general ledger. The only effect which the quality of
internal control will have on this process is on
a. Sample size.
b. The skills of the audit staff needed.
c. Designing the tests of controls.
d. The determination of the materiality level.
43. Whenever footing and comparisons are restricted to journals, master file records, and
ledgers, the process is
a. Valuation.
b. Summarization.
c. Cutoff.
d. Completeness.
44. The most difficult type of cash defalcation for the auditor to detect is that which occurs
a. Before the cash is recorded.
b. After cash is recorded but before it goes to the bank.
c. Out of the balance kept in a cash register.
d. In amounts under P100.
45. The audit procedure referred to as proof of cash receipts is useful to test.
a. Whether all recorded cash receipts have been deposited in the bank.
b. Time lags in making deposits.
c. Whether there are cash receipts that have not been recorded in the journals.
d. All three of the above.
46. The defalcation process which postpones entries for the collection of receivables to
conceal an existing cash shortage is referred to as
a. Kiting.
b. Lapping.
c. Computer fraud.
d. Cooking the books.
47. The two most important considerations the auditor should keep in mind in the verification
of the write-off of individual uncollectible accounts are
a. Cutoff and completeness.
b. Cutoff and authorization.
c. Validity and authorization.
d. Validity and completeness.
48. The most significant effect of the results of the tests of controls and substantive tests of
transactions in the sales and collection cycle is on the
a. Allowance for uncollectible accounts.
b. Bad debts expense account.
c. Confirmation of accounts receivable.
d. Income tax payable account.
49. Cash receipts from sales on account have been misappropriated. Which of the following
acts would conceal this defalcation and be least likely be detected by an auditor?
a. Understating the sales journal.
b. Overstating the accounts receivable subsidiary account.
c. Overstating the accounts receivable subsidiary ledger.
d. Understating the cash receipts journal.
50. The most likely result of ineffective internal controls in the revenue cycle is that
a. Fictitious transactions could be recorded, causing an understatement of revenues
and overstatement of receivable.
b. Irregularities is recording transactions in the subsidiary accounts could result in a
delay in goods shipped.
c. Omission of shipping documents could go undetected, causing an understatement
of inventory.
d. Final authorization of credit memos by personnel in the sales department could
permit an employee defalcation scheme.
51. To achieve good internal control, which department should perform the activities of
matching shipping documents with sales orders and preparing daily sales summaries?
a. Billing.
b. Shipping.
c. Credit.
d. Sales order.
52. Which of the following control procedures may prevent the failure to bill customers for
some shipments?
a. Each shipment should be supported by a prenumbered sales invoice that is
accounted for.
b. Each sales should be approved by authorized personnel.
c. Sales journal entries should be reconciled to daily sales summaries.
d. Each sales invoice should be supported by a shipping document.
53. For effective internal control, the billing function should be performed by the
a. Accounting department.
b. Sales department.
c. Shipping department.
d. Credit and collection department.
54. Which of the following would be the best protection for a company that wishes to prevent
the “lapping” of trade accounts receivable?
a. Segregate duties so that the bookkeeper in charge of the general ledger has no
access to incoming mail.
b. Segregate duties so that no employee has access to both checks from customers
and currency from daily cash receipts.
c. Have customers and payments directly to the company’s depository bank.
d. Request that customer’s payment checks be made payable to the company and
addressed to the treasurer.
55. To test for unsupported entries in the ledger direction of audit testing should be from the
a. Journal entries.
b. Ledger entries.
c. Original source documents.
d. Externally generated documents.
56. Confirmation is most likely to be a relevant form of evidence with regard to assertions
about accounts receivable when the auditor has concerns about receivables’
a. Valuation.
b. Classification.
c. Existence.
d. Completeness.
57. When a customer fails to include a remittance advice with a payment, it is a common
practice for the person opening the mail to prepare one. Consequently, mail should be
opened by which of the following four company employees?
a. Credit manager.
b. Receptionist.
c. Sales manager.
d. Accounts receivable clerk.
58. Which one of the following would the auditor consider to be an incompatible operation if
the cashier receives remittances from the mailroom?
a. The cashier prepares the daily deposit.
b. The cashier makes the daily deposit at a local bank.
c. The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
d. The cashier endorses the checks.
59. The cashier diverted cash received over the counter from a customer to his own use and
wrote off the receivables as a bad debt. Select the control that should have prevented the
error.
a. Aging schedules of accounts receivable are prepared periodically and reviewed by
a responsible official.
b. Journal entries are approved by a responsible official.
c. Receipts are given directly to the cashier by the person who opens the mail.
d. Remittance advises, letters, or envelopes that accompany receipts are separated
and given directly to the accounting department.
60. A CPA examines a sample of copies of December and January sales invoices for the
initials of the person who verified the quantitative data. This is an example of a
a. Compliance test.
b. Substantive test.
c. Cutoff test.
d. Statistical test.
61. The auditor is most likely to verify accrued commissions payable in conjunction with the
a. Sales cutoff review.
b. Verification of contingent liabilities.
c. Review of post balance sheet date disbursements.
d. Examination of trade accounts payable.
62. Which of the following internal control procedures will most likely prevent the
concealment of a cash shortage resulting from the improper write-off of a trade account
receivable?
a. Write-offs must be approved by a responsible officer after review of credit
department recommendations and supporting evidence.
b. Write-offs must be supported by an aging schedule showing that only receivables
overdue several months have been written-off.
c. Write-offs must be approved by the cashier who is in a position to know if the
receivables have, in fact, been collected.
d. Write-offs must be authorized by company field sales employees who are in a
position to determine the financial standing of the customers.
63. Internal control over cash receipts is weakened when an employee who receives customer
mail receipts also
a. Prepares initial cash receipts records.
b. Records credit to individual accounts receivable.
c. Prepares bank deposit slips for all mail receipts.
d. Maintains a petty cash fund.
64. A CPA auditing an electric utility wishes to determine whether all customers are being
billed. The CPA’s best direction of test is from the
a. Meter department records to the billing (sales) register.
b. Billing (sales) register to the meter department records.
c. Accounts receivable ledger to the billing (sales) register.
d. Billing (sales) register to the accounts receivable ledger.
65. Which of the following audit procedures is the most appropriate when internal control
over cash is weak or when a client requests an investigation of cash transactions?
a. Proof of cash.
b. Bank reconciliation.
c. Cash confirmation.
d. Evaluate ratio of cash to current liabilities.
66. Which of the following audit procedures is most effective in testing credit sales for
understatement?
a. Age accounts receivable.
b. Confirm accounts receivable.
c. Trace sample of initial sales slips through summaries to recorded general ledger
sales.
d. Trace sample of recorded sales, from general ledger to initial sales slip.
67. To determine that sales transactions have been recorded is the proper accounting period,
the auditor performs a cut-off review. Which of the following best describes the overall
approach used when performing a cut-off review?
a. Ascertain letter a statement that representation have been accounted for in the
proper accounting period.
b. Confirm year-end transactions with regular customer.
c. Examine cash receipts in the subsequent period.
d. Analyze transactions occurring within a few days before and after the year end.
68. Tedori Manufacturing Company received a substantial sales return on December 30,
19X3, but the credit memorandum is the return was not prepared and recorded until
March 4, 19x4. The returned merchandise was included in the year-end physical
inventory taken on December 31, 19x3. The most effective procedure for preventing this
type of error is to
a. Prepare an aged schedule of accounts receivable monthly.
b. Prenumber and account for all credit memorandums.
c. Reconcile the subsidiary accounts-receivable ledger with the general-ledger
control accounts monthly.
d. Prepare and numerically control receiving reports for all materials received.
69. Which of the following procedures would ordinarily be expected to best reveal
unrecorded sales at the balance sheet date?
a. Compare shipping documents with sales records.
b. Apply gross profit rates to inventory disposed of during the period.
c. Trace payments received subsequent to the balance sheet date.
d. Send accounts receivable confirmation requests.
70. At which point in an ordinary sales transaction of a wholesaling business would a lack of
specific authorization be at least concern to the auditor in the conduct of an audit?
a. Granting of credit.
b. Shipment of goods.
c. Determination of discounts.
d. Selling of goods for cash.
71. Smit Manufacturing Company’s accounts-receivable clerk has a friend who is also
Smith’s customer. The accounts-receivable clerk, on occasion, has issued fictitious credit
memorandums to his friend for goods supposedly returned. The most effective
procedures for preventing this activity is to
a. Prenumber and account for all credit memorandums.
b. Require receiving reports to support all credit memorandums before they are
approved.
c. Have the sales department independent of the accounts-receivable department.
d. Mail monthly statements.
72. Assuming an excellent system of internal control exists, which of the following audit
procedures would be least likely to be performed?
a. Physical inspection of a sample of inventory.
b. Search for unrecorded cash receipts.
c. Obtain a client representation letter.
d. Confirmation of accounts receivable.
73. The most important test of details of balances for accounts receivable is
a. Recalculation of the aged receivables and uncollectible accounts.
b. Confirmations.
c. Tracing from shipping documents to journals to the accounts receivable ledger.
d. Tracing credit memos for returned merchandise to receiving room reports.
74. Which of the following statements is not correct?

a. No matter how good client’s system of internal control may be some substantive
procedures must be performed to test whether transactions and balances are
correctly recorded.
b. It is often convenient, and permissible, to carry out tests of controls and
substantive tests of transactions simultaneously.
c. If tests of controls indicate weaknesses, substantive tests may need to be
expanded.
d. Tests of control procedures for testing internal control effectiveness need to be
performed whether or not the auditor intends to rely on the controls.
75. If the auditing concludes that the controls are effective, the risk of over-reliance for
substantive tests of transactions can be
a. Decreased.
b. Held constant.
c. Increased.
d. Reduced to zero.
76. Which of the following factors would not be a criterion applied in deciding whether it is
acceptable to test at an interim date rather than waiting for year-end.
a. Satisfactory tests results in the interim tests.
b. A short interval between interim and balance sheet date.
c. No changes in the internal control structure after the balance sheet date.
d. A relatively small number of transactions after the interim date but most for large
amounts.
77. There is a difference between internal control objectives and audit objectives. Which of
the following is not an audit objective?
a. Validity.
b. Completeness.
c. Valuation.
d. Authorization.
78. Analytical procedures for the accounts receivable audit objectives are normally
performed
a. During the planning phase.
b. At any time after the balance sheet date.
c. After the balance sheet date but before the tests of details of balances.
d. Last.
79. Which of the following would be least apparent from a review of the aged trial balance?
a. Large balances.
b. Old balances.
c. Credit balances.
d. Related party accounts.
80. Which of the following analytical procedures would not provide information on a
potential error of either overstatement or understatement of allowance for uncollectible
accounts?
a. Compare number of days accounts receivable outstanding with previous years.
b. Compare gross margin percentage with previous years.
c. Compare aging categories as a percentage of accounts receivable with previous
years.
d. Compare allowance for uncollectible accounts as a percentage of accounts
receivable with previous years.
81. Which of the audit objectives is performed first when doing the tests of details of
balances for accounts receivable?
a. Accounts receivable are valid.
b. Accounts receivable are mechanically accurate.
c. Accounts receivable are owned.
d. Existing accounts receivable are included.
82. Most tests of accounts receivable and the allowance for uncollectible accounts are based
on
a. The general ledger balance of each account.
b. The results of analytical procedures.
c. The results of confirmations.
d. The aged trial balance.
83. A listing of the balances in the accounts receivable master file at the balance sheet date,
by total balance outstanding and by the time the component parts have been outstanding,
is the
a. Schedule of accounts receivable.
b. Customer list.
c. Aged trial balance.
d. Accounts receivable ledger.
84. The understatement of sales and accounts receivable is best uncovered by

a. Confining receivables.
b. Reviewing the aged trial balance.
c. Reconciling the accounts receivable general ledger accounts with the schedule of
accounts receivable.
d. Test of transactions for shipment made but not recorded.
85. Which of the following audit procedures would usually not uncover the fact that
receivables are not owned by client (factoring)?
a. Confirmation with customer.
b. A review of minutes of board meetings.
c. Discussions with client.
d. Examination of correspondence files regarding receivable.
86. When customers do not respond to confirmation requests, auditors

a. Cannot express an unqualified opinion.
b. Must rely on inquiry of client.
c. Must examine supporting documents.
d. Cannot complete the engagement and most issue a disclaimer.
87. The client’s estimate of the total amount of receivable which are uncollectible is
represented by
a. The bad debts expense account on the income statement.
b. The accounts with credit balances in the account receivable subsidiary ledger.
c. Footnote disclosure in the financial statements.
d. The allowance for uncollectible accounts.
88. If accounts receivables accounts with credit balances are significant, they should be
a. Written off.
b. Reclassified as accounts payable.
c. Corrected by making adjusting entries.
d. Moved to the debit side.
89. The criterion used by most clients for determining when a sale takes place is when
a. Title passes.
b. The goods are shipped.
c. Cash is exchanged.
d. The costs are incurred.
90. Generally accepted accounting principles require that material sales returns and
allowances
a. Be recorded in the period when the merchandise is returned.
b. Be recorded in the period when the credit memo is issued.
c. Be matched with related sales.
d. Be recorded as a debit to the sales account.
91. For some companies, sales returns and allowances are recorded in the accounting period
in which they occur under the assumption of approximately equal offsetting errors at the
beginning and end of cash period.
a. This is acceptable.
b. This is acceptable as long as the amounts are not significant.
c. This is not acceptable.
d. This is not acceptable as long as the amounts are not significant.
92. If the internal control structure for recording sales returns and allowances is evaluated as
ineffective.
a. A larger sample is needed to verify cutoff.
b. Sampling is not appropriate.
c. All sales returns must be traced to supporting documentation.
d. All sales returns must be confirmed with the customer.
93. It is easy to test for a cash receipts cutoff error by

a. Reconciling the bank statement.
b. Performing a four-column proof-of-cash.
c. Tracing recorded cash receipts to bank deposits on the bank statement of a
different period.
d. Observing the counting of cash at the balance sheet date.
94. Which of the following statements regarding proper disclosure of accounts receivable is
not correct?
a. Receivables from officers must be segregated from accounts receivable from
customers if the amounts are material.
b. Under SEC requirements, it is necessary to disclose sales and assets for different
business segments separately.
c. Proper aggregation of general ledger balances in the financial statements also
requires combining account balances that are not relevant for external users.
d. All accounts included in the general ledger must be disclosed separately on the
financial statements.
95. The primary purpose of accounts receivable confirmation is to satisfy the

b. Validity and cutoff objectives.
c. Valuation and cutoff objectives.
d. Validity, valuation, and cutoff objectives.
96. An unqualified report may be issued even when accounts receivable have not been
confirmed, provided that
a. It is impractical or impossible to do the confirmations.
b. Other auditing procedures have satisfied the auditor that the accounts receivable
balance is fairly stated.
c. Both a and b above are present.
d. The auditor has received a written verification from management as to the
collectability of the receivables.
97. Confirmations are less effective than tests of transactions for discovering
a. Omitted accounts.
b. Disputed amounts.
c. Invalid accounts.
d. Uncollected amounts where the debtor has moved and left no forwarding address.

a. Confirmation of receivables is more effective in discovering overstatements than
understatements.
b. Tests of transactions are effective for discovering both overstatements and
understatements.
c. Confirmation is effective in discovering clerical errors in billing customers.
d. If the internal control structure is excellent and there are a large number of
accounts receivable, it is normally more cost effective to emphasize confirmations
and do fewer tests of transactions.
99. Communication addressed to the debtor requesting him or her to confirm whether the
balance as stated on the communication is correct or incorrect is a
a. Dunning letter.
b. Negative confirmation.
c. Positive confirmation.
d. Bank confirmation.
100. A positive confirmation is more reliable evidence than a negative confirmation

because
a. The auditor has a document which can be used in court.
b. Follow-up procedures can be performed if a response is not received from the
debtor.
c. The debtor’s lack of response indicates agreement with the stated balance.
d. Fewer confirmations can be sent out.
101. Which one of the following circumstances would indicate that negative
confirmations should not be used on this engagement?
a. A significant portion of the total accounts receivable balance is represented by a
small number of accounts with large balances.
b. The internal control over receivables is good.
c. The recipients are mostly business rather than individuals.
d. The auditor is unaware of disputed or inaccurate accounts.
102. The most reliable evidence from confirmations is obtained when they are sent
a. Several months before the year-end, so the auditor will have adequate time to
perform alternate procedures if they are required.
b. At various times throughout the year to different sections of the sample, so that
the entire sample is representative of account balances scattered throughout the
year.
c. As a close to the balance sheet date as possible.
d. At various times throughout the year to the same group in the sample, so that the
sample will not have a time bias.
103. Which of the following is not an important consideration in determining sample

size of confirmations?
a. Total annual credit sales.
b. The materiality of total accounts receivable relative to the other asset balances.
c. The type of confirmations being used; i.e., positive or negative.
d. The results of related analytical procedures.
104. The following statements relate to the process of selecting items to include in the
confirmation sample. Which of the following is not true statement?
a. With most confirmations, some type of stratification is desirable.
b. In most audits, the emphasis should be on sampling equally throughout the
population.
c. It is important that the auditor have complete independence in choosing the
accounts to be confirmed.
d. It is important to sample some items from every material stratum of the
population.
105. After the items for confirmation have been selected, the auditor must maintain
control of the confirmations until
a. The names are provided to client’s personnel to type the envelopes.
b. The sealed envelopes are provided to clients personnel to be mailed.
c. The responses are received by the client with the return mail.
d. They are returned by customer to the auditor.
106. When positive confirmations have been used, it is normally desirable to account
for unconfirmed balances with alternative procedures.
a. Even if the amounts are small.
b. Only if the amounts are large.
c. Only if the amounts are material.
d. If it does not increase the auditor firm’s costs.
107. Which of the following most likely would be detected by an auditor’s review of a
client’s sales cut-off?
a. Unrecorded sales for the year.
b. Lapping of year-end accounts receivable.
c. Excessive sales discounts.
d. Unauthorized goods returned for credit.
108. For effective internal control, employees maintaining the accounts receivable
subsidiary ledger should not also approve
a. Employee overtime wages.
b. Credit granted to customers.
c. Write-offs of customer accounts.
d. Cash disbursements.
109. Which of the following internal control procedures will most likely prevent the
concealment of a cash shortage resulting from the improper write-off of a trade account
receivable?
a. Write-off must be approved by a responsible office after review of credit
department recommendations and supporting evidence.
b. Write-offs must be supported by an aging schedule showing that only receivables
overdue several months have been written off.
c. Write-offs must be approved by the cashier who is in a position to know if the
receivables have, in fact been collected.
d. Write-offs must be authorized by company field sales employees who are in a
position to determine the financial standing of the customers.
110. Smith is engaged in the audit of a cable TV firm which services a rural
community. All receivable balances are small, customers are billed monthly, and internal
control is effective balances at the balance sheet date, Smith would most likely
a. Send positive confirmation requests.
b. Send negative confirmation requests.
c. Examine evidence of subsequent cash receipts instead of sending confirmation
requests.
d. Use statistical sampling instead of sending confirmation requests.
111. An auditor should perform alternative procedures to substantiate the existence of

accounts receivable when
a. No reply to a positive confirmation request is received.
b. No reply to a negative confirmation request is received.
c. Collectability of the receivables is in doubt.
d. Pledge of the receivables is probable.
112. Which of the following might be detected by an auditor’s cut off review and
examination of sales journal entries for several days prior to and subsequent to the
balance sheet date?
a. Lapping year-end accounts receivable.
b. Inflating sales for the year.
c. Kiting bank balances.
d. Misappropriating merchandise.
113. The CPA learns that collections of accounts receivable during the first ten days of
January were entered as debits to cash and credits to accounts receivable as of December
31. The effect generally will be to
a. Leave both working capital and the current ratio unchanged at December 31.
b. Overstate both working capital and the current ratio at December 31.
c. Overstate working capital with no effect on the current ratio at December 31.
d. Overstate the current ratio with no effect on working capital at December 31.
114. The audit working papers often include a client-prepared, aged trial balance of
accounts receivable as of the balance sheet date. This aging is best used by the auditor to
a. Evaluate internal over credit sales.
b. Test the accuracy of recorded change sales.
c. Estimated credit losses.
d. Verify the validity of the recorded receivables.
115. Which of the following would be the best protection for a company that wishes to
prevent the lapping of trade accounts receivable?
a. Segregate duties so that the bookkeeper in change of the general ledger has no
access to incoming mail.
b. Segregate duties so that no employee has access to both checks from customers
and currency from daily cash receipts.
c. Have customers send payments directly to the company’s depository bank.
d. Request that customers’ payment checks be made payable to the company and
addressed to the treasurer.
116. In determining the adequacy of the allowance for uncollectible accounts, the least
reliance should be placed upon which of the following?
a. The credit manager’s opinion.
b. An aging schedule of past due accounts.
c. Collection experience of the client’s collection agency.
d. Ratios calculated showing the past relationship of the valuation allowance to net
credit sales.
117. Skates, an independent auditor, was engaged to perform an examination of the

financial statements of Apex Incorporated one month after its fiscal year has ended.
Although the inventory count was not observed by Skates, and accounts receivable were
not confirmed by direct communication with creditors, Skates was able to gain
satisfaction by applying alternative auditing procedures. Skates’ auditor’s report will
probably contain
a. An “except for” qualification.
b. An qualified opinion and an explanatory middle paragraph.
c. Either a qualified opinion or a disclaimer of opinion or a disclaimer of opinion.
d. A standard unqualified opinion
118. Confirmation of individual accounts receivable balances directly with debtors

will, of itself, normally provide evidence concerning the
a. Collectability of the balances confirmed.
b. Ownership of the balances confirmed.
c. Validity of the balances confirmed.
d. Internal control over balances confirmed.
119. In determining validity of accounts receivable, which of the following would the
auditor consider most reliable?
a. Documentary evidence that supports the account receivable
b. Credits to accounts receivable from the cash receipts book after close of business
at year end.
c. Direct telephone communication between auditor and debtor.
d. Confirmation replies received directly from customers.
120. The confirmation of the client’s trade accounts receivable is a means of obtaining
evidential matter and is specifically considered to be a generally accepted auditing
a. Principle.
b. Standard.
c. Procedure.
d. Practice.
121. The auditor obtaining corroborating evidential matter for accounts receivable by
using positive or negative confirmation requests. Under which of the following
circumstances might the negative form of the accounts receivable confirmation be useful?
a. A substantial number of accounts are in dispute.
b. Internal control over accounts receivable is ineffective.
c. Client records include a large number of relatively small balances.
d. The auditor believes that recipients of the requests are unlikely to give them
consideration.
122. It is sometimes impracticable or impossible for an audit 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.
123. A corporation is holding securities as collateral for an outstanding account

receivable. During the course of the audit engagement the CPA should
a. Verify that title to the securities rests with the corporation.
b. Ascertain that the amount recorded in the investment account is equal to the fair
market value of the securities at the date of receipt.
c. Examine the securities and ascertain their value.
d. Refer to independent sources to determine that recorded dividend income is
proper.
124. In order to safeguard the assets through proper internal control, accounts
receivable that are written of are transferred to a (an)
a. Separate ledger.
b. Attorney for evidence in collection proceedings.
c. Tax deductions files.
d. Credit manager since customers may seek to re-establish credit by paying.
125. Which of the following sets of duties would ordinarily be considered basically
incompatible in terms of good internal control?
a. Preparation of monthly statements to customers and maintenance of the accounts
receivable subsidiary ledger.
b. Posting to the general ledger and approval of additional and terminations relating
to the payroll.
c. Custody of unmailed signed checks and maintenance of expense subsidiary
ledgers.
d. Collect on of receipts on account and maintaining accounts receivable records.
126. When reviewing a client’s statement of changes in financial position, where the
concept of funds in interpreted to mean cash, which of the following would the auditor
expect to find under the caption “Expense not requiring outlay of working capital in the
current period”?
a. An extraordinary change as a result o early extinguishment of debt.
b. Conversion of long-term debt to a common stock.
c. Goodwill arising from acquisition of a subsidiary.
d. Provision for uncollectible accounts receivable.
127. Which of the following is not a primary objective of the auditor in the
examination of accounts receivable?
a. Determine the approximate realized value.
b. Determine the adequacy of internal controls.
c. Establish validity of the receivables.
d. Determine the approximate time of collectability of the receivable.
128. Lapping would most likely be detected by

a. Examining cancelled checks clearing in the bank cutoff period.
b. Confirming year-end balances.
c. Preparing a schedule of inter-bank transfers.
d. Investigating responses to account-receivable confirmations.
129. When scheduling the audit work to be performed on an engagement, the auditor
should consider confirming accounts receivable balances at an interim date if
a. Subsequent collections are to be reviewed.
b. Internal control over receivables is good.
c. Negative confirmations are to be used.
d. There is a simultaneous examination of cash and accounts receivable.
130. The use of the positive (as opposed to the negative) from of receivables
confirmation is indicated when
a. Internal control surrounding accounts receivable is considered to be effective.
b. There is reason to believe that a substantial number of accounts may be in
dispute.
c. A large number of small balances are involved.
d. There is reason to believe a significant portion of the requests will be made.
131. Returns of positive-confirmation requests for accounts receivable were very poor.
As an alternative procedure, the auditor decided to check subsequent collections. The
auditor had satisfied himself that the client satisfactorily listed the customer name next to
each check listed on the deposit slip; hence, he decided that for each customer for which
a confirmation was not received that he would add all amounts shown for the customer
on each validated deposit slip for the two months following the balance-sheet date. The
major fallacy in the auditor’s procedure is the
a. Checking of subsequent collections is not a accepted alternative auditing
procedure for confirmation of accounts receivable.
b. By looking only at the deposit slip the auditor would not know if the payment was
for the receivable at the balance-sheet date or a subsequent transaction.
c. The deposit slip would not be received directly by the auditor as a confirmation
would be
d. A customer may not have made a payment during the two months period.
132. The document which indicates the assignments or departments an employee

worked for during a given time period is the
a. Time card.
b. Job time ticket.
c. Rate authorization form.
d. Payroll master file.
133. The general cash account is considered significant in almost all audits.
a. Where the ending balance is material.
b. Where either the beginning or ending balance is material.
c. Even when ending balance is immaterial.
d. Except those not-for-profit organizations.
134. Which of the following errors will be discovered as a result of the audit of the
bank reconciliation?
a. Failure to record a bank deposit.
b. Billing a customer at a lower price than called for.
c. Improper payments of officers’ personal expenditures.
d. Payment of interest to a related party for an amount of interest to a related party
for an amount in excess of the going rate.
135. Which of the following errors would not be discovered during the audit of sales
and collection cycle?
a. Failure to bill a customer.
b. Payment for raw materials that were not received.
c. Billing a customer at a lower price than called for.
d. A defalcation of cash by interception o collections from customers before they are
recorded, then charging the account off as a bad debt.
136. Which of the following errors would not be discovered during the audit of the
acquisitions and payments cycle?
a. Duplicate payment of a vendor’s invoices.
b. Improper payments of officers’ personal expenditures.
c. Payment of interest to related party for an amount in excess of the going rate.
d. Payment for raw materials that were not received.
137. Which of the following errors would not be discovered during the tests of the
bank reconciliation?
a. Cash received by the client subsequent to be balance sheet date but recorded as
cash receipts in the current year.
b. Deposits recorded in the cash book near the end of the year, deposited in the bank,
and included in the bank reconciliation as a deposit in transit.
c. The existence of payments on notes payable that were debited directly to the bank
balance by the bank but were not entered in the client’s records.
d. Payment to an employee for more hours than he worked.
138. A careful bank reconciliation by competent client personnel includes all but
which one of the following?
a. Comparison of cancelled checks with the cash disbursement journal for date,
payee, and amount.
b. Examination of cancelled checks for signature, endorsement, and cancellation.
c. Comparison of employees time cards with cancelled payroll checks to determine
if they were paid the correct amount.
d. Review of month-end inter-bank transfers for propriety and proper recording.
139. A careful bank reconciliation by competent client personnel includes all but
which one of the following?
a. Comparison of deposit in the bank with recorded cash receipts for date, customer,
and amount.
b. Accounting for the numerical sequence of checks, and the investigation of
missing ones.
c. Reconciliation of all items causing a difference between the book and bank
balance and the verification of their property.
d. A review of the names of payees on cancelled checks in order to discover
payments to related parties.
140. Which of the following audit objectives is not significant for the cah-in-bank
account?
a. Validity.
b. Classification.
c. Completeness.
d. Valuation.
141. Which of the following audit objectives is not significant for hthe cash-in-bank
account?
a. Ownership.
b. Cutoff.
c. Mechanical accuracy.
d. Disclosure.
142. A major consideration in the audit of the genera 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
a. Large cash balances at the end of the year.
b. Large cash receipts and disbursements during the year.
c. No imprest accounts used for payroll.
d. Inadequate internal controls.
143. The test 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
a. Mechanical accuracy.
b. Validity.
c. Completeness.
d. Valuation.
144. The auditor objective of determining that cash in bank, as stated on the
reconciliation, foots correctly and agrees with the general ledger can be tested by which
of the following procedures?
a. Receipt and test of a cutoff bank statement.
b. Foot the outstanding checks list and the list of deposits in transit.
c. Perform tests for kiting.
d. Examine the minutes of the Board for restrictions on the use of cash.
145. The audit objective of determining that cash in bank as stated on the
reconciliation is correctly valued can be tested by which of the following procedures?
a. Receipt and tests of a bank reconciliation.
b. Prove the bank reconciliation as to additions and subtractions.
c. Trace deposits in transit to subsequent period bank statement.
d. Do tests for kiting.
146. 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 journal is performed to satisfy the audit objective of
b. Validity.
c. Completeness.
d. Cut-off.
147. In an effort to satisfy the completeness objective, the auditor could perform which
of the following test of details of balance procedures?
a. Trace the book balance on the reconciliation to the general ledger.
b. Trace outstanding checks to subsequent period bank statements.
c. Do a four-column proof-of-cash.
d. Review financial statements to make sure that material savings accounts and
certificates of deposit are disclosed separately.
148. The audit objective to determine that cash in bank is properly disclosed can be
met through which of the following tests of details of balances?
a. Examine minutes, loan agreements, and the bank confirmation for restrictions on
the use of cash and compensating balances.
b. Trace outstanding checks to subsequent period bank statement.
c. Test for kiting.
d. Foot the outstanding check list and deposits in transit.
149. The direct receipt of a confirmation from every bank with which the client does
business is
a. Not necessary.
b. Not necessary unless material fraud is suspected.
c. Necessary for every audit.
d. Necessary for every audit except when there are an unusually large number o
inactive accounts.
150. The receipt of the completed standard bank confirmation form would provide the
auditor with all but which one of the following items?
a. The balances in all bank accounts with that bank.
b. Any restrictions o withdrawals, such as compensating balances.
c. The adjusted cash balance per bank.
d. A list of all contingent liabilities and open letters of credit with that bank.
151. A partial period bank statement and the related cancelled checks, duplicate
deposit slip, and other documents included in bank statements, mailed by the bank
directly to the CPA firm’s office is called
a. Our-column proof of cash.
b. A bank statement.
c. A cutoff bank statement.
d. A short-period bank statement.
152. 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 are provided by the
a. Journals and ledgers of client for the year under audit.
b. Cutoff bank statement.
c. Journals and ledgers of client for the subsequent year.
d. Cancelled checks for the year under audit.
153. When the auditor believes the year-end bank reconciliation may be intentionally
misstated, it is appropriate to perform extended test of the year-end bank reconciliation
assuming client has a December 31, year end, these extended tests would include
a. Comparing all November 30 reconciling items with cancelled checks and other
documents in the December bank statement.
b. Comparing all cancelled checks and deposit slips in the December bank statement
with the December cash disbursements and receipt journal.
c. Carrying out procedures subsequent to the end o the year with the use of the bank
cutoff statement.
154. A four-column proof of cash can be performed for
a. One or more interim months.
b. The entire year.
c. The last month of the year.
d. Any specified time period for which bank statements are available and which the
auditor chooses to designate.
155. The auditor uses a proof of cash to determine whether

a. All cash receipts were deposited and all deposits were recorded in the accounting
record.
b. All recorded cash disbursements were paid by the bank.
c. All amounts that were paid by the bank were recorded.
156. The December proof of cash disbursements on a fur-column proof of cash is not
useful for discovering that
a. December bank service charges were not recorded in the journals.
b. A check which was supposedly written and journalized in January of 19X2 had
cleared the bank in December of 19X1.
c. A creditor had been paid P1,000 when their invoice was for only P500.
d. Checks which client had written in November had cleared the bank in December.
157. The December proof of cash receipts on a four-column proof of cash is not useful
for discovering.
a. The theft of cash receipts which had not been recorded in the cash register.
b. November deposits had cleared the bank in December.
c. A note receivable had been collected by the bank but the entry had no been
recorded in the cash receipts journal.
d. That a deposit of client had been erroneously credited by the bank to the wrong
customer.
158. The process of transferring money from one bank account to another and
improperly recording the transaction is
a. Lapping.
b. Embezzling.
c. Kiting.
d. A scam.
159. When the auditor lists all bank transfers made a few days befor and after the
balance sheet date and trace each to the accounting records for proper reording, this is a
useful approach to test for
a. Lapping.
b. Embezzlement
c. Kiting.
d. Ending cash balance.
ITEMS 160 AND 161 ARE BASED ON THE FOLLOWING
Miles Company
Bank Transfer Schedule
December 31, 1994
Date Date
disbursed deposited
Check Balance Accounts per per
# From To Amount Books Bank Books Bank
2020 MBTC CBC P32,000 12/31 1/5* 12/31 1/3^
2021 MBTC FEBTC P21,000 12/31 1/4* 12/31 1/3^
3217 BPI CBC P6,700 1/3 1/5 1/3 1/6
0659 FEBTC CBC P5,500 12/30 1/5* 12/30 1/3^
160. The tick mark* most likely indicates that the amount was traced to the
a. December cash disbursements journal.
b. Outstanding check list of the applicable bank reconciliation.
c. January cash disbursements journal.
d. Year-end bank confirmations.
161. The tick mark ^ most likely indicates that the amount was traces to the
a. Deposits in transit of the applicable bank reconciliation.
b. December cash receipts journal.
c. January cash receipts journal.
d. Year-end bank confirmations.
162. For good internal control, which of the following functions should not be the
responsibility of the treasurer’s department?
a. Data processing.
b. Handling of cash.
c. Custody of securities.
d. Establishing credit policies.
163. When a customer fails to include a remittance advice with a payment, it is

common practice for the person opening the mail to prepare one. Consequently, mail
should be opened by which of the following four company employees?
a. Credit manager.
b. Receptionist.
c. Sales Manger.
d. Accounts receivable clerk.
164. Which of the following cash transfer results in a misstatement of cash at

December 31, 1994?
Bank Transfer Schedule

Disbursement Receipt
Transfe
r Recorded Paid by Recorded Received
in books bank in books by bank
a. 12/31/94 1/04/95 12/31/94 12/31/94
b. 1/04/95 1/05/95 12/31/94 1/04/95
c. 12/31/94 1/05/95 12/31/94 1/04/95
d. 1/04/95 1/11/95 1/04/95 1/04/95
165. To gather evidence regarding the balance per bank in a bank reconciliation, an
auditor would examine all of the following except
a. Cutoff bank statement.
b. Year-end bank statement.
c. Bank confirmation.
d. General ledger.
166. A cash shortage may be concealed by transporting funds from one location to
another or by converting negotiable assets to cash. Because of this, which of the
following is vital?
a. Simultaneous confirmations.
b. Simultaneous bank reconciliations.
c. Simultaneous verification.
d. Simultaneous surprise cash count.
167. An auditor who is engaged to examine the financial statements of a business

enterprise will request a cutoff bank statement primarily in order to
a. Verify the cash balance reported on the bank confirmation inquiry form.
b. Verify reconciling items on the client’s bank reconciliation.
c. Detect lapping.
d. Detect kiting.
168. Under which of the following circumstances would an auditor be most likely to
intensify an examination of a P500 imprest petty cash fund?
a. Reimbursement vouchers are not prenumbered.
b. Reimbursement occurs twice each week.
c. The custodian occasionally uses the cash fund to cash employee checks.
d. The custodian endorses reimbursement checks.
169. Contact with banks for the purpose of opening company bank accounts should
normally be the responsibility of the corporate
a. Board of directors.
b. Treasurer.
c. Controller.
d. Executive committee.
170. For good internal control, the monthly bank statements should be reconciled by
someone under the direction of the
a. Credit manager.
b. Controller.
c. Cashier.
d. Treasurer.
171. The standard bank cash confirmation form requests all of the following except
a. Maturity date of a direct liability.
b. The principal amount paid on a direct liability.
c. Description of collateral for a direct liability.
d. The interest rate of a direct liability.
172. On the last day of the fiscal year, the cash disbursements clerk drew a company
check on bank A and deposited the check in the company account in bank B to cover a
previous theft of cash. The disbursement has not been recorded. The auditor will best
detect this form of kiting by
a. Comparing the detail of cash receipts as shown by the cash receipts records with
the detail on the confirmed duplicate deposit tickets for three days prior to and
subsequent to year end.
b. Preparing from the cash disbursements book a summary of bank transfer for one
week prior to and subsequent to year end.
c. Examining the composition of deposits in both A and B subsequent to year end.
d. Examining paid checks returned with the bank statement of the next account
period after year end.
173. During his examination of a January 19, 1995, cut-off bank, an auditor notice that
the majority of checks listed as outstanding at December 31, 1994, had not cleared the
bank. This would indicate
a. A high probability of lapping.
b. A high probability of kiting.
c. That the cash-disbursements journal had been held open past December 31, 1994.
d. That the cash-disbursements journal had been closed prior to December 31, 1994.
Items 174, 175, and 176 are based on the following information:
Listed below are four inter-bank cash transfers, indicated by the number 1,2,3 and 4, of a client
for late December 1994 and early January 1995. Your answer choice for each item 490, 491, and
492, should be selected from this list.
Bank Account One Bank Account Two

Disbursing Date Receiving Date
(Month/Day) (Month/Day)
Per Bank Per Books Per Bank Per Books
a. 12/31 12/30 12/31 12/30
b. 1/2 12/30 12/31 12/31
c. 1/3 12/31 1/2 1/2
d. 1/3 12/31 1/2 12/31
174. Which of the cash transfers indicates an error in cash cutoff at December 31,
1994? (c)
175. Which of the cash transfers would appear as a deposit in transit on the December
31, 1994, bank reconciliation? (d)
176. Which of the cash transfers would not appear as an outstanding check on the
December 31, 1994, bank reconciliation? (a)
177. Vox. Inc. Which as a December 31 year end, closed an out-of-town division on
April 21, 19X4, The checking account used by the division at a local bank was closed out
as of April 21, 19X4. The bank, however, has continued to mail bank statements with
zero balances, as of the fifth of each month. Vox has requested the bank to mail the
January 5, 19X5, bank statement directly to its independent auditor. For this bank
checking account during his examination for 19X3, the auditor should ordinarily
a. Review only the January 2, 19X4, bank statement.
b. Review only the bank statements for 19X4.
c. Review only the bank statements for 19X4 and the January 5, 19X5, statement.
d. Send a bank confirmation as of December 31, 19X4 in additional to reviewing the
bank statements for 19X3 and the January 5, 19X5 statement.
178. The Jackson company records checks as being issued on the day they are written;
however, the checks are often held a number of days before being released. The audit
procedure which is least likely to reveal this method of incorrect cash-disbursements
cutoff is to
a. Examine checks returned with cutoff bank statement for unreasonable time lag
between date recorded in cash-disbursements book and date clearing bank.
b. Reconcile vendors’ invoices with accounts payable per books.
c. Reconcile bank statement at year end.
d. Reconcile exceptions to account-payable confirmations.
179. Wald, Inc., has a June 30 year end. Its bank mails bank statements each Friday of
every week and on the last business day of each month. For year end. Saturday, June 30,
19X4, the auditor should have the client ask the bank to mail directly to the auditor
a. Only the June 20 bank statement.
b. Only the July 13 bank statement.
c. Both the June 29 and July 6 statements.
d. Both the July 6 and 13 bank statements.
180. In the revenue and collection cycle, o the order of activities listed, which is in the
best order of a typical sequence of activities?
a. Delivering goods, billing customer, credit ranting collection activity.
b. Customer ordering, delivering goods, billing customer, cash receipts.
c. Customer ordering, delivering goods, credit granting, collection activity.
d. Credit granting, billing customers, delivering goods, cash receipts.
181. An understanding of the transaction flow in the revenue and collection cycle
would not be obtained from the following procedure:
a. Interviews.
b. Observation.
c. Confirmations.
d. Collecting sample documents.
182. Sales order forms and invoice blanks should be controlled in the
a. Sales order section of the sales department.
b. Billing clerk in the accounting department.
c. Credit manager in the credit department.
d. Sales manager in the sales department.
183. When an account receivable is considered uncollectible the person who generally
authorizes the write-off is the
a. Credit manager.
b. Treasurer.
c. Accountant.
d. Sales manager.
184. An internal control questionnaire for evaluating the completeness objective would
not include the following question
a. Are sales invoice blanks prenumbered?
b. Is the sequence checked for missing invoices?
c. Is the shipping document numerical sequence checked for missing bills of lading
numbers?
d. Are shipped quantities compared to invoice quantities?
185. An internal control questionnaire for evaluating the environment of cash receipts
processing would not include the following question
a. Are receipts deposited daily, intact, and without delay?
b. Does someone other than the cashier or bookkeeper take deposits to bank?
c. Does the accounting manual contain instructions for classifying cash receipts
credits?
d. Are duties of cashier entirely separate from record-keeping.
186. The assertions by management regarding accounts and note receivable in the
financial statements would not include that they are
a. Bona fide obligations owed to the company as of the balance sheet date.
b. Collectible at the recorded values shown in the balance sheet.
c. Properly classified as short-term and long-term in the balance sheet.
d. Adequately disclosed and properly presented.
187. An audit program of substantive procedures for cash would not include
a. Request a cutoff bank statement be mailed to the client.
b. Request client to prepare bank reconciliation of all accounts.
c. Prepare a schedule of inter-bank transfers for a period of ten business days before
and after year-end date.
d. Obtain a written client representation concerning compensating balance
agreements.
188. The negative confirmation is not used when

a. Internal control is considered effective.
b. A large number of small balances are involved.
c. Customer can be expected to consider the confirmation properly.
d. A response in required.
189. A cashier who prepares bank deposits and bank reconciliations who takes cash by
inflating “deposits in transit” could not cover the theft by
a. Underfooting the deposits in transit.
b. Underfooting the outstanding check list.
c. Omitting outstanding checks from the reconciliation.
d. Covering with a receipt of a later date.
AUDIT OF THE EXPENDITURE CYCLE

Payroll and Production
190. The total of the individual employee earnings in the payroll master file equals the
a. Total balance of gross payroll in general ledger accounts.
b. Total of the checks drawn to employees for payroll.
c. Total gross payroll plus the total contributed by the employer for payroll taxes.
d. Total gross pay for the current week’s payroll.
191. No individual with access to time cards, payroll records, or checks should also be
permitted access to
a. Personnel records.
b. The computer.
c. The cancelled check file.
d. Job time tickets.
192. Controls should prevent those responsible for the preparation of payroll checks
from al but which one of the following activities?
a. Signing paychecks.
b. Distributing paychecks.
c. Access to time cards.
d. Access to the payroll journal.
193. The signing and distribution of the checks must be properly handled to prevent
their theft. Which of the following is not an important control consideration?
a. The person authorized to sign paychecks should not be involved otherwise in the
preparation of the payroll.
b. A check signing machine should not be used to replace a manual signature.
c. Distribution of pay checks should be performed by someone who is not involved
in the other payroll functions.
d. Unclaimed paychecks should be immediately returned for re-deposit.
194. Most companies use an imprest account to pay the payroll. Which of the
following is not an advantage of such an account?
a. It limits the company’s exposure to payroll fraud.
b. It facilitates cash management.
c. It eliminates the requirement of keeping a minimum balance in a checking
account.
d. It allows the delegation of payroll check-signing duties.
195. The careful and timely preparation of all payroll tax returns is necessary to avoid
penalties and criminal charges. The most important control in the timely preparation of
these returns is
a. Computerized preparation of tax returns.
b. A well-defined set of policies that indicate when each form must be filed.
c. Independent verification of computer output by a competent individual.
d. A Gaant chart.
196. The most important means of verifying account balances in the payroll and
personnel cycle are
a. Analytical procedures.
b. Test of controls.
c. Test of transactions.
d. Test o details of balances.
197. Which of the following would not be a justification for an auditor spending very
little time performing tests of transactions in the payroll and personnel cycle?
a. The new payroll bookkeeper has a much better educational background than the
former one.
b. Employees will detect any underpayments.
c. Payroll transactions are uniform and uncomplicated.
d. Payroll transactions are extensively audited by government agencies.
198. Which of the following circumstances would not cause an auditor to extend
payroll procedures considerably?
a. Payroll significantly affects inventory valuation.
b. There is a possibility of material fraudulent payroll transactions.
c. There is a weak internal control structure.
d. There is a lack o independent third-party evidence, such as confirmations.
199. Which of the following statements is correct?

a. The overhead charged to inventory at the balance sheet date can be understated if
the salaries of administrative personnel are inadvertently or intentionally charged
to indirect manufacturing overhead.
b. When jobs are billed on a cost-plus basis, revenue and the expenses are both
affected by charging labor to incorrect jobs.
c. Payroll is a significant portion of inventory for retail and service industry
companies.
d. The valuation of inventory is affected if the direct labor cost of individual
employees is improperly charged to the wrong job or process.
200. Which of the following is not a procedure which can be performed on canceled
checks in an effort to detect defalcations?
a. Compare the endorsements on checks with authorized signatures.
b. Scan endorsements for unusual or recurring second endorsements.
c. Examine voided checks to be sure they haven’t been used.
d. Examine the payroll records in subsequent periods to determine that terminated
employees are not longer being paid.
201. A procedure in which employee must pick up and sign for his or her check in the
presence of a supervisor and the auditor is
a. A surprise payroll payoff.
b. A payroll roll call.
c. An inexpensive way to uncover payroll “ghosts”.
d. A payroll queue.
202. Because of the lack of available evidence, it s usually difficult for an auditor to
discover if an employee records more time on his or her time card than actually worked.
One procedure is
a. To reconcile the total hours paid this period with a previous period.
b. To reconcile the total hours paid according to the payroll records with an
independent record of the total hours worked, such as those maintained by
production control.
c. To reconcile the total hours worked according to the summary payroll report with
the total hours worked as recorded on the time card for the period.

a. Internal controls will vary from company to company; therefore, the auditor must
identify the controls and weaknesses for each organization.
b. The auditor must perform tests of controls on all of client’s internal controls.
c. The substantive tests of transactions will vary depending on the assessed control
risk.
d. The tests of controls and substantive test of transactions are combined where
appropriate.
204. “Recorded payroll payments are for work actually performed by non-fictitious
employees” satisfies the control objective of
a. Authorization.
b. Completeness.
c. Validity.
d. Valuation.
205. “Existing payroll transactions are recorded “satisfies the control objective of
a. Authorization.
b. Completeness.
c. Validity.
d. Valuation.
206. “Recorded payroll transactions are for the amount of time actually worked and at
the proper pay rate; withholdings are properly calculated “ satisfies the control objective
of
a. Authorization.
b. Completeness.
c. Validity.
d. Valuation.
207. Which of the following is a Test of Controls?

a. Review the payroll journal, general ledger, and payroll earnings records for large
or unusual amounts.
b. Examine time cards for indication of supervisor approval.
c. Compare cancelled check with payroll journal for name, amount, and date.
d. Examine cancelled checks for proper endorsement.
208. Which of the following is a substantive test of transactions?
a. Review personal policies.
b. Accounts for a sequence of payroll checks.
c. Reconcile the disbursements in the payroll journal with the disbursements on the
payroll bank statement.
d. Examine printouts of transactions rejected by the computer as having invalid
employee numbers.
209. The auditor should review the preparation of at least one of each type of payroll
tax from the client is responsible for filing, as a part of the auditor’s responsibility for
a. Understanding the internal control structure.
b. Doing tests of controls.
c. Doing tests of transactions.
d. Doing tests of balances.
210. To test whether the client has fulfilled its legal obligation in submitting payments
for tall payroll withholdings, the auditor must first
a. Contact client’s independent attorney.
b. Know the dates when tax payments are due.
c. Trace these payments to the imprest payroll account.
d. Determine the client’s requirements for submitting the payments.
211. The periodic payment from the general cash account to be payroll account for net
payroll should be tested for at least one payroll period. The major audit concern is
a. A substantive test that the correct amount was transferred for this test period.
b. A test of transactions that the check is prepared for the prepared for the checks are
handed out.
c. An analytical review procedure that net pay is reasonable.
d. A test of controls that an imprest account is being used for payroll.
212. Good internal control for the payroll function is usually

a. Not difficult to establish.
b. Difficult to establish.
c. Absent.
d. A result of prior audit results.
213. Which of the following is not a type of error that gives the auditor concern in
auditing payroll transactions?
a. Classification errors in charging labor to inventory and job cost accounts.
b. Computational errors in formulas when a computerized system is used.
c. Weaknesses in the control system which allows underpayment of employees.
d. Any error which indicates possible fraud.
214. Generally, the tests of transactions performed in the payroll cycle will use
a. An attributes sampling plan that assumes a zero deviation rate.
b. A variable sampling plan that assumes a zero deviation rate.
c. An attributes sampling plan that assumes a large deviation rate.
d. A variables sampling plan that assumes a large deviation rate.
215. 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.
216. Client’s liability for payroll taxes withheld but not yet disbursed can be tested by
comparing the balance with
a. The payroll journal.
b. The payroll tax form prepared in the subsequent period.
c. The cash disbursement in the subsequent period.
217. The correct cutoff and valuation of accrued salaries and wages
a. Is to calculate the exact hours of pay that were earned in the current period and
paid in a subsequent period.
b. Is the compute an approximate proportion of the wages that were earned in the
current period and use that amount as the accrual.
c. Allows the client to choose between a and b above each year.
d. Depends on company policy, consistently followed.
218. Which of the following would not be a test used when auditing accrued sales
commissions?
a. Confirm the amount of commissions directly with the employees.
b. Test the calculations (recalculate based on the agreement between client and
employees.
c. Compare the method of accruing commissions with the previous years.
d. Test the mechanical accuracy in the Commissions Expense account at interim
dates.
219. 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.
220. The most important consideration in evaluating the fairness of the amounts
accrued for vacation pay, sick pay, and other benefits is
a. The consistent accrual of these liabilities relative to those of the preceding year.
b. The actual to those of the preceding year.
c. The amount expended to date in the current period.
d. The profitability of the client which will enable these liabilities to be met.
221. The usual audit test for officers’ compensation is to obtain the authorized salary
of each officer from the minutes of the board of directors and compare it with
a. The related earnings report.
b. The SEC’s 10K report.
c. The company’s federal income tax return.
d. Any of the three above.
222. Tracing selected items from the payroll register to employee time cards that have
been approved by supervisory personnel provides evidence that
a. Internal controls relating to payroll disbursements were operating effectively.
b. Payroll checks were signed by an appropriate officer independent of the payroll
preparation process.
c. Only bona fide employees worked and their pay was properly computer.
d. Employees worked the number of hours for which their pay was computed.
223. To minimize the opportunity for fraud, unclaimed salary checks should be
a. Deposited in a special bank account.
b. Kept in the payroll department.
c. Left with the employee’s supervisor.
d. Held for the employee in the personnel department.
224. An auditor decides that it is important and necessary to observe a client’s

distribution of payroll checks on a particular audit. The client organization is so large that
the auditor cannot conveniently observe the distribution of the entire payroll. In these
circumstances, which of the following is most acceptable to the auditor?
a. Observation should be limited to one or more selected departments.
b. Observation should be made for all departments regardless of the inconvenience.
c. Observation should be eliminated and alternative auditing procedures should be
used to obtain satisfaction.
225. It would be appropriate for the payroll accounting department to be responsible

for which of the following functions?
a. Approval of employee time records.
b. Maintenance of records of employment discharges and pay increases.
c. Preparation of periodic governmental reports as to employees’ earnings and
withholding taxes.
d. Temporary retention of unclaimed employee paychecks.
226. Effective internal accounting control over the payroll function should include
procedures that segregate the duties of making salary payments to employees and
a. Controlling unemployment insurance claims.
b. Maintaining employee personnel records.
c. Approving employee fringe benefits.
d. Hiring new employees.
227. An auditor will ordinarily ascertain whether payroll checks are properly endorsed
during the examination of
a. Time cards.
b. The voucher system.
c. Cash in bank.
d. Accrued payroll.
228. Which of the following best describes proper internal control over payroll?
a. The preparation of the payroll must be clear under the control of the personnel
department protected to
b. The confidentiality of employee payroll date should be carefully protected to
prevent fraud.
c. The duties of hiring, payroll computation, and payment to employees should be
segregated.
d. The payment of cash to employees should be replaced with payment by checks.
229. Effective internal accounting control over unclaimed payroll checks that are kept
by the treasury department would include accounting department procedures that require
a. Effective cancellation and stop payment orders for checks representing unclaimed
wages.
b. Preparation of a list of unclaimed wages on a periodic basis.
c. Accounting for all unclaimed wages in a current liability account.
d. Periodic accounting for the actual checks representing unclaimed wages.
230. Which of the following is an effective internal accounting control used to prove
that production department employees are properly validating payroll time cards at time-
recording station?
a. Time cards should be carefully inspected by those persons who distribute pay
envelopes to the employees.
b. One person should be responsible for maintaining records of employee time for
which salary payment is not be made.
c. Daily reports showing time charged to jobs should be approved by the supervisor
and compared to the total hours worked on the employee time cards.
d. Internal auditors should make observations of distribution of paychecks on a
surprise basis.
231. When examining payroll transactions, an auditor is primarily concerned with the
possibility of
a. Overpayments and unauthorized payments.
b. Posting of gross payroll amounts to incorrect salary expense accounts.
c. Misfootings of employee time records.
d. Excess withholding of amounts required to withheld.
232. Which of the following procedures would normally be performed by the auditor
when making tests of payroll transactions?
a. Interview employees selected in a statistical sample of payroll transactions.
b. Trace number of hours worked as shown on payroll to time cards and time reports
signed by the supervisor.
c. Confirm amounts withheld from employees’ salaries with proper governmental
authorities.
d. Examine signatures on paid salary checks.
233. 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
employees their badge or identification numbers.
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.
234. A large retail enterprise has established a policy which requires that the paymaster
deliver all unclaimed payroll checks to the internal auditing department at the end of each
payroll distribution day. This policy was most likely adopted in order to
a. Assure that employees who were absent on a payroll distribution day are not paid
for that day.
b. Prevent the paymaster from cashing checks which are unclaimed for several
weeks.
c. Prevent a bona file employee’s check from being claimed by another employee.
d. Detect any fictitious employee who may have been placed on the payroll.
235. To check the accuracy of hours worked, an auditor would ordinarily compare
clock cards with
a. Personal records.
b. Shop job time tickets.
c. Labor variance reports.
d. Time recorded in the payroll register.
236. Which of the following individuals is the most appropriate person to be assigned
the responsibility of distributing envelopes that include employee payroll checks?
a. The company paymaster.
b. A member of the accounting department.
c. The internal auditor.
d. A representative of the bank where the company payroll is maintained.
237. Effective internal control over the payroll function would include which of the
following?
a. Total time recorded on time-clock punch cards should be reconciled to job reports
by employees responsible for those specific jobs.
b. Payroll department employees should be supervised by the management of the
personnel department.
c. Payroll department employee personnel records.
d. Total time spent in jobs should be compared with total time indicated time-clock
punch cards.
238. In testing the payroll of a large company, the auditor wants to establish that the
individuals included in a sample actually were employees of the company during the
period under review. What will be the best source to determine this?
a. Telephone contact with the employees.
b. Tracing from the payroll register to the employees’ earning records.
c. Confirmation with the union or other independent organization.
d. Examination of personnel department records.
239. The acquisition and payment cycle includes payments

a. To a bank for a note payable.
b. Of employees wages.
c. For purchase of raw materials from subsidiaries.
d. For research and development.
240. The typical function of the production and conversion cycle does not include
a. Cost accounting for materials and overhead.
b. Reporting attendance and work performed.
c. Labor cost accounting.
d. Cost of goods sold determination.
241. The information typically needed to prepare a production order would not include
a
a. Sales forecast.
b. Production plan.
c. Inventory plan.
d. Bill of materials.
242. When raw materials are released from inventory generally a multi-copy material
issue slip is prepared which would not include a copy
a. Accompanying the material to production.
b. For cost accounting as a check on material used.
c. To production planning for scheduling.
d. Filed with the material requisition.
243. To what objective is the following internal control question related “ Are
differences between issue slips and materials-used reports recorded and reported to the
cost accounting supervisor?”
a. Accuracy.
b. Accounting.
c. Classification.
d. Validity.
244. Selecting a sample of open and closed job sheets and vouching overhead charges
to overhead analysis schedules is a test of the control objective
a. Accuracy.
b. Accounting.
c. Completeness.
d. Validity.
245. In the personnel and payroll cycle, of the order of activities listed, which is the
best order of a typical sequence o activities?
a. Attendance and work, payroll accounting, cash disbursement, payroll distribution
b. Personnel hiring, labor relations attendance and work, payroll accounting.
c. Personnel hiring, attendance and work, payroll distribution, payroll accounting.
d. Labor relations, personnel hiring, payroll distribution, payroll accounting.
246. An internal control questionnaire for payroll processing environment objective

would not include the question
a. Are payroll checks signed by persons who do not prepare checks or accounting
records?
b. Is there a timekeeping department independent of the payroll department?
c. Is a time clock or other electromechanical system used?
d. Are payroll department personnel related in their duties?
247. The reference files in a personnel and payroll data base would not include
a. Deduction table.
b. Payroll master.
c. Compensation table.
d. Employee earning record.
248. Error-checking procedures to prevent errors or irregularities would typically not

include
a. Payroll bank account reconciliation.
b. Periodic rechecking of wage rate authorization.
c. Observing employee activities
d. Periodic comparison of payroll to the personnel files for terminated employees
not deleted.
249. The most common control deficiency in the personnel and payroll cycle is
a. Attitude of management toward control.
b. Inadequate segregation of duties.
c. Unlimited access to payroll system.
d. Little comparison of personnel and payroll records.
Purchases and Cash Disbursements
250. The major balance sheet account in the Acquisition and Payment cycle is
a. Accounts payable.
b. Purchases.
c. Merchandise inventory.
d. Common stock.
251. A request by an authorized employee for goods or services is made on the

a. Purchase order.
b. Purchase requisition.
c. Debit memo.
d. Acquisition transaction file.
252. The receipt of goods and services in the normal course of business represent the
date clients normally recognize
a. Income.
b. The liability.
c. Warranty assets.
d. Expenses.
253. A computer file where, for a purchase of inventory, the operator would enter each
product number and cost, the amount of purchase, vendor account number, and date
payment is due
a. Cash disbursements transactions file.
b. Accounts payable master life.
c. Acquisition transactions file.
d. Purchase requisition.
254. A document indicating a reduction in the amount owed to a vendor because of
returned goods is a
a. Debit memo.
b. Credit memo.
c. Receiving room report.
d. Shipping room report.
255. The document which specifies the amount of money owed to the vendor for an
acquisition is the
a. Receiving report.
b. Purchase order.
c. Vendor’s invoice.
d. Accounts payable trial balance.
256. A file for recording individual acquisitions, cash disbursements and acquisition
returns and allowances for each vendor is the
a. Accounts payable master file.
b. Disbursements transactions file.
c. Acquisitions transactions file.
d. Summary acquisitions report.
257. Many companies do not maintain an accounts payable master file by vendor.
These companies pay on the basis of
a. Vendor’s monthly statements.
b. Individual vendor’s invoices.
c. The accounts payable account in the general ledger.
d. Dunning letters.
258. The client’s accounts payable master file should be the same as the vendor’s
statement, except for
a. Disputed amounts.
b. Timing differences.
d. None of the above.
259. Proper authorization for acquisitions ensures that client will not
a. Be overbilled by vendor.
b. Run out of stock before the next shipment arrives.
c. Purchase excessive or unnecessary items.
260. The purchase order, usually in writing, is a legal document that is

a. A binding agreement between client and vendor.
b. An offer to buy.
c. Not enforceable if it is not in writing.
d. An acceptance of a vendor’s catalog offer to sell.
261. The accounts payable department usually has responsibility for verifying the
propriety of acquisitions by comparing the details on the
a. Vendor’s invoice and the purchase acquisition.
b. Vendor’s invoice and the receiving report.
c. Purchase requisition, purchase order, and receiving report.
d. Purchase order, receiving report, and vendor’s invoice.
262. The personnel in the Receiving Department should

a. Be supervised by the head of the Storeroom, since it is the storeroom personnel
who are responsible for the physical control of goods.
b. Be supervised by the Accounting Department, since it is the accounting personnel
who are responsible for the accuracy of the records about the goods.
c. Be independent of both the storeroom and accounting functions.
d. Be supervised by the Shipping Department since the receiving docks and the
shipping docks are in close proximity.
263. An important control in the accounts payable and EDP departments is to require
that those personnel who record acquisitions do not have access to
a. Lists of vendor’s names and addresses.
b. Cash, marketable securities, and other assets.
c. Vendor’s price lists.
d. The accounts payable master file.
264. When processing and recording cash disbursements, it is important to have a

method of cancelling the supporting documents to prevent their reuse as support for
another check at a later time. A common method is to
a. Shared the documents so they can’t be reused.
b. Transfer possession of the documents to a bank vault such as a safety deposit box.
c. Move the documents to a permanent off-site facility such as a warehouse.
d. Write the check number on the supporting documents.
265. Which of these functions is not a test of acquisitions?

a. Processing purchase orders.
b. Receiving goods and services.
c. Recognizing the liability.
d. Processing cash disbursements.
266. The auditor’s internal control objective to determine that “recorded acquisitions
are for goods and services received” satisfies the objective of
a. Validity.
b. Authorization.
c. Completeness.
d. Valuation.
267. The internal control objective to determine that “existing acquisition transactions
are recorded” satisfies the objective of
a. Validity.
b. Authorization.
c. Completeness.
d. Valuation.
268. The internal control which requires the “cancellation of documents to prevent
their reuse” satisfies the objective of
a. Validity.
b. Authorization.
c. Completeness.
d. Valuation.
269. The internal control which requires that “purchase orders, receiving reports, and
vouchers are prenumbered and accounted for” satisfies the objective of
a. Validity.
b. Authorization.
c. Completeness.
d. Valuation.
270. The internal control which requires that “batch totals are compared with computer
summary reports” satisfies the objective of
a. Validity.
b. Authorization.
c. Completeness.
d. Valuation.
271. The substantive test which requires the auditor to “compare recorded transactions
in the acquisitions journal with the vendor’s invoice, receiving report, and other
supporting documentation” satisfies the objective of
a. Validity.
b. Authorization.
c. Completeness.
d. Valuation.
272. The substantive test which requires the auditor to “trace from a file of receiving
reports to the acquisitions journal” satisfies the objective of
a. Validity.
b. Authorization.
c. Completeness.
d. Valuation.
273. Internal controls which are likely to prevent the client from including as a
business expense those transactions that primarily benefit management or other
employees rather than the entity being audited satisfy the control objective that
a. Recorded acquisitions are for goods and services received.
b. Existing acquisitions are recorded.
c. Acquisitions are correctly valued.
d. Acquisitions are correctly classified.
274. Failure to record the acquisition of goods received and services received directly
affects the balance in
a. Inventory.
b. Property, plant, and equipment.
c. Accounts payable.
d. Capital.
275. Since the audit accounts payable generally takes a considerable amount of audit
time, an effective internal control structure, property tested, can significantly reduce audit
costs by reducing
a. Tests of controls.
b. Tests of transactions.
c. Tests of details of balances.
d. Analytical procedures.
276. If the auditor believes that the permanent assets are correctly valued in the books
of original entry, it is acceptable, in this area, to
a. Eliminate tests of controls.
b. Vouch fewer current period acquisitions.
c. Decrease the tests of transactions.
d. Eliminate analytical procedures.
277. When a client uses a perpetual inventory records, the tests of details of inventory
can also be significantly reduced if the auditor believes the perpetuals are accurate. The
controls over the acquisitions included in the perpetuals are normally testes as a part of
the
a. Test of controls.
c. Test of details of balances.
278. Although all account are affected to some degree by effective controls over
classification, one of the areas least affected is
a. Current period acquisitions of permanent assets.
b. Repairs and maintenance expense.
c. Leaseholds.
d. Cash.
279. Once the auditor has decided on the procedures, the acquisitions tests and the cash
disbursements tests are typically performed
a. Concurrently.
b. Sequentially.
c. Independently.
d. Separately.
280. The accounts payable account includes obligations for the acquisition of
a. Raw materials.
b. Equipment.
c. Utilities.
281. The internal control which requires “ adequate segregation of duties between
accounts payable and custody of signed checks” satisfies the objective of
a. Validity.
b. Completeness.
c. Valuation.
d. Posting and summarization.
282. The internal control which requires “examination of supporting documentation

before signing of checks by an authorized person” satisfies the objective of
a. Validity.
b. Completeness.
c. Valuation.
283. The internal control which requires that “checks are prenumbered and accounted
for” satisfies the objective of
a. Validity.
b. Completeness.
c. Valuation.
284. The internal control which requires a “monthly preparation of a bank

reconciliation by an independent person” satisfies the objective of
a. Validity.
b. Completeness.
c. Valuation.
285. The test of transactions which requires.” Trace the cancelled check to the related
acquisitions journal entry and examine for payee name and amount” satisfies the
objective of
a. Validity.
b. Completeness.
c. Valuation.
286. The test of transactions which requires “reconcile recorded cash disbursements
with the cash disbursements on the bank statement” satisfies the objective of
a. Validity.
b. Completeness.
c. Valuation.
287. The test of transactions which requires “recomputed cash discounts” satisfies the
objective of
a. A. Validity.
b. Completeness.
c. Valuation.
288. The test of transactions which requires “test clerical accuracy by footing journals
and tracing postings to general ledger and accounts payable master file “satisfies the
objectives of
a. Validity.
b. Completeness.
c. Valuation.
289. If an obligation includes the payment of interest, it would be incorrect to classify

it as
a. Note payable.
b. Account payable.
c. Contract payable.
d. Mortgage payable.
290. Comparing expenses to prior years is an effective analytical procedure for
accounts payable because expenses from year to year are
a. Relatively stable.
b. Erratic.
c. Variable.
d. Dynamic.
291. The analytical procedure which requires the auditor to “review the list of accounts
payable for unusual or nonvendor payables” would have the best chance of discovering
which possible error?
a. Misstatement of accounts payable and expenses.
b. Classification error for non-trade liabilities.
c. Unrecorded accounts or misstatements.
d. Invalid accounts or misstatements.
292. The overall objective in the audit of accounts payable is to determine whether
accounts payable
a. Is fairly stated and properly disclosed.
b. Is overstated.
c. Is understated.
d. In accurately stated.
293. The main focus taken by the auditor in verifying liability balances is on the
discovery of
a. Understated liabilities.
b. Overstated liabilities.
c. Understated of omitted liabilities.
d. Overstated or extraneous liabilities.
294. Which of the following statements is not true?

a. The ownership objective is an important part of verifying assets but not liabilities.
b. In auditing liabilities, the emphasis is on the search for understatements rather
than overstatements.
c. Because of the emphasis on understatements in liability accounts, out-of-period
liability tests are important for accounts payable.
d. The success of the auditor’s search for unrecorded accounts payable is not
dependent upon the materiality of the potential balance in the account.
295. The purpose of the audit procedure to “examine underlying documentation for
subsequent cash disbursements” is to
a. Uncover liabilities on the balance sheet which should not have been recorded until
a subsequent period.
b. Find the documentation relating to a cash disbursement.
c. Uncover payments made in a subsequent accounting period that represent
liabilities at the balance sheet date.
d. Uncover cash disbursements recorded in a subsequent accounting period which
should be recorded in this period.
296. The purpose of the audit procedure to “trace receiving reports issued before year-
end to related vendors’ invoices” is to determine that all
a. Merchandise received is included in accounts payable.
b. Merchandise received is included in inventory.
c. Merchandise was received.
d. Invoices have been paid.
297. The test of details of balances procedure to “foot the accounts payable list “
satisfies the auditor objective of
a. Validity.
b. Completeness.
c. Classification.
d. Mechanical accuracy.
298. The test of details of balances procedures to “trace from account payable list to
vendors’ invoices and statements” satisfies the objective of
a. Validity.
b. Completeness.
c. Classification.
299. The test o details of balances procedure to “perform out-of-period liability tests”
satisfies the objective of
a. Validity.
b. Completeness.
c. Classification.
300. The test of details of balances procedure to “review the list accounts payable list
and master file for related parties, notes, or other interest bearing liabilities” satisfies the
objective of
a. Validity.
b. Completeness.
c. Classification.
301. Sending confirmations to active vendors for which a balance has not been
included in the accounts payable list is referred to as
a. Positive confirmations.
b. Negative confirmations.
c. Zero-balance confirmations.
d. Omitted confirmations.
302. With one of the following procedures, it would not be appropriate to examine
supporting documentation as a test of overstatement of accounts payable
a. Send confirmations to vendors with which the client does business.
b. Examine underlying documents for subsequent cash disbursements.
c. Examine underlying documentation for bill paid several weeks after the year end.
d. Trace receiving reports issued after year-end to related invoices.
303. In determining that the accounts payable cutoff is correct it is essential that the
tests be coordinated with the
a. Confirmation of payables.
b. Tests of long-term liabilities.
c. Observation of inventory.
d. Cash count.
304. During the physical observation of the inventory, the auditor should review the
procedures in the receiving department to determine that all inventory receiving
department to determine that all inventory received was counted, and the auditors should
record in the working papers the last receiving report number included in the physical
count. During the year-end filed work, the auditor should then test the accounting records
for
a. Completeness.
b. Cutoff.
c. Classification.
d. Calibration.
305. The mailing of disbursement checks and remittance advises should be controlled
by the employee who
a. Signed the checks last.
b. Approved the voucher for payment.
c. Matched the receiving reports, purchase orders, and vendor’s invoices.
d. Verified the mathematical accuracy of the vouchers and remittance advises.
306. For effective internal control purposes, the vouchers payable department generally
should
a. Stamp, perforate, or otherwise cancel supporting documentation after payment is
mailed.
b. Ascertain that each requisition is approved as to price, quantity, and quality by a
authorized employee.
c. Obliterate the quantity ordered on the receiving department copy of the purchase
order.
d. Establish the agreement of the vendor’s invoice with the receiving report and
purchase order.
307. For effective internal control, the accounts payable department should compare
the information on cash vendor’s invoice with the
a. Receiving report and the purchase order.
b. Receiving report and the voucher.
c. Vendor’s packing slip and the purchase order.
d. Vendor’s packing slip and the voucher.
308. An auditor’s test of controls over the issuance of raw materials to production
would most likely include
a. Reconciling raw materials and work in process perpetual inventory records to
general ledger balances.
b. Inquiring of the custodian about the procedures followed when defective materials
are received from vendors.
c. Observing that raw materials are stored in secure areas and that storeroom
security is supervised by a responsible individual.
d. Examining material requisitions and performing client controls designed to
process and record issuances.
309. Which of the following is the most effective control procedure to detect vouchers
that were prepared for the payment of goods that were not received?
a. Custody of work in process and of finished goods is properly maintained.
b. Production orders are prenumbered and signed by a supervisor.
c. Raw materials purchases are authorized by the purchasing department.
d. Independent internal verification of activity reports is established.
310. The objectives of internal control for a production cycle are to provide assurance
that transactions are properly executed and recorded, and that
a. Custody of work in process and of finished goods in properly maintained.
b. Production orders are prenumbered and signed by a supervisor.
c. Raw materials purchases are authorized by the purchasing department.
d. Independent internal verification of activity reports is established.
311. An auditor performs attest 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. Cancelled checks.
d. Receiving reports.
312. Internal control is strengthened when the quantity o merchandise ordered is

omitted from the copy of the purchase order send to the
a. Department that initiated the requisition.
b. Receiving department.
c. Purchasing agent.
d. Accounts payable department.
313. The auditor will most likely perform extensive tests for possible understatement
of
a. Revenues.
b. Assets.
c. Liabilities.
d. Capital.
314. An auditor usually examines receiving reports to support entries n the

a. Voucher register and sales returns journal.
b. Sales journal and sales returns journal.
c. Voucher register and sales journal.
d. Check register and sales journal.
315. An auditor compares information on cancelled checks with information contained

in the cash disbursement journal. The objective of this test is to determine that
a. Recorded cash disbursement transactions are properly authorized.
b. Proper cash purchase discounts have been recorded.
c. Cash disbursements are for goods and services actually received.
d. No discrepancies exist between the data on the checks and the data in the journal.
316. An internal control questionnaire indicates that an approved receiving report is

required to accompany every check request for payment of merchandise. Which of the
following procedures provides the greatest assurance that this control is operating
effectively?
a. Select and examine receiving reports and ascertain that the related canceled
checks are dated no earlier than the receiving reports.
b. Select and examine receiving reports and ascertain that the related canceled
checks are dated no later than the receiving reports.
c. Select and examine cancelled checks and ascertain that the related receiving
reports are dated no earlier than the checks.
d. Select and examine cancelled checks and ascertain that the related receiving
reports are dated not later than the checks.
317. An important purpose of the auditor’s review of the client’s purchasing system
should be determine the effectiveness of the procedures to protect against
a. Improper materials handling.
b. Unauthorized persons issuing purchase orders.
c. Mispostings of purchase returns.
d. Excessive shrinkage or spoilage.
318. A good system of internal accounting control over purchase will give proper
evaluation to the time for ordering merchandise. When making this evaluation the
purchasing company should give primary consideration to
a. The price differences that exist between various vendors who can supply the
merchandise at the required time.
b. The borrowing cost of money (interest) which the company must incur as a
consequence of acquiring the merchandise.
c. The trade-off between the cost of owning and storing excess merchandise and the
risk of loss by not having merchandise on hand.
d. The flow of funds within the company which indicates when money is available
to pay for merchandise.
319. A client’s purchasing system ends with the assumption of a liability and the
eventual payment of the liability. Which of the following best describes the auditor’s
primary concern with respect to liabilities resulting from the purchasing system?
a. Accounts payable are not materially understated.
b. Authority to incur liabilities is restricted to one designated person.
c. Acquisition of materials is not made form one vendor or one group of vendors.
d. Commitments for all purchases are made only after established competitive
bidding procedures are followed.
320. A client’s materials-purchasing cycle begins with requisitions user departments

and ends with the receipt of materials and the recognition of a liability. An auditor’s
primary objective in reviewing this cycle is to
a. Evaluate the reliability of information generated as a result of the purchasing
process.
b. Investigate the physical handling and recording of unusual acquisitions of
materials.
c. Consider the need to be on hand for the annual physical count if this system is not
functioning property.
d. Ascertain that materials said to be ordered, received and paid for are on hand.
321. Operating control of the check-signing machine normally should be the

responsibility of the
a. General accounting function.
b. Treasury function.
c. Legal counsel.
d. Internal audit function.
322. To strengthen the system of internal accounting control over the purchase of
merchandise, a company’s receiving department should
a. Accept merchandise only if a purchase order or approval granted by the
purchasing department is on hand.
b. Accept and count all merchandise received from the usual company vendors.
c. Rely on shipping documents for the preparation of receiving reports.
d. Be responsible for the physical handling of merchandise but not the preparation of
receiving reports.
323. To avoid entail errors and irregularities a well-designated system of internal
accounting control in the account payable area should include a separation of which of
the following functions?
a. Cash disbursements and invoice verification.
b. Invoice verification and merchandise ordering.
c. Physical handling of merchandise received and preparation of receiving reports.
d. Check signing and cancellation of payment documentation.
324. With respect to a small company’s system of purchasing supplies, an auditor’s

primary concern should be obtain satisfaction that supplies ordered and paid for have
been
a. Requested by and approved by authorized individuals who have no incompatible
duties.
b. Received, counted, and checked to quantities and amounts on purchase orders and
invoices.
c. Properly recorded as assets and systematically amortized over the estimated
useful life of the supplies.
d. Used in the course of business and solely for business purposes during the year
under audit.
325. Which of the following is an effective internal accounting control over cash
payments?
a. Signed checks should be mailed under the supervision of the check signer.
b. Spoiled checks that have been voided should be disposed of immediately.
c. Checks should be prepared only by persons responsible for cash receipts and cash
disbursements.
d. A check-signing machine with two signatures should be utilized.
326. For good internal control, the person who should sign checks is the
a. Person preparing the checks.
b. Purchasing agent.
c. Accounts payable clerk.
d. Treasurer.
327. An effective internal accounting control measure that protects against the
preparation of improper or inaccurate disbursements would be to require that all checks
be
a. Signed by an officer after necessary supporting evidence has been examined.
b. Reviewed by the treasurer before mailing.
c. Sequentially numbered and accounted for by internal auditors.
d. Perforated or otherwise effectively canceled when they are returned with the bank
statement.
328. Matching the supplier’s invoice, the purchase order, and the receiving report
normally should be the responsibility of the
a. Warehouse receiving function.
b. Purchasing function.
c. General accounting function.
d. Treasury function.
329. Which of the following internal accounting control procedures is effective in

preventing duplicate payment of vendors’ invoices?
a. The invoices should be stamped, perforated, or otherwise effectively canceled
before submission for approval of the voucher.
b. Unused voucher forms should be prenumbered and accounted for.
c. Canceled checks should be sent to persons other than the cashier or accounting
department personnel.
d. Properly authorized and approved vouchers with appropriate documentation
should be the basis for check preparation.
330. A CPA learns that his client has paid a vendor twice for this same shipment, once
based upon the original invoice and once based upon the monthly statement. A control
procedure that should have prevented this duplicate payment is
a. Attachment of the receiving report to the disbursement report.
b. Prenumbering of disbursement vouchers.
c. Use of a limit of reasonableness test.
d. Prenumbering of receiving reports.
331. Bell’s account-payable clerk has a brother who is one of Bell’s vendors. The
brother will often invoice Bell twice for the same delivery. The accounts-payable clerk
removes the receiving report for the first invoice from the paid-voucher file and uses it
for support of payment for the duplicate invoice. The most effective procedure for
preventing this activity is to
a. Use prenumbered receiving reports.
b. Mail signed checks without allowing them to be returned to the accounts-payable
clerk.
c. Cancel vouchers and supporting papers when payment is made.
d. Use dual signatures.
332. Purchase cut-off procedures should be designed to test that merchandise is

included in the inventory of the client company, if the company
a. Has paid for the merchandise.
b. Has physical possession of the merchandise.
c. Holds legal title in the merchandise.
d. Holds the shipping documents for the merchandise issued in the company’s name.
333. Auditor confirmation of accounts payable balances at the balance sheet date may
be unnecessary because
a. This is a duplication of cutoff tests.
b. Accounts payable balances at the balance sheet date may not be paid before the
audit is completed.
c. Correspondence with the audit client’s attorney will reveal all legal action by
vendors for nonpayment.
d. There is likely to be other reliable external evidence available to support the
balances.
334. Propex Corporation uses a voucher register and does not record invoices in a
subsidiary ledger. Propex will probably benefit most from the additional cost of
maintaining an accounts payable subsidiary ledger if
a. There are usually invoices in an unmatched invoice file.
b. Vendor’s requests for confirmation of receivables often go unanswered for several
months until paid invoices can be reviewed.
c. Partial payments to vendors are continuously made in the ordinary course of
business.
d. It is difficult to reconcile vendors’ monthly statements.
335. If a client is using a voucher system, the auditor who is examining accounts
payable records should obtain a schedule of all unpaid vouchers at the balance sheet date
and
a. Retrace vouchers register items to the source indicated in the reference column of
the register.
b. Vouch items in the voucher register and examine related canceled checks.
c. Confirm items on the schedule of unpaid vouches and obtain satisfaction for all
confirmation exceptions.
d. Compare the items on the schedule with open vouchers and uncanceled entries in
the voucher register and account for unmatched items.
336. Under which of the following circumstances would it be advisable for the auditor
to confirm accounts payable with credits?
a. Internal accounting control over accounts payable is adequate and there is
sufficient evidence on hand to minimize the risk of a material misstatement.
b. Confirmation response is expected to be favorable and account payable balances
are of immaterial amounts.
c. Credit statements are not available and internal accounting control over account
payable is unsatisfactory.
d. The majority of accounts payable balances are with associated companies.
337. Which of the following best explains why accounts payable confirmation
procedures are not always used?
a. Inclusion of accounts payable balances on the liability certificate completed by
the client allows the auditor to refrain from using confirmation procedures.
b. Accounts payable generally are insignificant and can be audited by utilizing
analytic review procedures.
c. The auditor may feel certain that the creditors will press for payment.
d. Reliable externally generated evidence supporting accounts payable balance is
generally available for audit inspection on the client’s premises.
338. Which of the following procedures relating to the examination of accounts

payable would the auditor delegate entirely to the client’s employees?
a. Test footings in the accounts payable ledger.
b. Reconcile unpaid invoices to vendors’ statements.
c. Prepare a schedule of accounts payable.
d. Mail confirmations for selected account balances.
339. An examination of the balance in the accounts payable account is ordinarily not
designated to
a. Detect accounts payable were properly authorized.
b. Verify that accounts payable were properly authorized.
c. Ascertain the reasonableness of recorded liabilities.
d. Determine that all existing liabilities at the balance sheet date have been recorded.
340. An auditor is planning the study and evaluation of internal control for purchasing
and disbursements procedures. In planning this study and evaluation the auditor will be
least influenced by
a. The availability of a company manual describing purchasing and disbursement
procedures.
b. The scope and result of audit work by the company’s internal auditor.
c. The existence within the purchasing and disbursements area of internal control
strengths that offset weaknesses.
d. The strength and weakness of internal control in other areas, e.g., sales and
accounts receivable.
341. Which of the following is a primary function of the purchasing department?

a. Authorizing the acquisition of goods.
b. Ensuring the acquisition of goods or a specified quality.
c. Verifying the propriety of goods acquired.
d. Reducing expenditures for goods acquired.
342. When title to merchandise in transit has passed to the audit client, the auditor
engaged in the performance of a purchase cutoff will encounter the greatest difficulty in
gaining assurance with respect to the
a. Quantity.
b. Quality.
c. Price.
d. Terms.
343. A basic characteristic of the audit of the inventory and warehousing cycle for a
manufacturing company is the close relationship to other transaction cycles in the
organization. Which of the following cycles in the organization. Which of the following
cycles does not have a direct tie-in to the inventory and warehousing cycle?
a. Acquisition and payment cycle.
b. Payroll and personnel cycle.
c. Sales and collection cycle.
d. Capital acquisition cycle.
344. The inventory and warehousing cycle can be thought of as comprising two
separate but closely related system, one involving the actual physical flow of goods, and
the other the
a. Internal control over those goods.
b. Related costs.
c. Storing of the goods.
d. Prevention of waste, obsolescence, and theft.
345. The controls over purchase requisitions and the related purchase orders are
evaluated and tested as part of the
a. Inventory and warehousing cycle.
b. Acquisitions and payments cycle.
c. Payroll and personnel cycle.
d. Capital acquisitions cycle.
346. After inspections of new material by the receiving department, the material is sent
to the storeroom and the receiving documents are typically sent to
a. Purchasing.
b. The storeroom.
c. Accounts payable.
347. In any company involved in manufacturing, an adequate cost accounting internal

control structure is necessary to indicate the relative profitability of the various products
for management planning and control and to
a. Determine variances from standards.
b. Determine variances from budgets.
c. Value inventories for financial statement purposes.
d. Value inventories for audit verification.
348. Master files, worksheets, and reports that accumulate material, labor, and
overhead as the costs are incurred are
a. Accounting systems.
b. Storeroom documents.
c. Finished goods inventory records.
d. Cost accounting records.
349. The main difference between the two types of cost systems is that
a. One accumulates costs by materials issued and the other by labor incurred.
b. One accumulates costs by individual jobs and other by particular processes.
c. One emphasizes costs accumulated in completed products and the other
emphasizes costs associated with work-is-process.
d. One emphasizes costs adding value to the product and the other emphasizes costs
incurred because of waste, scrap, and obsolescence.
350. As finished goods are completed by the production department and await
shipment, they are placed in the
a. Stockroom.
b. Storeroom.
c. Waiting room.
d. Shipping room.
351. Shipping of completed goods is an integral part of the

a. Acquisitions and payments cycle.
b. Inventory and warehousing cycle.
c. Sales and collections cycle.
d. Payroll and personnel cycle.
352. A well designed computerized system of perpetual inventory master file includes
a. Information about the units of inventory purchased, sold, and on hand.
b. Information about the unit costs of inventory purchased, sold, and on hand.
c. Information about the units and unit costs of inventory purchased, sold, and on
hand.
d. Information about the units of raw materials, work-in-process, and finished goods.
353. The overall objective in the audit of the inventory and warehousing cycle is to
determine that
a. Costs of goods sold and gross profit are correctly stated on the income statement.
b. Inventory items on the balance sheet are neither fraudulent nor materially in error.
c. Gross profit and inventory are fairly presented on the financial statements.
d. Inventory and cost of goods sold are fairly stated on the financial statements.
354. The auditor should be satisfied that acquisitions of new materials and
manufacturing costs are correctly stated as the completion of the
c. Acquisitions and payments cycle.
d. Cash cycle.
355. Finished goods perpetual inventory master files include the same type information
as raw materials perpetuals, but are considerably
a. More complex if costs are included along with units.
b. Simpler since materials, labor, and overhead have been combined into one total
value.
c. More complex because of the paper trail that is needed in addition to the computer
records.
d. Simpler because the cost accounting system is in effect and well defined.
356. When labor is a significant part of inventory, verifying the proper accounting of
these costs should be tested in the
d. Cash cycle.
357. Verification of the processing of goods and the storing of finished goods should
be tested in the
d. Cash cycle.
358. The auditor procedure of observing the client taking a physical inventory count
and testing the count is not sufficient to determine whether recorded inventory
a. Actually exists.
b. Was properly valued by client.
c. Is properly counted by client.
d. Was counted by client.
359. The costs used to value the physical inventory must be tested to determine
whether the client has correctly followed an inventory method that is in accordance with
GAAP and is consistent with previous years. The audit procedures used to verify these
costs are referred to as
a. Price tests.
b. Compilation tests.
c. Cost tests.
d. Consistency tests.
360. The auditor must verify whether the physical counts were correctly summarized,
the inventory quantities are prices were correctly extended, and the extended inventory
was correctly footed. These tests are called
a. Price tests.
b. Compilation tests.
c. Cost tests.
d. Mechanical tests.
361. The audit tests to verify that client is using a generally accepted inventory method
and to verify that physical counts were correctly summarized are performed as part of the
a. Acquisitions and payments cycle.
c. Sales and collection cycle.
d. Inventory and warehousing cycle.
362. Almost all companies need physical controls over their assets to prevent loss.
Which of the following is not an example of such a control?
a. Perpetual inventory master files.
b. Segregated, limited-access storage areas.
c. Custody of assets assigned to specific responsible individuals.
d. Approved pre-numbered documents for authorizing movement of inventory.
363. Perpetual inventory master files provide a record

a. Of items on hand.
b. Of the use of raw materials and the sale of finished goods.
c. That can be used to pinpoint responsibility for custody.
d. For all three of the above.
364. Which of the following is not an aspect of concern when auditing the cost
accounting system?
a. Physical controls over inventory.
b. Safeguarding the raw materials from point of receipt to the store room.
c. Documents and records for transferring inventory.
d. Unit costs records.
365. The auditor’s test of the adequacy of the physical controls over raw materials,
work in process, and finished goods must be restricted to
a. Observation and inquiry.
b. Documentation and observation.
c. Documentation and confirmation.
d. Documentation and inquiry.
366. Tests of the perpetual inventory master files for the purpose of reducing the tests
of physical inventory changing their timing are done through the use of
a. Observation.
b. Documentation.
c. Inquiry.
d. Confirmation.
367. A major difficulty in the verification of inventory cost records is determining the
reasonableness of
a. Direct labor’s hourly rate.
b. Raw materials per unit cost.
c. Cost allocations.
368. When auditing the inventory and warehousing cycle, the use of analytical
procedure is
a. As important as their use is any other cycle.
b. More important than for any other cycle.
c. Less important than for any other cycle.
d. Not important for this cycle.
369. Which one of the following analytical procedures would be most helpful in
alerting the auditor to the possibility of obsolete inventory?
a. Compare gross margin percentage with previous years.
b. Compare unit costs of inventory with previous years.
c. Compare inventory turnover costs with previous years.
d. Compare current year manufacturing costs with previous years.
370. Test result of which other cycle, in addition to the tests results of inventory and
warehousing, will affect the tests of details of balances for inventory?
a. The sales cycle.
b. The acquisition and payments cycle.
c. The payroll and personnel cycle.
371. The inventory turnover analysis is useful to the auditor because it may detect
a. Inadequacies in inventory pricing.
b. Methods of avoiding cyclical holding costs.
c. The optimum automatic reorder points.
d. The existence of obsolete merchandise.
372. In the case of inventories which in the ordinary course of business are in the
hands of public warehouses or other outside custodians, the auditor’s responsibility is to
a. Observe client count the inventory.
b. Make test counts of the inventory.
c. Get direct confirmation in writing from the custodian.
d. Observe the custodian count the inventory.
373. The requirements imposed by SAS 1 regarding the taking inventory make a
distinction between those of auditor and client.
a. Client has the responsibility for setting up the procedures for taking an accurate
physical inventory and actually making and recording the counts.
b. Auditor has the responsibility for setting up the procedures for taking an accurate
physical inventory and actually making and recording the counts.
c. Auditor has the responsibility for setting up the procedures and client has the
responsibility for following the procedures when actually making and recording
the counts.
d. Client has the responsibility for setting up the procedures and auditor has the
responsibility for making and recording the counts.
374. There must be a periodic physical count by client of the inventory items on hand
a. Only if client used the LIFO method.
b. If client used either the LIFO or FIFO method.
c. If client uses a lower-of-cost-or-market method.
d. Regardless of the client’s inventory record-keeping method.
375. When a physical count of inventory is permitted at an interim date, the auditor
observes it at that time, and also tests the perpetuals 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.
376. When there are no perpetual inventory files and the inventory is material,
a. The auditor is relieved of responsibility for observing inventory counts, but still
must do test counts.
b. A complete physical inventory must be taken by client near year-end.
c. An audit cannot be performed so the auditor must issue a disclaimer.
d. The auditor will have to perform the inventory count and valuation instead of
client.
377. Sample size in physical observation of inventory is

a. Determined using attributes sampling.
b. Determined using variables sampling.
c. Determined using peso-unit sampling.
d. Impossible to specify in units because the emphasis is on observing client’s
procedures.
378. A useful starting point for becoming familiar with the client’s inventory is for the
auditor to
a. Read the PICPA’s Industry Audit Guide.
b. Review accounting theory covering special problems, such as gas and oil
accounting, or lease-purchase agreements.
c. Read client’s Accounting Manual.
d. Tour the client’s facility.
379. 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.
a. Inventory as recorded on tags is valid. (Validity).
b. Existing inventory is counted and tagged. (Completeness).
c. Inventory is counted accurately. (Accuracy).
d. Inventory is classified correctly. (Classification)
380. A common inventory observation procedure is to inquire as to inventory in other

locations. The audit objective being achieved by this procedure is
a. Inventory as recorded is valid.
b. Existing inventory is counted and tagged.
c. Inventory is counted accurately.
d. Inventory is classified correctly.
381. A common inventory observation procedure is to record in the working papers for
subsequent follow-up the last shipping document number used at year end. The audit
objective being achieved by this procedure is
a. Inventory as recorded is valid.
b. Existing inventory is counted and tagged.
c. Information is obtained to make sure sales and inventory purchases are recorded
in the proper period.
d. Tags are accounted for to make sure none is missing.
382. Restrictions imposed by a client prohibit the observation of physical inventories,

which are 35% of all assets. Alternative procedures cannot be applied, although the
auditor was able to examine satisfactory evidence for all other items in the statements.
The auditor should issue a (an)
a. “Except for” qualified opinion.
b. Disclaimer of opinion.
c. Unqualified opinion with a separate explanatory paragraph.
d. Unqualified opinion with an explanation in the scope paragraph.
383. Independent internal verification of inventory occurs when employees who

a. Issue raw materials obtain material requisitions for each issue and prepare daily
total of material issued.
b. Compare the records or have custody of the inventory.
c. Obtain receipts for the transfer of completed work to finished goods prepare a
completed production report.
d. Are independent of issuing production orders update records from completed job
cost sheets and production cost reports on a timely basis.
384. After accounting for a sequence of inventory tags, an auditor traces a sample of
tags to the physical inventory listing to obtain evidence that all items
a. Included in the listing have been counted.
b. Represented by inventory tags are included in the listing.
c. Included in the listing are represented by inventory tags.
d. Represented by inventory tags are bona fide.
385. When auditing merchandise inventory at year-end, the auditor performs a

purchase cutoff test to obtain evidence that
a. All goods purchased before year end are received before the physical inventory
count.
b. No goods on consignment for customers are included in the inventory count.
c. No goods observed during the physical count are pledged or sold.
d. All goods owned at year end are included in the inventory balance.
386. Which of the following is not one of the independent auditor’s objectives
regarding the examination of inventories?
a. Verifying that inventory counted is owned by the client.
b. Verifying that the client has used proper inventory pricing.
c. Ascertaining the physical quantities of inventory on hand.
d. Verifying that all inventory owned by the client is on hand at the time of the
count.
387. The auditor tests the quantity of materials charged to work in process by tracing
these quantities to
a. Cost ledgers.
b. Perpetual inventory records.
c. Receiving reports.
d. Material requisitions.
388. Which of the following situations would most likely require special audit
planning by the auditor?
a. Some items of factory and office equipment do not bear identification numbers.
b. Depreciation methods used on the client’s tax return differ from those used on the
books.
c. Assets costing less than P500 are expensed even though the expected life exceeds
one year.
d. Inventory is comprised of precious stones.
389. An auditor has accounted for a sequence of inventory tags and is now going to
trace information on a representative number of tags to the physical inventory sheets. The
purpose of this procedure is to obtain assurance that
a. The final inventory is valued at cost.
b. All inventory represented by an inventory tag is listed on the inventory sheets.
c. All inventory represented by an inventory tag is bona fide.
d. Inventory sheets do not include untagged inventory items.
390. When auditing a public warehouse, which of the following is the most important
audit procedure with respect to disclosing unrecorded liabilities?
a. Confirmation of negotiable receipts with holders.
b. Review of outstanding receipts.
c. Inspection of receiving and issuing procedures.
d. Observation of inventory.
391. 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. Purchases returned to vendors.
b. Sales returns received.
c. Sales discounts allowed.
d. Cash purchases.
392. A CPA observes his client’s physical inventory count on December 31, 19X1.
There are eight inventory-taking teams, and a tag system is used. The CPA’s observation
normally may be expected to result in detection in which of the following inventory
errors:
a. The inventory takes forgot to count all the items in one room of the warehouse.
b. An error is made in the count of one inventory item.
c. Some of the items included in the inventory had been received on consignment.
d. The inventory omits items on consignment to wholesalers.
393. When an outside specialist has assumed full responsibility for taking the client’s
physical inventory, reliance on the specialist’s report is acceptable if
a. The auditor is satisfied through application of appropriate procedures as to the
reputation and competence of the specialist.
b. Circumstances made it impracticable or impossible for the auditor either to do the
work personally or observe the work done by the inventory firm.
c. The auditor conducted the same audit tests and procedures as would have been
applicable if the client’s employees took the physical inventory.
d. The auditor’s report contains reference to the assumption of full responsibility.
394. The auditor tests the quantity of material charged to work-in-process by tracing
these quantities to
a. Cost ledgers.
b. Perpetual inventory records.
c. Receiving reports.
d. Material requisitions.
395. Stone was asked to perform the first audit of a wholesale business that does not
maintain perpetual inventory records. Stone has observed the current inventory but has
not observed the physical inventory at the previous year-end date and concludes that the
opening inventory balance, which is not auditable, is a material factor in the
determination of cost of goods sold for the current year. Stone will probably
a. Decline the engagement.
b. Express an unqualified opinion on the balance sheet and income statement, except
for inventory.
c. Express an unqualified an opinion on the income statement.
d. Disclaim an opinion on the balance sheet and income statement.
396. The primary objective of a CPA’s observation of a client’s physical inventory

count is to
a. Discover whether a client has counted a particular inventory item or group of
items.
b. Obtain direct knowledge that the inventory exists and has been properly counted.
c. Provide an appraisal of the quality of the merchandise on hand on the day of the
physical count.
d. Allow the auditor to supervise the conduct of the count so as to obtain assurance
that inventory quantities are reasonably accurate.
397. Which of the following is an effective internal accounting control measure that
encourages receiving department personnel to count and inspect all merchandise
received?
a. Quantities ordered are excluded from the receiving department copy of the
purchase order.
b. Vouchers are prepared by accounts payable department personnel only after they
match item counts on the receiving report with the purchase order.
c. Receiving department personnel are expected to match and reconcile the receiving
report with the purchase order.
d. Internal auditors periodically examine, on a surprise basis, the receiving
department copies of receiving reports.
398. Quigley Corporation’s physical count of inventories was lower than the inventory
quantities shown in its perpetual records. This situation could be the result of the failure
to record
a. Sales.
b. Sales returns.
c. Purchased.
d. Purchase discounts.
399. The audit of year-end physical inventories should include steps to verify that the
client’s purchases and sales cutoffs were adequate. The audit step should be designed to
detect whether merchandise included in the physical count at year end was not recorded
as a
a. Sale in the subsequent period.
b. Purchase in the current period.
c. Sale in the current period.
d. Purchase return in the subsequent period.
400. 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 cut-off procedures.
c. Contractual commitments made by the purchasing department.
d. Purchase invoices received on or around year-end.
401. From which of the following evidence-gathering audit procedures would an

auditor obtain most assurance concerning the existence of inventories?
a. Observation of physical inventory counts.
b. Written inventory representations from management.
c. Confirmation of inventories in a public warehouse.
d. Auditor’s recomputation of inventory extensions.
402. When verifying debit to the perpetual inventory records of a non-manufacturing

company, an auditor would be most interested in examining a sample of purchase
a. Approvals.
b. Requisitions.
c. Invoices.
d. Orders.
403. Which of the following is the best audit procedure for the discovery of damaged
merchandise in a client’s ending inventory?
a. Compare the physicals quantities of slow-moving items with corresponding
quantities of the prior year.
b. Observe merchandise and raw materials during the client’s physical inventory
taking.
c. Review the management’s inventory representation letter for accuracy.
d. Tests overall fairness of inventory values by comparing the company’s turnover
ratio with the industry average.
404. Which of the following is an internal control weakness for a company whose
inventory of supplies consists of a large number of individual items?
a. Supplies of relatively little value are expensed when purchased.
b. The cycle basis is used for physical counts.
c. The storekeeper is responsible for maintenance of perpetual inventory records.
d. Perpetual inventory records are maintained only for items of significant value.
405. When an auditing a public warehouse, which of the following is the most
important audit procedure with respect to disclosing unrecorded liabilities?
a. Confirmation of negotiable receipts with holders.
b. Review of outstanding receipts.
c. Inspection of receiving and issuing procedures.
d. Observation of inventory.
406. An auditor has accounted for a sequence of inventory tags and is now going to
trace information on a representative number of tags to the physical inventory sheets. The
purpose of this procedure is to obtain assurance that
a. The final inventory is valued at cost.
b. All inventory represented by an inventory tag is listed on the inventory sheets.
c. All inventory represented by an inventory tag is bona fide.
d. Inventory sheet do not include untagged inventory items.
407. Tony Company, which has no perpetual inventory records, takes a monthly
physical inventory and reorders any item which is less than its reorder point. On February
5, 19X3, Tony ordered 5,000 units of item A. on February 6, 19X3, Tony received 5,000
units of item A which had been ordered on January 3, 19X3. To prevent this excess
ordering, Tony should
a. Keep an adequate record of open purchase orders and review it before ordering.
b. Use perpetual inventory records which indicate goods received issued, and
amounts on hand.
c. Are prenumbered purchase orders.
d. Prepare purchase orders only on the basis of purchase requisitions.
408. Detdet Manufacturing Corporation mass produces eight different products. The
controller who is interested in strengthening internal controls over the accounting for
materials used in production would be most likely to implement
a. An economic order quantity (EOQ) system.
b. A job order cost accounting system.
c. A perpetual inventory system.
d. A separation of duties among production personnel.
409. Karen Corporation has an inventory of parts consisting of thousands of different

items of small value individually, but significant in total. Karen could establish effective
internal accounting control over the parts by requiring
a. Approval of requisitions for inventory parts by a company officer.
b. Maintenance of inventory records for all parts included in the inventory.
c. Physical counts of the parts on a cycle basis rather than at year end.
d. Separation of the store-keeping function from the production and inventory
record-keeping functions.
410. Which one of the following procedures would not be appropriate for an auditor in
discharging his responsibilities concerning the client’s physical inventories?
a. Confirmations 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
peso amount of the inventory.
411. An auditor will usually trace the details of the test counts made during the
observation of the physical inventory taking got a final inventory schedule. This audit
procedure is undertaken to provide evidence that items physically present and observed
by the auditor at the time of the physical inventory count are
a. Owned by the client.
b. Not obsolete.
c. Physically present at the time of the preparation of the final inventory schedule.
d. Included in the final inventory schedule.
412. Gilbert Inc., a manufacturing company, has engaged a CPA to examine its
financial statements for the year ended June 30, 19X3. The CPA observed the physical-
inventory count at June 30, 19X3, but there was no physical inventory taken at June 30,
19X2. The CPA has nor been able to satisfy himself as to the value of the inventory at
June 30, 10X2. Assuming that there are no other exceptions, the CPA should
a. Issue an unqualified opinion of the financial statements taken as a whole but
clearly indicate in the scope paragraph of his auditor’s report the limitations in his
work.
b. Issue an unqualified opinion on the financial statements taken as a whole; no
mention of the scope limitation is necessary.
c. Disclaim an opinion on the statements of income and retained earnings but issue
an unqualified opinion on the balance sheet and the statement of changes in
financial position.
d. Disclaim an opinion on the statements of income, retained earnings, and changes
in financial position but issue an unqualified opinion on the balance sheet.
413. The Bettina Corporation uses prenumbered receiving reports which are released in
numerical order from a locked box. For two days before the physical count all receiving
reports are stamped “before inventory,” and for two days after the physical count all
receiving reports are stamped “after inventory”. The receiving department continues to
receive goods after the cutoff time while the physical count is in process. The least
efficient method for checking the accuracy of the cutoff is to
a. List the number of the last receiving report for items included in the physical-
inventory count.
b. Observe that the receiving clerk is stamping the receiving reports properly.
c. Test trace receiving reports issued before the last receiving report to the physical
items to see that they have been included in the physical count.
d. Test trace receiving reports issued after the last receiving report to the physical
items to see that they have not been included in the physical count.
414. A CPA’s client maintains perpetual inventory records. In the past, all inventory
items have been counted on a cycle basis at least once during the year. Physical count and
perpetual record differences have been minor. Now, the client wishes to minimize the
cost of physically counting the inventory items will not be counted during a given year.
For purposes of expressing an opinion on his client’s financial statement, the CPA will
accept the sampling method only if
a. The sampling method has statistical validity.
b. A stratified sampling plan is used.
c. The client is willing to accept an opinion qualification in the auditor’s report.
d. The client is willing to accept a scope qualification in the auditor’s report.
415. The transactions typically classified in the acquisition and expenditure cycle flow
a. Authorizing acquisition and vendor services.
b. Maintaining the inventory and fixed asset subsidiary records.
c. Delivering goods and services.
d. Accounting for cash disbursements.
416. The internal control questionnaire for purchases and accounts payable
authorization objective would not include the question
a. Are competitive bids received and reviewed for certain items?
b. Are vendors’ invoices matched against purchase orders and receiving reports?
c. Are all purchases routed through the purchasing department for approval?
d. Are invoices approved for payment by a responsible office?
417. The accounts payable department clerks file open vouchers in a tickler file by
a. Cash discount due date.
b. Voucher number.
c. Vendor name in alphabetical order.
d. Account code number.
418. The internal control questionnaire for the cash disbursement processing
completeness objective would include the following question
a. Are blank checks prenumbered and the numerical sequence checked?
b. Are bank accounts reconciled by personnel independent of cash custody or
record-keeping?
c. Is the distribution of charges double-checked periodically by an official?
d. Are invoices, receiving reports, and purchase orders reviewed by the check
signer?
419. Computer controls that might be found in an advanced on-line acquisition and
expenditure system would not include
a. A daily search of open data bases is made.
b. Each terminal performing all functions.
c. Transaction codes call up a full screen “form” on the terminal in same format as
the original document.
d. All input is immediately logged to provide restart processing should any terminal
become inoperative during processing.
420. The internal control objective for purchases would not include
a. Purchase orders are accurately prepared.
b. Recorded purchases are valid and documented.
c. Purchase transaction accounting is complete and proper.
d. Purchases are paid for within cash discount date.
421. The primary audit work at year-end for liabilities involves

a. Confirmation of outstanding liability accounts.
b. Actual balance of the subsidiary vendor ledger.
c. A search for unrecorded liabilities.
d. Substantive audit procedures.
422. When confirming accounts payable which of the following procedures would
reveal accounts that were entirely omitted?
a. Accounts with zero balances.
b. Accounts listed in the accounts payable subsidiary.
c. All recent suppliers of the client.
d. Amounts that are old and past due.
423. The verification of the recorded amounts in prepaid insurance and tests for
unrecorded insurance amounts can be best accomplished by
a. A schedule of the insurance account for the year.
b. Sending a confirmation letter.
c. Auditing prepaid insurance along with insurance expense.
d. Recalculation of the prepaid insurance account.
424. Production the fits created by a dishonest inspector who labels good production as
defective on scrap and then removes it could be prevented by all of the following except
a. Sound system of accounting controls.
b. Production quality and efficiency reports.
c. Control of scrap sales and reward operations.
d. Fraudulent understatement of inventories.
425. The problem recognition steps in assessing inventory records control risk is
concerned with
a. Auditor’s judgment on control strengths and weaknesses.
b. Evaluating information gathered on inventory records.
c. Errors and irregularities which could affect the financial statements.
d. Assertions expressed in financial statements.
426. Specific assertions typical of inventory and cost of sales accounts would not
include
a. Inventory perpetual records completely document the inventory owned.
b. Inventory includes goods taken in on consignment.
c. Inventory is accurately valued using an accepted cost flow method, adjusted to
lower of cost or market.
d. Adequate disclosure is made of major categories of inventory.
427. Observing the work habits of the inventory record-keeping department personnel
achieves the control objective
a. Environment.
b. Completeness.
c. Accuracy.
d. Accounting.
428. An audit program to determine whether obsolete or damaged goods should be

written down would not include
a. During the physical observation, be alert to notice damaged or scrap inventory.
b. Scan the perpetual records for slow-moving issue.
c. Compare the listing of slow-moving inventory from last year’s audit to the current
inventory compilation.
d. Compute the gross margin rate and compare to prior years.
429. The audit procedures relating to the inventory compilation schedule would not
include
a. Trace test counts to compilation.
b. Prices are vouched to invoices.
c. Valuation of inventory at market.
d. All calculations are incalculated.
AUDITED OF THE INVESTING AND FINANCING CYCLE

430. It is not an audit objective, when auditing manufacturing equipment and the
related depreciation and accumulated depreciation accounts, to determine whether
a. Costs and related depreciation for all significant retirements, abandonments, and
disposals of property have been properly recorded.
b. The balances in the property accounts, including the amounts carried forward
from the preceding year, are properly stated.
c. Additions represent actual property, whether installed, constructed, or rented.
d. The balance in accumulated depreciation accounts are reasonable, considering
expected useful lives of property units and possible net salvage values.
431. The emphasis in auditing manufacturing equipment is on the verification of

a. The balance carried forward in the account from the previous period (beginning
balance).
b. Current period acquisitions and retirements.
c. The balance in the account after the current year’s activities are considered
(ending balance)
432. The approach used to verify manufacturing equipment is different that the one
used to verify
a. Current assets.
b. Patents.
c. Copyrights.
d. All other types of property, plant, and equipment.
433. In the audit of manufacturing equipment, it is helpful to separate the tests into all
but which one of the following categories?
a. Verification of the beginning balance.
b. Verification of current-year acquisitions.
c. Verification of current-year disposals.
d. Verification of the ending balance.
434. The failure to capitalize a permanent asset, or the recording of an asset

acquisitions at the improper amount, affects the balance sheet
a. For the current period.
b. For the depreciable life of the asset.
c. Until the firm disposes of the asset.
d. Forever.
435. The failure to capitalize a permanent asset, or the recording of an asset acquisition
at the improper amount, affects the income statement
a. For the current period.
b. For the depreciable life of the asset.
c. Until the firm disposes of the asset.
d. Forever.
436. The test of details of balances procedure which “physically examines assets” is
done to satisfy the audit objective of
a. Classification.
b. Completeness.
c. Cutoff.
d. Validity.
437. The test of details of balances procedure to “Examine vendors’ invoices related
accounts such as repairs to uncover items that should be manufacturing equipment” is
done to satisfy the audit objective of
a. Classification.
c. Cutoff.
d. Validity.
438. The test of details of balances procedure which requires a “recalculation of

investment credit? Is done to satisfy the audit objective of
a. Classification.
c. Validity.
d. Classification.
439. The most common audit test to verify additions to manufacturing equipment is
examination of vendors’ invoices and equipment is examination of vendors’ invoices and
receiving reports. This process is known as
a. Verifying.
b. Cross referencing.
c. Dual referencing.
d. Vouching.
440. It should ordinarily be unnecessary to examine supporting documentation for each

addition to manufacturing equipment, but it is normal to verify
a. All large transactions.
b. All unusual transactions.
c. A representative sample of typical additions.
441. The erroneous inclusion of transactions that should properly be recorded as assets
into accounts such as repairs expense, lease expense, or supplies is a common client
error. The auditor should evaluate the likelihood of these types of misclassifications in
conjunction with
a. Obtaining an understanding of the internal control structure.
b. The tests of controls.
c. The tests of transactions.
d. The tests of details of balances.
442. If the client fails to record disposals of manufacturing equipment, both the
original cost of the asset account and the net book value will be incorrect.
a. Both will be overstated indefinitely.
b. The original cost will be overstated indefinitely and the net book value will be
overstated until the asset is fully depreciated.
c. The original cost will be overstated indefinitely and the net book value will be
understated indefinitely.
d. The original cost will be overstated indefinitely and the net book value will be
understated until the asset if finally depreciated.
443. Because the failure to record disposals of manufacturing equipment can

significantly affect the financial statements, the search for unrecorded disposals is
essential. Which of the following is not a procedure used to verify disposals?
a. Make inquiries of management and production personnel about the possibility of
the disposal of assets.
b. Review whether newly acquired assets replace existing assets.
c. Tests the valuation of fixed assets recorded in prior period.
d. Review plant modifications and changes in product line, taxes, or insurance
coverage.
444. When an asset is sold or disposed of without having been traded in for a
replacement asset, the valuation of the transaction can be verified by examining the
related
a. Purchase order and property master file.
b. Sales invoice and property master file.
c. Sales invoice and merchandise inventory listing.
d. Purchase order and merchandise inventory listing.
445. An area of special concern to the auditor occurs when client disposes of assets
affected by the investment credit recapture provision. Since the recapture affects the
current year’s income-tax expense and liability, the auditor must determine that client’s
calculation of the investment credit is accurate. Before the recalculation can be made, it is
necessary to have an understanding of the recapture provisions for
a. The year the asset was disposed.
b. The year the investment credit was implemented by congress.
c. The year the asset was acquired.
d. Every year since the investment credit was implemented and/or changed by
congress.
446. After assessing control risk, the auditor must decide whether it is necessary to
verify the existence of individual items of manufacturing equipment included in the
master file. This audit procedure, if performed, would satisfy the audit objective of
a. Valuation.
b. Classification.
c. Validity.
447. If the auditor believes there is a high likelihood of significant missing permanent
assets that are still recorded on the accounting records, an appropriate procedure is to
select a sample from the assets master file and examine
a. The documents verifying their acquisitions.
b. The assets.
c. All the related journal entries.
d. The accumulated depreciation calculations.
448. Ordinarily, it is unnecessary to test the valuation of fixed assets recorded in prior
periods because
a. It will not affect the current valuations.
b. They were verified in previous audits.
c. The related depreciation calculations for the current period are more important.
d. The emphasis of the audit is on the income statement items, not the balance sheet
items.
449. A major consideration in verifying the ending balance in permanent assets is the
possibility of existing legal encumbrances. Tests to identify possible legal encumbrances
would satisfy possible legal encumbrances would satisfy the audit objective for
a. Validity.
b. Classification.
c. Disclosure.
450. The proper disclosure of manufacturing equipment in the financial statements

would ordinarily not include the disclosure of
a. Gross costs.
b. Leased property as a separate line item on the face of the statement.
c. Liens on property as a separate line item on the face of the statement.
d. Manufacturing equipment as a separate item from other permanent assets.
451. Depreciation expense is one of the few expense accounts that is not verified as a
part of
a. Tests of controls.
c. Tests of details of balances.
452. The most important objective for depreciation expense is proper

a. Valuation.
b. Classification.
c. Cutoff.
d. Disclosure.
453. Occasionally, changing circumstances may necessitate a revaluation of the useful

of an asset. When this occurs, it involves a change in
a. Accounting estimate rather than a change in accounting principle.
b. Accounting principle rather than a change in accounting estimate.
c. Both accounting principle rather than a change in accounting estimated.
d. Neither accounting principle nor accounting estimated.
454. In verifying accumulated depreciation, the credits to accumulated depreciation are

verified as part of the audit of depreciation expense, whereas the debits are normally
tested as a part of the audit of
a. Asset acquisitions.
b. Capital acquisitions.
c. Disposal of assets.
d. Accumulated depreciation.
455. One typical difference the asset Prepaid Expenses and other assets, such as
Accounts Receivable and Inventory, is the immateriality of the former in many audits.
Because of this immateriality, frequently the only audit procedure necessary to perform is
a. Tests of control.
b. Test of transactions.
c. Test of details of balances.
456. Throughout the auditor of prepaid insurance and insurance expense, the auditor
should keep in mind that the amount in insurance expense is a residual based on
a. The beginning balance in prepaid insurance.
b. The payment of premiums during the year.
c. The ending balance in prepaid insurance.
457. The verification of validity and tests for omissions of the insurance policies in
force can be tested in one of two ways: by referring to supporting documentation or by
obtaining a confirmation of insurance information from the company’s insurance agent.
Sending a confirmation to be client’s insurance agent is preferable because
a. It is usually less time consuming than vouching tests.
b. It provides 100 percent verification.
d. It provides an adequate sample size.
458. Estimated unpaid obligations for services or benefits that have been received prior
to the balance sheet date are classified as
a. Accounts payable.
b. Accrued liabilities.
c. Miscellaneous assets.
d. Deferred charges.
459. Expense accounts analysis is closely related to tests of transactions. The major
difference is
a. The difference in the types of underlying documentation which is examined.
b. The degree of concentration on an individual account.
c. The use or non-use of cutoff tests.
d. The one emphasizes transactions and the other emphasizes amounts.
460. The initial allocations of accounting expense date are important because they
determine.
a. What GAAP must be used.
b. What GAAS must be applied.
c. The life of the asset.
d. Whether a particular expenditure is an assets or a current period expense.
461. Which of the following explanation might satisfy an auditor who discovers
significant debits to an accumulated depreciation accounts?
a. Extraordinary repairs have lengthened the life of an asset.
b. Prior year’ depreciation charges were erroneously understated.
c. A reserve for possible loss on retirement has been recorded.
d. An asset has been recorded at its fair value.
462. In verifying the amount of goodwill recorded by a client, an auditor can obtain the
most convincing evidence by comparing the recorded value of assets acquired with the
a. Assessed value as evidenced by tax bills.
b. Seller’s book value as evidenced by financial statements.
c. Insured value as evidenced by insurance policies.
d. Appraised value as evidenced by independent appraisals.
463. In connection with a review of the prepaid insurance account, which of the
following procedures would generally not be performed by the auditor?
a. Recompute the portion of the premium that expired during the year.
b. Prepaid excerpts of insurance policies for audit working papers.
c. Confirm premium rates with an independent insurance broker.
d. Examine support for premium payments.
464. Which of the following audit procedures would be least likely to lead the auditor
to find 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 assets additions.
465. An auditor would be least likely to use confirmations in connection with the
examination of
a. Inventories.
b. Long-term debt.
c. Property, plant, and equipment.
d. Stockholders’ equity.
466. To achieve effective internal accounting control over fixed asset additions, a
company should establish procedures that require
a. Capitalization of the cost of fixed-asset additional in excess of a specific peso
amount.
b. Performance of recurring fixed-asset maintenance work solely by maintenance
department employees.
c. Classification as investments, those fixed-asset additional that are not used in the
business.
d. Authorization and approval of major fixed-asset additions.
467. Which of the following is the most important internal control procedure over
acquisitions of property, plant, and equipment?
a. Establishing a written company policy distinguishing between capital and revenue
expenditures.
b. Using a budget to forecast and control acquisitions and retirements.
c. Analyzing monthly variances between authorized expenditures and actual costs.
d. Requiring acquisitions to be made by user departments.
468. The auditor interviews the plant manager. The auditor is most likely to rely upon
this interview as primary support for an audit conclusion on
a. Capitalization vs. expensing policy.
b. Allocation of fixed and variable cost.
c. The necessity to record a provision for deferred maintenance costs.
d. The adequacy of the depreciation expense.
469. The auditor procedures used to verify accrued liabilities differ from those
employed for the verification of accounts payable because
a. Accrued liabilities usually pertain to services of a continuing nature whereas
accounts payable are the result of completed transactions.
b. Accrued liability balances are less material than accounts payable balances.
c. Evidence supporting accrued liabilities is non-existent whereas evidence
supporting accounts payable is readily available.
d. Accrued liabilities at year end will become accounts payable during the following
year.
470. A normal audit procedure is to analyze the current year’s repairs and maintenance
accounts to provide evidence in support of the audit proposition that
a. Expenditures for fixed assets have been recorded in the proper period.
b. Capital expenditures have been properly authorized.
c. Non-capitalizable expenditures have been properly expensed.
d. Expenditures for fixed assets have been capitalized.
471. Which of the following is a customary audit procedure for the verification of the
legal ownership of real property?
a. Examination of correspondence with the corporate counsel concerning acquisition
matters.
b. Examination of ownership documents registered and on file at a public hall of
records.
c. Examination of corporate minutes and resolutions concerning the approval to
acquire property, plant and equipment.
d. Examination of deeds and title guaranty policies on hand.
472. Which of the following is not one of the auditor’s primary objectives in an
examination of marketable securities?
a. To determine whether securities are authentic.
b. To determine whether securities are the proper of the client.
c. To determine whether securities actually exist.
d. To determine whether securities are properly classified on the balance sheet.
473. A company holds bearer bonds as a short-term investment. Responsibility for

custody of these bonds and submission of coupons for periodic interest collections
probably should be delegated to the
a. Chief Accountant.
b. Internal Control.
c. Cashier.
d. Treasurer.
474. Once the initial audit of a newly constructed industrial plant has been performed,
with respect of consistency, which of the following is of least concern to the continuing
auditor in the following year?
a. Prior years’ capitalization policy.
b. Prior years’ capitalization costs.
c. Prior year’s depreciation methods.
d. Prior years’ depreciable life.
475. Which of the following is not a characteristic of the capital acquisition and
repayment cycle?
a. Relatively few transactions affect the account balances, but each transaction is
often highly material in amount.
b. The exclusion of a few transactions is rarely material by itself.
c. There is a legal relationship between the client and the holder of the equity
securities.
d. There is a direct relationship between the interest and dividends accounts and debt
and equity.

a. Bonds are infrequently issued by most companies.
b. The amount of a bond issued is normally large.
c. It is common to verify each transaction taking place in the capital acquisition
cycle for the entire as a part of verifying the balance sheet accounts.
d. It is unusual to see audit working papers that include the beginning balance of
every account in the capital acquisition and repayment cycle, and documentation
of every transaction that occurred during the year.
477. Considering the effect o understatements of liabilities and owners’ equity a major
audit concern is
a. Omissions.
b. Redundancies.
c. Duplications.
478. In the audit of the transactions and amounts in the capital acquisitions and
repayments cycle, the auditor must take great care in making sure that the significant
legal requirements affecting the financial statements have been properly fulfilled and
a. Any violations are reported to the SEC.
b. Any departures from the agreements are made with management’s knowledge and
consent.
c. Are adequately disclosed in the financial statements.
d. Must issue a disclaimer if they haven’t been fulfilled.
479. Of the eight tests of details of balances objectives, which one is usually not an
important concern in the auditor of notes payable?
a. Validity.
b. Completeness.
c. Ownership.
d. Valuation.
480. In the audit of notes payable, it is common to include tests of principal and
interest payments as a part of the audit of the acquisitions and payment cycle because the
payments are in the cash disbursements journal which is being sampled. It is also normal
to test these transactions as part of the capital acquisitions and repayment cycle because
a. It is not unusual for the auditor to duplicate a process, thereby gathering a larger
quantity of evidence.
b. Replicating the evidence with provide the auditor with a higher level of assurance.
c. The tests done in the acquisitions and payments cycle will only look at the cash
credit side so the test done on the capital acquisitions and repayment cycle will
have to look at the debit side of the transaction.
d. Due to the infrequency of these transactions, in many cases no transactions
involving notes payable are included in the sample tests of acquisitions and
payments.
481. Which of the following is not an objective of the auditor’s examination of notes
payable?
a. To determine whether client’s financing arrangements are effective and efficient.
b. To determine whether the internal control structure is adequate.
c. To determine whether transactions regarding the principle and interest of notes
are properly authorized.
d. To determine whether the liability for notes and related interest expense and
accrued liabilities are properly stated.
482. Proper authorization for the issuance of notes payable requires that
a. Wherever notes are renewed (refinanced), they should be subject to the same
authorization procedures as those used when they were first issued.
b. Responsibility for authorizing notes should lie with the manager who will receive
the benefits of the loan.
c. Responsibility for authorization should lie with the Treasurer’s function, since
they will receive the cash generated.
d. Responsibility for authorization should lie with the manager who must generate
the revenue to repay the loan.
483. Notes payable which have been repaid in full should be

a. Destroyed so that they will not be paid again inadvertently.
b. Canceled and destroyed.
c. Canceled and returned to the creditor.
d. Canceled and retained by an authorized company official.
484. Adequate controls over the repayment of principal and interest require that
a. The periodic payments of principal and interest should be controlled as a part of
the acquisition and payment cycle instead of the capital acquisition cycle.
b. The accounts payable department should automatically issue checks for the notes
when they become due.
c. The copy of the above are factual.
d. All three of the above are factual.
485. Analytical procedures are essential for notes payable because

a. Of the paucity of documentation is this area.
b. Tests of details for interest expense and accrued interest can frequently be
eliminated when results are favourable.
c. There are few internal controls in this area which the auditor can rely upon to
reduce substantive testing.
d. The large quantity of transactions would make this an expensive area to audit if
some other means of reducing tests were not available.
486. The tests of details of balances procedure which requires the auditor to trace the
total of the notes payable list to the general ledger satisfies the objective of
a. Validity.
b. Completeness.
c. Valuation.
487. The audit objective to determine that notes payable in the schedule are valid is
verified by the tests of balances procedure to
a. Foot the notes payable list.
b. Confirm notes payable.
c. Recalculate interest expense.
d. Examine the balance sheet for proper disclosure of noncurrent portions.
488. The test details of balances procedure which requires the auditor to examine
corporate minutes for loan approval would satisfy the audit objective of
b. Validity.
c. Completeness.
d. Valuation.
489. The tests of details of balances procedure which requires the auditor to examine
notes paid after year-end to determine whether they were liabilities at the balance sheet
date is an attempt to satisfy the audit objective of
a. Validity.
b. Completeness.
c. Valuation.
d. Classification.
490. The auditor objective to determine that existing notes payable are included in the
notes payable schedule (completeness) is accomplished by the following test of balances
procedure.
a. Confirm notes payable.
b. Trace the individual notes payable on the schedule to the master file.
c. Review the bank reconciliation for new notes credited already directly to the bank
account by the bank.
d. Examine duplicate copies of notes for principal and interest rates.
491. The audit objective to determine that notes payable and accrued interest on the
notes payable schedule are properly valued is accomplished by the following test of
balances procedure.
a. Examine duplicate copies of notes for principal and interest rates.
b. Review the minutes of the board of directors for authorized but unrecorded notes.
c. Trace the total of the notes payable schedule to the general ledger.
d. Review the notes to determine whether any are with related parties or should be
accounts payable.
492. The test of details of balances procedure which requires the auditor to recalculate
accrued interest will satisfy the audit objective of
a. Validity.
b. Completeness.
c. Classification.
d. Valuation.
493. The auditor objective which requires the auditor to determine the notes payable on
the notes payable schedule are properly classified can be tested with the following
procedure.
a. Review the notes to determine whether any are with related parties.
c. Examine corporate minutes for loan approval.
d. Examine notes, minutes, and bank confirmations for restrictions.
494. The audit procedure that requires the auditor to examine notes, minutes, and bank
confirmations for restrictions is performed to satisfy the audit objective of
a. Validity.
b. Completeness.
c. Valuation.
d. Disclosure.
495. The audit objective requiring that existing notes payable are included in the notes
payable schedule (completeness) is satisfied by performing the following audit
procedure.
a. Trace the total of the notes payable schedule to the general ledger.
c. Review the notes payable schedule to determine whether any are related parties.
d. Obtain confirmations from creditors who have held notes from the client in the
past and are not currently included in the notes payable schedule.
496. The amount of time spent verifying owners’ equity is frequently minimal for the
closely held corporation because
a. These companies are so small that it is not necessary to audit the capital section.
b. The few owners all have access to the books so the auditor spends more time on
the books so the auditor spends more time on accounts like liabilities, which
affect outsiders.
c. There are few if any transactions during the year for the capital stock accounts,
expect for earnings and dividends.
d. There is no public interest in these companies.
497. Which of the following types of owners’ equity transactions would not require
authorization by the board of directors?
a. Issuance of capital stock.
b. Repurchase of capital stock.
c. Declaration of dividends.
d. None of the three above.
498. The record of the issuance and repurchase of capital stock for the life of the
corporation is maintained in the
a. Shareholders’ capital stock master file.
b. Stock certificate books.
c. Schedule of stock owners.
d. Corporate directory.
499. The record of the outstanding shares at any given time is maintained in the
500. When a dividend is declared by the Board, the source of determining who should
receive dividend checks is the
501. Any company whose stock is listed on a securities exchange is required to engage
a. An independent registrar.
b. A stock transfer agent.
c. Both “a” and “b” above.
502. Which of the following concerns in auditing capital stock and paid-in capital
involved tests of transaction.
a. Existing capital stock transactions are recorded.
b. Capital stock is properly valued.
c. Capital stock is properly disclosed.
503. Which of the following concerns in auditing capital stock and paid-in capital
involve test of balances?
a. Existing capital stock transactions are recorded.
b. Recorded capital stock transactions are authorized.
c. Capital stock is properly disclosed.
504. Primary concern in determining whether retained earnings is correctly disclosed

on the balance sheet is
a. Correct calculation of the net income or loss for the year.
b. Correct calculation of dividend payments for the year.
c. Whether prior-period-adjustments have been made correctly.
d. Whether there are any restrictions on the payment of dividends.
505. An auditor would 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.
506. An auditor testing long-term investments would ordinarily use analytical

procedures as the primary audit procedure to ascertain the reasonableness of the
a. Valuation of marketable equity securities.
b. Classification of gains and losses on the disposal of securities.
c. Completeness of recorded investment income.
d. Existence and ownership of investments.
507. 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 and the 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 date 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 the auditor will have an independent direct
verification.
508. An auditor analyzes repairs and maintenance accounts primarily to obtain

evidence in support of the audit assertion that all
a. Non-capitalizable expenditures for repairs and maintenance have been properly
charged to expense.
b. Expenditures for property and equipment have not been charged to expense.
c. Non-capitalizable expenditures for repairs and maintenance have been recorded in
the proper period.
d. Expenditures for property and equipment have been recorded in the proper period.
509. The auditor may conclude that depreciation charges are insufficient by noting
a. Large amounts of fully depreciated assets.
b. Continuous trade-ins of relatively new assets.
c. Excessive recurring losses on assets retired.
d. Insured value greatly in excess of book values.
510. During an examination Wicks learns that the audit client was granted a three-
month waiver of the repayment of principal on the instalment loan with Blank Bank
without an extension of the maturity date. With respect to this loan, the audit program
used by Wicks would be least likely to include a verification of
a. Interest expense for the year.
b. Balloon payment.
c. Total liability at year end.
d. Instalment loan payments.
511. 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
a. Long-term debt is understated.
b. Discount on bonds payable is overstated.
c. Long-term debt is overstated.
d. Premium on bonds payable is understated.
512. During its fiscal year, a company issued, at a discount, a substantial amount of
first-mortgage bonds. When performing audit work in connection with the bond issue, the
independent auditor should
a. Confirm the existence of the bondholders.
b. Review the minutes for authorization.
c. Trace the net cash received from the issuance to the bond payable account.
d. Inspect the records maintained by the bond trustee.
513. A company issued bonds for cash during the year under audit. To ascertain that
this transaction was properly recorded, the auditor’s best course of action is to
a. Request a statement from the bond trustee as to the amount of bonds issued and
trustee as to the amount of bonds issued and outstanding.
b. Confirm the results of the issuance with the underwriter or investment banker.
c. Trace the cash received from the issuance to the accounting records.
d. Verify that the new cash received is credited to an account entitled “Bonds
Payable”.
514. In connection with the audit of a current issue of long-term bonds payable, the
auditor should
a. Determine whether bondholders are persons other than owners, directors, or
officers of the company issuing the bond.
b. Calculate the effective interest rate to see if it is substantially the same as the rates
for similar issues.
c. Decide whether the bond issue was made without violating state or local law.
d. Ascertain that the client has obtained the opinion of counsel on the legality of the
issue.
515. Many of the Dexter Corporation’s convertible bondholders have converted their
bonds into stock during the year under examination. The independent auditor should
review the Dexter Corporation’s statement of changes in financial position to ascertain
that it shows
a. Only financial resources used to reduce convertible debt.
b. Only financial resource provided by issuance of stock.
c. Financial resource provided by the issuance of stock and used to reduce
convertible debt.
d. Nothing relating to the conversion because it does not affect net working capital.
516. Mean analyzes the accrued-interest-payable account for the year, recomputes the
amounts of payments and beginning and ending balances, and reconciles to the interest-
expense account.
a. Interest revenue of P75 on a note receivable was credited against miscellaneous
expense.
b. A provision of Echo’s loan agreement was violated. Dividends on common stock
are prohibited if income available for interest requirements.
c. Interest paid on an open account was charged to the raw-material purchases
account.
d. A note payable had not been recorded. Interest of P180 on the note was properly
paid and charged to the interest-expense account.
517. Which of the following is the most important consideration of an auditor when
examining the stockholders’ equity section of a client’s balance sheet?
a. Changes in the capital stock accounts are verified by an independent stock
transfer agent.
b. Stock dividends and/or stock splits during the year under the year under the year
audit were approved by the stockholders.
c. Stock dividends are capitalized at par or stated value on the dividend declaration
date.
d. Entries in the capital stock account can be traced to a resolution in the minutes of
the board of directors’ meeting.
518. Josie Company has a separate outside transfer agent and outside registrar for its
common stock. A confirmation request sent to the transfer agent should ask for
a. A list of all stockholders and the number of shares issued to each.
b. A statement from the agent that all surrendered certificates have been effectively
cancelled.
c. Total shares issued, shares issued in name of client, and unbilled fees.
d. Total shares authorized.
519. 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 of stock
a. Surrendered and canceled during the year.
b. Authorized at the balance sheet date.
c. Issued and outstanding at the balance sheet date.
d. Authorized, issued, and outstanding during the year.
520. When a company has treasury stock certificates on hand, a year-end count of the
certificates by the auditor is
a. Required when the company classifies treasury stock with other assets.
b. Not required if treasury stock is a deduction from stockholders’ equity.
c. Required when the company had treasury stock transactions during the year.
d. Always required.
521. Ellen Corporation declared a 100 percent stock dividend during 2004. In
connection with the examination of Round’s financial statements. Ellen’s auditor should
determine that
a. The additional shares issued do not exceed the number of authorized but
previously unissued shares.
b. Stockholders received their additional shares by confirming year-end holdings
with them.
c. The stock dividend was properly recorded at fair market value.
d. Round’s stockholders have authorized the issuance of 100 percent stock
dividends.
522. A company has additional temporary funds to invest. The board of directors
decided to purchase marketable securities and assigned the future purchase and sale
decisions to a responsible financial executive. The best person(s) to make periodic
reviews of the investment activity should be
a. The investment committee of the board of directors.
b. The treasurer.
c. The corporate controller.
d. The chief operating officer.
523. If the auditor discovers that the carrying amount of a client’s investments is
overstated because of a loss in value which is other than a temporary decline in market
value, the auditor should insist that
a. The approximate market value of the investments be shown on the face of the
balance sheet.
b. The investments be classified as long-term for balance sheet purposes with full
disclosure in the footnotes.
c. The loss in value be recognized in the financial statements of the client.
d. The equity section of the balance sheet separately show a charge equal to the
amount of the loss.
524. A company holds bearer bonds as a short-term investment. Custody of these

bonds and submission of coupons for interest payments normally is the responsibility of
the
a. Treasury function.
b. Legal counsel.
c. General-accounting function.
d. Internal-audit function.
525. The auditor can best verify a client’s bond sinking fund transactions and year-end
balance by
a. Recomputation of interest expense, interest payable, and amortization of bond
discount or premium.
b. Confirmation with individual holder of retired bonds.
c. Confirmation with the bond trustee.
d. Examination and count of the bonds retired during the year.
526. When negotiable securities are of considerable volume, planning by the auditor is
necessary to guard against
a. Unauthorized negotiation of the securities before they are counted.
b. Unrecorded sales of securities after they are counted.
c. Substitution of securities already counted for other securities which should be on
hand but are not.
d. Substitution of authentic securities with counterfeit securities.
527. The financial management of a company should take steps to see that company
investment securities are protected. Which of the following is not a step that is designed
to protect investment securities?
a. Custody of securities should be assigned by persons who have the accounting
responsibility for securities.
b. Securities should be properly controlled physically in order to prevent
unauthorized usage.
c. Access to securities should be vested in more than one person.
d. Securities should be registered in the name of the owner.
528. In order to avoid the misappropriation of company-owned marketable securities,

which of the following is the best course of action that can be taken by the management
of a company with a large portfolio of marketable securities?
a. Require that one trustworthy and boded employee be responsible for access to the
safekeeping area, where securities are kept.
b. Require that employees who enter and leave the safekeeping area sign and record
in a log the exact reason for the access.
c. Require that employees involved in the safekeeping function maintain a
subsidiary control ledger for securities on a current basis.
d. Require that the safekeeping function for securities be assigned to a bank, that
will act as a custodial agent.
529. In manufacturing company, which one of the following audit procedures would
give the least assurance of the validity of the general ledger balance of investment in
stocks and bonds at the audit date?
a. Confirmation from the broker.
b. Inspection and account of stocks and bonds.
c. Vouching all changes during the year to brokers’ advices and statements.
d. Examination of paid checks issued in payment of securities purchased.
530. The functions typically related to fixed asset flow of transactions and control
would not include
a. Valuation of fixed asset.
b. Inspection and custody of fixed assets.
c. Depreciation allocation.
d. Funding of fixed asset acquisition.
531. An internal control questionnaire for a computer system fixed asset application
controls would not include the question
a. Does the computer print an input error report?
b. Is there a date base administrator who is independent of computer operations,
systems, programming, and users?
c. Is terminal entry of fixed asset data done on the basis of up-to-date written
instructions?
d. Is an accounting department person assigned the responsibility for promptly
correcting errors in input data?
532. The audit program for fixed assets and related accounts would not include the
procedure
a. Prepare a schedule of fixed asset additions and disposals for the period.
b. Observe a physical inventory-taking of fixed assets and compare to detail fixed
asset records.
c. Recalculate depreciation expense and trace to general ledger.
d. Compute insurance coverage for co-insurance requirement.
533. The primary working paper for fixed assets is the account analysis often referred
to as the
a. Input/output schedule.
b. Compilation schedule.
c. Fixed asset register.
d. Subsidiary trial balance.
534. Related party transactions that cause material misstatements in financial

statements usually involve
a. Purchasing supervisors accepting kickbacks.
b. Purchases from companies controlled by insiders,
c. Theft of fixed assets.
d. Diversion of proceeds of sale of fixed assets.
535. The typical business activity of the financing and investment cycle would not
include
a. Proposals for cash forecasts, capital budgets, business expansion.
b. Analyses of excess cash funds.
c. Reconciliation of cash.
d. Sale of stocks, bonds, or notes.
536. Records of notes and bonds payable should be maintained by the

a. Accounts payable department.
b. Treasurer’s office.
c. Completeness.
d. Validity.
537. In cases where the system of internal control procedures for notes payable is not
elaborate, the audit team is not interested in the existence of controls that
a. Assign high-level responsibility for review and approval.
b. Have an accounting system that is part of the review and approval letter.
c. Have review procedures to check for errors in data processing.
d. Provide sufficient information to monitor activity in account.
538. Selecting a sample of paid notes and tracing interest to the general ledger account
is a test of the controls objective for
a. Accounting.
b. Accuracy.
c. Completeness.
d. Validity.
539. The typical assertions related to investments and related accounts would not
include the assertion that
a. Capitalized intangible costs related to intangibles acquired in exchanged
transactions.
b. Amortization is properly calculated.
c. Research and development costs are properly classified.
d. Goodwill is valued at market value.
540. The substantive audit procedures related to the existence completeness, and right
objectives for investments would not include
a. Vouching investment costs to brokers’ reports.
b. Verbal inquiry of changes during the year.
c. Physical observation and count of investments.
d. Confirmation of securities not held by client.
541. The purchase and payment of a check for an investment in stocks, bonds, or notes
must be authorized by the
a. Board of directors.
b. Vice president for finance.
c. Purchase manager.
d. Accounts payable department.
542. The major working paper for owners’ equity is the

a. Schedule of all activity for each equity account for the year.
b. Confirmation of shares outstanding with stockholders.
c. Carry-forward schedule of all transactions since the initial audit.
d. Subsidiary schedule of stock issued to general ledger control.
543. The major audit concern for the owners’ equity area in most audit engagements is
with
a. Valuation of accounts.
b. Interpreting and following generally accepted accounting principles.
c. Number of shares issued and outstanding.
d. Equity transactions have been authorized by board of directors.
AUDIT OF INCOME STATEMENT ACCOUNTS AND COMPLETING THE

AUDIT
544. The CPA compares 19X2 revenues and expenses with the prior year and
investigates all changes exceeding 10 percent.
a. The cashier began lapping accounts receivable in 19x2.
b. Because of worsening economic conditions, the 19X2 provision for uncollectible
accounts was inadequate.
c. Echo changed its capitalization policy for small tools in 19X2.
d. An increase in property tax rates has not been recognized in Echo’s 19X2 accrual.
545. “A potential future obligation to an outside party for an unknown amount

resulting from activities that have already taken place” is the definition of a(n)
a. Current liability.
b. Long-term liability.
c. Accrued liability.
546. Which of the following is a required condition for a contingent liability to exist?
a. There is a potential liability to an employee of the client.
b. The amount of the future payment is known.
c. The liability resulted from an existing condition.
d. The outcome has been resolved by a current event.
547. SFAS 7 describes three levels of likelihood regarding the uncertainty of a future
payment. Which of the following is not one of those three levels?
a. Highly unlikely.
b. Remote.
c. Reasonably possible.
d. Probable.
548. If the amount of a probable loss on a contingent liability cannot be reasonably

estimated, the liability should be
a. Accrued and indicated in the body of the financial statements.
b. Disclosed in footnotes, but not accrued.
c. Neither accrued nor disclosed in footnotes.
d. Disclosed in the auditor’s report but not disclosed on the financial statements.
549. If the amount of a probable loss on a continent liability is only reasonably

possible, the liability should be
c. Neither accrued not disclosed in footnotes.
550. If a potential loss on a contingent liability is remote, the liability should be

551. If a potential loss on a contingent liability is probable and the amount of the loss
can be reasonably estimated, the liability should be
552. When the proper disclosure in the financial statements of material contingencies
is through footnotes, the footnotes should describe the nature of the contingency to the
extent it is known and
a. The auditor’s opinion as to the expected outcome.
b. The opinion of legal counsel or management as to the expected outcome.
c. The opinion of an outside independent party, such as an appraiser, as to the
expected outcome.
d. The steps client has taken to ensure that it doesn’t recur.
553. When auditing contingent liabilities, the primary objective at the initial stage of
the tests is to determine
a. The materiality of any liability.
b. What constitutes adequate disclosure of the liability.
c. The likelihood of the liability.
d. The existence of the liability.
554. Inquiries of management (orally and in writing) regarding the possibility of

unrecorded contingencies will not be useful in uncovering
a. Management’s intentional failure to disclose existing contingencies.
b. A particular type of contingency which management has overlooked.
c. A contingency where management does not comprehend accounting disclosure
requirements.
d. All three of the above items.
555. Which of the following procedures might be useful in discovering a contingent

liability for a lawsuit that management is intentionally neglecting to disclose?
a. Inquiries (orally and in writing) of management.
b. Analyze legal expense and review invoices and statements from outside legal
counsel.
c. Review current and previous years’ internal revenue agent reports.
d. Obtain a letter of representation from management that is aware of no undisclosed
contingent liabilities.
556. If an attorney refuses to provide the auditor with information, that is within the
attorney’s jurisdiction and may directly affect the fair presentation of financial
statements, about material existing lawsuits (asserted claims) or unasserted claims, the
audit report would have to be
a. An adverse opinion.
b. A qualified opinion.
c. An unqualified opinion with an explanatory paragraph.
d. Modified to reflect the lack of available evidence.
557. The standard letter of confirmation from client’s legal counsel should be prepared
on the
a. Auditor’s stationery and signed by an audit partner.
b. Lawyer’s stationery and signed by the lawyer.
c. Client’s stationery and signed by a company official.
d. Plain paper and be unsigned.
558. Which of the following items would ordinarily not be included in the standard
letter of confirmation from the client’s attorney?
a. A list, prepared by management, of pending threatened litigation of material
amounts.
b. A requires that the attorney furnish information or comment about the likelihood
of an unfavorable outcome of litigation.
c. A request that the attorney furnish an estimate of the amount or range of the
potential loss.
d. A request that the attorney confirm the amount of outstanding fees which client
owes for legal services.
559. The standard letter of confirmation from client’s legal counsel should ask for
information about the period of time
a. Covered by client’s financial statements.
b. Covered by client’s financial statements plus the preceding year.
c. Covered by client’s financial statements plus the succeeding year.
d. Approximately up to the date of the auditor’s report.
560. An agreement which commits the firm to a set of fixed conditions in the future
regardless of what happens to profits or the economy as a whole is a definition of
a. Contingent liability.
b. Potentially hazardous agreement.
c. Commitment.
d. Conditional contract.
561. The auditor’s responsibility for “reviewing the subsequent events” of a non-SEC
client is normally limited to the period of time
a. Beginning with the balance sheet date and ending with the date of the auditor’s
report.
b. Beginning with the start of the fiscal year under audit and ending with the balance
sheet date.
c. Beginning with the start of the fiscal year under audit and ending with the date of
the auditor’s report.
d. Beginning with the balance sheet date and ending with the date the Registration
Statement becomes effective.
562. The auditor’s responsibility for “reviewing the subsequent events” of a public
company that is about to issue new securities normally limited to the period of time
a. Beginning with the balance sheet date and ending with the date of the auditor’s
report.
b. Beginning with the start of the fiscal year under audit and ending with the balance
sheet date.
c. Beginning with the start of the fiscal year under audit and ending with the date of
the auditor’s report.
d. Beginning with the balance sheet date and ending with the date the Registration
Statement becomes effective.
563. The auditor has a responsibility to review transactions and activities occurring
after the year-end to determine whether anything occurred that might affect the valuation
or disclosure of the statements being audited. The auditing procedures required to verify
these transactions are commonly referred to as the review for
a. Contingent liabilities.
b. Subsequent year’s transactions.
c. Late unusual occurrences.
d. Subsequent events.
564. The following event all occurred after the balance sheet date (12/31/X3) but prior
to the auditor’s report (3/15/X4). Which one would not require an adjustment of the
account balances as of 12//31/X3?
a. A customer declared bankruptcy on 1/31/X4/
b. Investments on the books at a cost of P100,000 were sold on 2/1/X4 for P60,000.
c. A contingent liability recorded on the books as of 12/31/X3 for P100,000 was
settled out of court on 2/15/X4 for P125,000.
d. Uninsured inventory valued at P100,000 on 12/31/X3 was destroyed in afire on
2/1/X4.
565. The following events all occurred after the balance sheet date (6/30/X3) but prior
to the auditor’s report (9/10/X3). Which one would require an adjustment to the account
balances as of 6/30/X3?
a. Client will market a new series of equity securities (P2 million of preferred stock)
on 8/1/X3.
b. Unused equipment on the books at 6/30/X3 for P100,000 was disposed of
7/31/X3 for P60,000.
c. Securities on 6/31/X3 declined in value by one third when the market took a
plunge on 8/15/X3.
d. Inventory valued at P100,000 on 6/30/X3 was destroyed in a fire on 8/1/X3.
566. The audit procedure 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 are in category 1?
a. Inquiries of client regarding contingent liabilities.
b. Obtain a letter of representation written by client.
c. Subsequent period sales and purchases transactions are examined to determine
whether the cutoff is accurate.
d. Journals and ledgers of year 2 should be reviewed to determine the existence and
nature of any transaction related to year 1.
567. 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 year0end
account balances, and 2) those performed specifically for the purpose of discovering
subsequent events. Which of the following procedures are in category 2?
a. Subsequent period sales and purchases transactions are examined to determine
whether the cutoff is accurate.
b. Correspond with attorneys.
c. Test the collectability of accounts receivable by reviewing subsequent period cash
receipts.
d. Compare the subsequent period purchase price of inventory with the recorded cost
as a test of lower of cost or market valuation.
568. During the final review of working papers and financial statements, it is common
to have the analytical procedures done by a
a. Partners.
b. Manager.
c. Senior.
d. Staff members.
569. The concept of “dual sating” on the auditor’s report refers to

a. The client’s date on the statements (12/31/X1) and the auditor’s date on the report
(3/30/X2).
b. The auditor’s date on the report (3/30/X2) and the review required when client
files a registration statement with the SEC (5/30/X2).
c. The auditor’s date on the repost representing the end of the fieldwork (3/30/X2)
and the review of an important event that occurred after the completion of field
work (4/5/X2) but before the auditor’s report was delivered.
d. The working problem created because some of client’s statements are for a period
of time (For Year Ended 12/31/X1) and others are for one specific date
(12/31/X1).
570. SASP requires the auditor to evaluate whether there is a substantial doubt about a
client’s ability to continue as a going concern for at least one year beyond the balance
sheet date. One of the most important types of evidence to assets the going concern
question is
a. Statistical sampling procedures.
b. Analytical procedures.
c. Inquiries of client and their legal counsel.
d. Confirmations of creditors.
571. Which of the following is not a reason why auditor requests client to provide a
letter of representation?
a. The Codification of Statements on Auditing Standards requires the auditor to
obtain a letter of representation.
b. It impresses upon management its responsibility for the accuracy of the
information in the financial statements.
c. It provides written documentation of the oral responses already received to
inquiries of management,
d. It provides written documentation which is a higher quality of evidence than
management’s oral responses to inquiries.
572. Refusal by a client to prepare and sign the representation letter would require a(n)
a. Qualified opinion or a disclaimer.
b. Adverse opinion or a disclaimer.
c. Adverse or an adverse opinion.
d. Unqualified opinion with an explanatory paragraph.
573. The auditor is required to read information included in published annual reports,
such as the president’s letter, that pertains directly to the financial statements and to
compare that information to make sure that it corresponds. If there is a material
inconsistency, the client should be requested to change the information. If the client
refuses, the auditor should
a. Issue an adverse opinion.
b. Issue a qualified opinion or withdraw from the engagement.
c. Include an explanatory paragraph in the audit report or withdraw from the
engagement.
d. Issue the unqualified opinion, bill the client, and withdraw from any future
engagements.
574. If, after the accumulation of final evidence and during the valuation of results, the
auditor concludes that sufficient evidence has not been obtained to draw a conclusion
about fairness of the client’s representations, there are two choices:
a. 1) obtain additional evidence, or 2) issue a qualified opinion or a disclaimer.
b. 1) issue a qualified opinion, or 2) withdraw from the engagement.
c. 1) issue a disclaimer, or 2) withdraw from the engagement.
d. 1) obtain additional information, or 2) issue an adverse opinion.
575. There are often a large number of immaterial errors discovered that do not require
an adjustment at the time they are found.
a. Since these items are individually immaterial, the auditor would not recommend
adjusting entries to client.
b. Since there are a large number of these, the auditor would recommend adjusting
entries to client.
c. The auditor must combine the individually immaterial errors and evaluate whether
the combine amount is material.
d. The auditor would never combine these individually immaterial amounts because
that would mix apples and oranges.
576. The auditor is responsible for communicating “reportable conditions” to the audit
committee, if it is a large company, or to the owners or senior management, if the
company is smaller. These reportable conditions are
a. Illegal acts.
b. Significant deficiencies in the design or operations of the internal control
structure.
c. Material errors in the accounts.
d. Highly material errors in the accounts.
577. If, after the accumulation of final evidence and during the evaluation of results,
the auditor concludes that there is a sufficient evidence but it does not warrant a
conclusion of fairly presented financial statements, the auditor has two choices:
a. 1) the statements must be revised to the auditor’s satisfaction, or 2) either a
qualified or an adverse opinion must be issued.
b. 1) either a qualified opinion must be issued, or 2) an adverse opinion must be
issued.
c. 1) either a disclaimer must be issued, or 2) an adverse opinion must be issued.
d. 1) the statements must be revised to the auditor’s satisfaction, or 2) a disclaimer
must be issued.
578. The initial review of the working papers prepared by any given auditor is
normally done by
a. The partner assigned to the audit.
b. The supervisor or manager.
c. The senior.
d. The immediate supervisor.
579. The auditor is required to communicated all irregularities and illegal acts to the
audit committee
a. If the act is slightly material.
b. If the act is material.
c. If the act is highly material.
d. Regardless of materiality.
580. The management letter

a. Is required whenever these are “reportable conditions”.
b. Must follow the format prescribed by the PICPA.
c. Spells out to the audit committee the auditor’s responsibilities under generally
accepted auditing standards.
d. Is option and is intended to help client operate its business more effectively.
581. If the auditor becomes aware after the audited financial statements have been
released that some information included in the statements is materially misleading, he or
she has
a. No obligation to disclose it since he/she acted in good faith and without
negligence in arriving at the audit opinion.
b. An obligation to inform the board of directors of the misleading statements.
c. An obligation to inform all users who are relying on the financial statements.
d. An obligation to make certain that users who are relying on the financial
statements are informed.
582. The primary objective of analytical procedures used in the final review stage of an
audit is to
a. Obtain evidence from details tested to corroborate particular assertions.
b. Identify areas that represent specific risks relevant to the audit.
c. Assist the auditor in assessing the validity of the conclusions reached.
d. Satisfy doubts when questions arise about a client’s ability to continue in
existence.
583. 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?
a. Review compliance with the terms of debt agreements.
b. Confirmation of accounts receivable from principal customer.
c. Reconciliation of interest expense with debt outstanding.
d. Confirmation of bank balances.
584. When a client will not permit inquiry of outside legal counsel, the audit report
will ordinarily contain a(n)
a. Disclaimer of opinion.
b. “Except for” qualified opinion.
c. Unqualified opinion.
d. Unqualified opinion with a separate explanatory paragraph.
e.
585. An auditor concludes that there is substantial doubt about an entity’s ability to
continue as a going concern for a reasonable period of time. If the entity’s disclosures
concerning this matter are adequate, the audit report may include a(n)
Disclaimer “Except for”

Of opinion qualified opinion
-------------- -----------------------
a. Yes Yes
b. No No
c. No Yes
d. Yes No
586. Which of the following audit procedures would be least effective for detecting
contingent liabilities?
a. Abstracting the minutes of the meeting of the board of directors.
b. Reviewing the bank confirmation letter.
c. Examining confirmation replies from customer.
d. Confirming pending legal matters with the corporate attorney.
587. Management furnished the independent auditor with information concerning

litigation, claims, and assessments. Which of the following is the auditor’s primary
means of initiating action to corroborate such information?
a. Request that client lawyers undertake a reconsideration of matters of litigations,
claims, and assessments witch which they were consulted during the period under
examination.
b. Request that client management send a letter of audit inquiry to those lawyers
with whom management consulted concerning litigation, claims, and assessments.
c. Request the client lawyers provide a legal opinion concerning the policies and
procedures adopted by management to identify, evaluate, and account for
litigation, claims, and assessments.
d. Request that client management engage outside attorneys to suggest working for
the text of a footnote explaining the nature probable outcome of existing
litigation, claims, and assessments.
588. A company guarantees the debt of an affiliate. Which of the following best
describes the audit procedure that would make the auditor aware of the guarantee?
a. Review minutes and resolutions of the board of directors.
b. Review prior year’s working papers with respect to such guarantees.
c. Review the possibility of such guarantees with the chief accountant.
d. Review the legal letter returned by the company’s outside legal counsel.
589. A charge in the subsequent period to a notes receivable account from the cash
disbursements journal should alert the auditor to the possibility that
a. A contingent asset has come into existence in the subsequent period.
b. A contingent liability has come into existence in the subsequent period.
c. A provision for contingencies is required.
d. A contingent liability has become a real liability and has been settled.
590. An auditor must obtain written client representations that normally should be
signed by
a. The president and the chairperson of the board.
b. The treasurer and the internal auditor.
c. The chief executive officer and the chief financial officer.
d. The corporate counsel and the audit committee chairperson.
591. In connection with the annual audit, which of the following is not a “subsequent
events” procedure?
a. Review available interim financial statements.
b. Read available minutes of meetings of stockholders, directors, and committees
and as, too meetings for which minutes are not available, inquire about matters
dealt with at such meetings.
c. Make inquiries with respect to the financial statements covered by the auditor’s
previously issued report if new information has become available during the
current examination that might affect that report.
d. Discuss with officers the current status of items in the financial statements that
were accounted for on the basis of tentative, preliminary, or inconclusive data.
592. Subsequent events affecting the realization of assets ordinarily will require
adjustments of the financial statements under examination because such event typically
represent
a. The culmination of conditions that existed at the balance sheet date.
b. The final estimate of losses relating to casualties occurring in the subsequent
events period.
c. The discovery of new conditions occurring in the subsequent events period.
d. The preliminary estimate of losses relating to new events that occurred
subsequent to the balance sheet date.
593. As part of an audit, a CPA often requests a representation letter from the client.
Which one of the following is not a valid purpose of such a letter?
a. To provide audit evidence.
b. To emphasize to the client and the client’s responsibility for the correctness of the
financial statements.
c. To satisfy the CPA by means of other auditor procedures when certain customary
auditing procedures are not performed.
d. To provide possible protection to the CPA against a change of knowledge in cases
where fraud is subsequently discovered to have existed in the accounts.
594. An auditor’s decision concerning whether or not to “dual date” the audit report is
based upon the auditor’s willingness to
a. Extend auditing procedures.
b. Accept responsibility for subsequent events.
c. Permit inclusion of a footnote captioned: event (anaudited) subsequent to the date
of the auditor’s report.
d. Assume responsibility for events subsequent to the issuance of the auditor’s
report.
595. An auditor generally obtains from a client a formal written statement concerning
the accuracy of inventory. This particular letter of representation is used by the auditor to
a. Reduce the scope of the auditor’s physical inventory work that is normally
performed.
b. Confirm in writing the valuation basis used by the client to value the inventory at
the lower of cost or market.
c. Lessen the auditor’s responsibility for the fair presentation of the balance sheet
inventories.
d. Remind management that the primary responsibility for the overall fairness of the
financial statements rests with management and not with the auditor.
596. Although there is no professional requirement to do so on audit engagement,

CPAs normally issue a formal “management” letter to their clients. The primary purpose
of this letter is to provide
a. Evidence indicating whether the auditor is reasonably certain that the system of
internal accounting control is operating as prescribed.
b. A permanent record of the internal accounting control work performed by the
auditor during the course of the engagement.
c. A written record of discussions between auditor and client concerning the
auditor’s observations and suggestions for improvements.
d. A summary of the auditor’s observations that resulted from the auditor’s special
study of the system of internal control.
597. Under which of the following circumstances may audited financial statements
contains a note disclosing a subsequent event which is labeled unaudited?
a. When the subsequent event does not require adjustment of the financial
statements.
b. When the event occurs after completion of fieldwork and before issuance of the
auditor’s report.
c. When audit procedures with respect to the subsequent event were not performed
by the auditor.
d. When the event occurs between the date of the auditor’s original report and the
date of the reissuance of the report.
598. 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?
a. Sale of a bond or capital stock issue.
b. Loss of plant or inventories as a result of fire or flood.
c. A major drop in the quoted market price of the stock of the corporation.
d. Settlement of litigation when the vent giving rise to the claim took place after the
balance sheet date.
599. Ajax Inc., is an affiliate of the audit client and is audited by another firm of
auditors. Which of the following is most likely to be used by the auditor to obtain
assurance that all guarantees of the affiliate’s indebtedness have been detected?
a. Send the standard bank confirmation request to all of the client’s lender banks.
b. Review client minutes and obtain a representation letter.
c. Examine supporting documents for all entries in inter-company accounts.
d. Obtain written confirmation of indebtedness from the auditor of the affiliate.
600. After an auditor has issued an audit report on a non-public entity, there is no
obligation to make any further audit tests or inquiries with respect to the audited financial
statements covered by that report unless
a. New information comes to the auditor’s attention concerning an event which
occurred prior to the affected the auditor’s report which may have affected the
auditor’s report.
b. Material adverse events occur after the date of the auditor’s report.
c. Final determination or resolution was made on matters which had resulted in a
qualification in the auditor’s report.
d. Final determination or resolution was made of a contingency which had been
disclosed in the financial statements.
601. The auditor’s formal review of subsequent events normally should be extended
through the date of the
a. Auditor’s report.
b. Next formal interim financial statements.
c. Delivery of the audit report to the client.
d. Mailing of the financial statements to the stockholders.
602. Harvey, CPA, is preparing an audit program for the purpose of ascertaining the
occurrence of subsequent events that may require adjustment or disclosure essential to a
fair presentation of the financial statements in conformity with generally accepted
accounting principles. Which one of the following procedures would be least appropriate
for this purpose?
a. Confirm as of the completion of field work accounts receivable which have
increased significantly from the year-end date.
b. Read the minutes of the board of directors.
c. Inquire of management concerning events which may have occurred.
d. Obtain a lawyer’s letter as of the completion of field work.
603. Which of the following auditing procedures is ordinarily performed last?

a. Reading of the minutes of the director’s meetings.
b. Confirming accounts payable.
c. Obtaining a management representation letter.
d. Testing of the purchasing function.
604. A client has a calendar 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?
a. Adoption of accelerate depreciation methods.
b. Write-off of a substantial portion of inventory as obsolete.
c. Collection of 90% of the accounts receivable existing at December 31.
d. Sale of a major subsidiary.
605. With respect to contingent liabilities, the Standard Bank Confirmation Inquiry
form approved jointly by the PICPA and the Bank Administration Institute requests
information regarding notes receivable.
a. Held by the bank in a custodial account.
b. Held by the bank for collection.
c. Collected by the bank.
d. Discounted by the bank.
606. The statement that best expresses the auditor’s responsibility with respect to
events occurring between the balance sheet date and the end of his examination is that
a. 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.
b. 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.
c. The auditor is fully responsible for events occurring in the subsequent period and
should extend all detailed procedures through the last day of field work.
d. The auditor is responsible for determining that a proper cutoff has been made and
perform
607. The statement that best expresses the auditor’s responsibility with respect to
events occurring between the balance sheet date and the end of hid examination is that
a. 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.
b. The auditor’s responsibility is to determine that a proper cutoff has been made
and that a proper cutoff has been made and that transactions recorded on or before
the balance-sheet date actually occurred.
c. The auditor is fully responsible for events occurring in the subsequent period and
should extend all detailed procedures through the last day of field work.
d. 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.
608. 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?
a. Sale of long-term debt or capital stock.
b. Loss of a plant as a result of a flood.
c. Major purchase of a business which is expected to double the sales volume.
d. Settlement of litigation, in excess of the recorded liability.
609. Which of the following is the most efficient audit procedure for the detection of
unrecorded liabilities at the balance sheet date?
a. Confirm large accounts payable balance at the balance sheet date.
b. Compare cash disbursements in the subsequent period with the accounts payable
trial balance at years end.
c. Examine purchase orders issued for several days prior to the close of the year.
d. Obtain an attorney’s letter from the client’s attorney.
610. A CPA has received an attorney’s letter in which no significant disagreements

with the client’s assessments of contingent liabilities were noted. The resignation of the
client’s lawyer shortly after receipt of the letter should alert the audit that
a. Undisclosed unasserted claims may have arisen.
b. The attorney was unable to form a conclusion with respect to the significance of
litigation, claims and assessments.
c. The auditor must begin a completely new examination of contingent liabilities.
d. An adverse opinion will be necessary.
611. An auditor performs interim work at various times throughout the year. The
auditor’s subsequent events work should be extended to the date of
a. A post-dates footnote.
b. The next scheduled interim visit.
c. The final billing for audit services rendered.
d. The auditor’s report.
612. An attorney is responding to an independent auditor as a result of the audit

client’s letter of inquiry. The attorney may appropriately limit the response to
a. Asserted to claims and litigation.
b. Matters to which the attorney has given substantive attention in the form of legal
consultation or representation.
c. Asserted, overtly threatened, or pending claims and litigation.
d. Items which have an extremely high probability of being resolved to the client’s
detriment.
END

Unit X Compilance and Substantive Audit Procedures

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Unit X Compilance and Substantive Audit Procedures

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UNIT X

COMPLIANCE AND SUBSTANTIVE PROCESURES

AUDIT OF THE REVENUE CYCLE

9. A document prepared to initiate shipment of the goods sold is the

12. The document which supports reductions in accounts receivable is the

13. The document which accompanies the customer’s payment is the

22. Most companies recognize sales when

29. The use of prenumbered documents is meant to prevent

32. The appropriate test of controls for separation of duties is

74. Which of the following statements is not correct?

84. The understatement of sales and accounts receivable is best uncovered by

86. When customers do not respond to confirmation requests, auditors

93. It is easy to test for a cash receipts cutoff error by

95. The primary purpose of accounts receivable confirmation is to satisfy the

98. Which of the following statements is not correct?

100. A positive confirmation is more reliable evidence than a negative confirmation

103. Which of the following is not an important consideration in determining sample

111. An auditor should perform alternative procedures to substantiate the existence of

117. Skates, an independent auditor, was engaged to perform an examination of the

118. Confirmation of individual accounts receivable balances directly with debtors

122. It is sometimes impracticable or impossible for an audit to use normal accounts

123. A corporation is holding securities as collateral for an outstanding account

128. Lapping would most likely be detected by

132. The document which indicates the assignments or departments an employee

155. The auditor uses a proof of cash to determine whether

ITEMS 160 AND 161 ARE BASED ON THE FOLLOWING

163. When a customer fails to include a remittance advice with a payment, it is

164. Which of the following cash transfer results in a misstatement of cash at

Bank Transfer Schedule

167. An auditor who is engaged to examine the financial statements of a business

Bank Account One Bank Account Two

188. The negative confirmation is not used when

AUDIT OF THE EXPENDITURE CYCLE

199. Which of the following statements is correct?

203. Which of the following statements is not correct?

207. Which of the following is a Test of Controls?

212. Good internal control for the payroll function is usually

219. Verification of the legitimacy of year-end unpaid bonuses to officers and

224. An auditor decides that it is important and necessary to observe a client’s

225. It would be appropriate for the payroll accounting department to be responsible

239. The acquisition and payment cycle includes payments

246. An internal control questionnaire for payroll processing environment objective

248. Error-checking procedures to prevent errors or irregularities would typically not

251. A request by an authorized employee for goods or services is made on the

260. The purchase order, usually in writing, is a legal document that is

262. The personnel in the Receiving Department should

264. When processing and recording cash disbursements, it is important to have a

265. Which of these functions is not a test of acquisitions?

282. The internal control which requires “examination of supporting documentation

284. The internal control which requires a “monthly preparation of a bank

289. If an obligation includes the payment of interest, it would be incorrect to classify

294. Which of the following statements is not true?

312. Internal control is strengthened when the quantity o merchandise ordered is

314. An auditor usually examines receiving reports to support entries n the

315. An auditor compares information on cancelled checks with information contained

316. An internal control questionnaire indicates that an approved receiving report is

320. A client’s materials-purchasing cycle begins with requisitions user departments

321. Operating control of the check-signing machine normally should be the

324. With respect to a small company’s system of purchasing supplies, an auditor’s

329. Which of the following internal accounting control procedures is effective in

332. Purchase cut-off procedures should be designed to test that merchandise is

338. Which of the following procedures relating to the examination of accounts

341. Which of the following is a primary function of the purchasing department?