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6A

1. When labor is a material factor in inventory valuation, the auditor should place special
emphasis on testing the internal controls concerning
a. fictitious employees.
b. authorization of wage rates.
c. proper classification of payroll transactions.
d. completeness of recorded transactions.

2. The total of the individual employee earnings in the payroll master file should equal the
total
a. balance of gross payroll in general ledger accounts.
b. of the checks drawn to employees for payroll.
c. gross payroll plus the total contributed by the employer for payroll taxes.
d. gross pay for the current week's payroll 3.

3. Which of the following types of audit tests is usually emphasized due to a lack of
independent third-party evidence related to payroll transactions?
a. analytical procedures
b. tests of details of balances
c. tests of controls
d. Each of the above is emphasized.

4. The most important part of the observation of inventory is to determine whether


a. all counts are accurate.
b. the inventory-takers are qualified.
c. obsolete inventory has been identified.
d. the physical count is being taken in accordance with the client's instructions.

5. Which of the following statements regarding the capital acquisition and repayment cycle
is most correct?
a. A relatively few transactions affect the cycle, and most are smaller amounts.
b. A large number of transactions affect the cycle, and most are smaller amounts.
c. A relatively few transactions affect the cycle, and most are highly material.
d. A large number of transactions affect the cycle, and most are highly material.

6. The inventory and warehousing cycle can be thought of as having two separate but closely
related systems, one involving the actual physical flow of goods, and the other the
a. related costs.
b. storage of the goods.
c. internal control over those goods.
d. prevention of waste, obsolescence, and theft.

7. Failure to capitalize a fixed asset at the correct amount would impact which financial
statements?
a. the balance sheet
b. the income statement
c. the cash flow statement only
d. both the income statement and the balance sheet

8. Which of the following is a substantive analytical procedure to determine if there is idle


equipment or equipment that was disposed of but not written off?
a. Compare depreciation expense divided by gross equipment cost with previous
years.
b. Compare gross manufacturing cost divided by some measure of production
with previous years
c. Compare accumulated depreciation divided by gross equipment cost with previous
years.
d. Compare annual repairs and maintenance accounts with previous years.

9. Smaller privately held companies may not maintain an accounts payable master file by
vendor. These companies pay on the basis of?
a. vendors' monthly statements.
b. individual vendors' invoices.
c. the accounts payable account in the general ledger.
d. dunning letters

10. In the processing and recording of cash disbursements:


a. After a check includes the signature of an authorized person, it is a liability.
b. When a check cashed by the vendor has cleared the bank, it is called an
outstanding check
c. in many cases, the company submits payment to the vendor electronically
through an electronic funds transfer (EFT) between the company's bank and
the vendor's bank.
d. The accounts payable master file is a computer-generated file that includes all
cash di transaction processed by the accounting system for a period.

11. The accounts payable department usually has responsibility for approving acquisitions for
payment by comparing the details on the:
a. vendor's invoice and the receiving report.
b. vendor's invoice and the purchase requisition.
c. purchase order, receiving report, and vendor's invoice.
d. purchase requisition, purchase order, and receiving report.

12. Which of the following audit procedures would be the most correct in determining the audit
objective of existence for the equipment account in the fixed asset master file?
a. Examine vendor invoices and receiving reports.
b. Review transactions near the balance sheet date.
c. Recalculate vendor invoices.
d. Examine vendor invoices for correct accounting treatment.

13. The test of transactions which requires one to "reconcile recorded cash disbursements
with the cash disbursements on the bank statement" satisfies the objective of:
a. occurrence.
b. completeness.
c. accuracy.
d. posting and summarization.

14. Which of the following is not one of the business functions for the payroll and personnel
cycle?
a. payment of payroll
b. timekeeping and payroll preparation
c. reconciliation of payroll account
d. human resources and employment

15. Which of the following is a substantive test of transactions?


a. Review personnel policies.
b. Account 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 IDs.

16. The auditor's internal control objective to determine that "recorded acquisitions are for
goods and services received" satisfies the audit objective of
a. accuracy.
b. occurrence.
c. authorization.
d. completeness.

17. Which of the following statements is correct regarding the audit of inventory cost
accounting?
a. Cost accounting systems and controls are the same for all manufacturing
companies.
b. All companies that have work-in-process must use a perpetual inventory system.
c. Auditors test perpetual inventory master files by examining documentation
that supports additions and reductions of inventory amounts in the master
files.
d. Manufacturing companies keep their cost accounting records separate from the
production and other accounting records.

18. Comparing the physical counts with the perpetual inventory master files satisfies the
balance-related audit objective of
a. Classification.
b. Observation.
c. Accuracy.
d. completeness.

19. When auditing interest-bearing debt, the auditor should __expense and interest payable.
a. Not
b. attempt to
c. simultaneously
d. never

20. You are the in-charge auditor for a company who has been an audit client for several
years. Which of the following is not a category of tests commonly associated with the audit
of manufacturing equipment?
a. verification of depreciation expense
b. analytical procedures
c. verification of current-period disposals
d. verification of the beginning balance in the equipment account

21. To determine if notes payable is included in the proper period, the auditor should
a. trace the cash received from the issuance to the accounting records.
b. examine duplicate copies of notes to determine whether the notes were
dated on or before the balance sheet date.
c. examine duplicate copies of notes for principal and interest rates.
d. trace the individual notes payable to the master file.

22. The 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.
6B

1. Internal auditors
a. are hired by accounting firms to audit business firms.
b. are employees of the taxing authority who evaluate the internal controls of
companies filing tax returns.
c. evaluate the system of internal controls for the companies that employ them.
d. cannot evaluate the system of internal controls of the company that employs
them because they are not independent.
2. When the auditor sends a confirmation to the broker-dealer, they are testing the
balance-related audit objective oF
a. detail tie-in.
b. Existence.
c. Cutoff
d. rights.
3. Three conditions are required for a contingent liability to exist. Which of the following is
not one of those conditions?
a. There is a potential future payment to an outside party or the impairment of an
asset that resulted from an existing condition.
b. The outcome must be resolved by a third-party.
c. There is uncertainty about the amount of the future payment or impairment.
d. The outcome will be resolved by some future event or events.
4. The control principle related to not having the same person authorize and pay for goods
is known as
a. establishment of responsibility.
b. independent internal verification.
c. segregation of duties.
d. rotation of duties.
5. The auditor's responsibility with respect to events occurring between the balance sheet
date and the end of the audit examination is best expressed by which of the following
statements?
a. The auditor is fully responsible for events occurring in the subsequent period and
should extend all detailed procedures through the last day of fieldwork.
b. 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.
c. 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.
d. 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.
e.
6). An accounts payable clerk also has access to the approved supplier master file for
purchases. The control principle of
A). establishment of responsibility is violated.
B). independent internal verification is violated.
C). documentation procedures is violated.
D). segregation of duties is violated.

7) A commitment is best described as


A) an agreement to commit the firm to a set of fixed conditions in the future.
B) an agreement to commit the firm to a set of fixed conditions in the future that depends on
company profitability.
C) an agreement to commit the firm to a set of fixed conditions in the future that depends on
current market conditions.
D) a potential future obligation to an outside party for an as yet to be determined amount.

8) Which of the following is likely to be detected as part of the audit of the bank reconciliation?
A) failure to bill a customer
B) duplicate payment of a vendor invoice
C) cash received by the client after year-end, but included in cash receipts in the current year
D) an embezzlement of cash by intercepting cash receipts from customers before they are
recorded

9) When performing an operational audit, the internal audit team must first determine that
A) a financial audit has been performed by an independent auditor.
B) a financial audit has been performed by an internal auditor.
C) a review was performed by either an independent or an internal auditor.
D) specific criteria are developed to define effectiveness.

10) An auditor is reviewing the minutes of board meetings to determine whether any securities
are pledged as collateral. This test of the detail of balances relates to the audit objective of
A) rights.
B) cutoff.
C) realizable value.
D) classification.

11) Which of the following is not a similarity between external and internal auditors?
A) Both must be independent of the company.
B) Both must be competent.
C) Both follow a similar methodology in performing their audits.
D) Both consider risk and materiality deciding the extent of their tests and evaluating results.

12) Auditors will generally send a standard inquiry to the client's attorney letter to
A) only those attorneys who have devoted substantial time to client matters during the year.
B) every attorney that the client has been involved with in the current or preceding year, plus
any attorney the client engages on occasion.
C) every attorney whose legal fees for the year exceed a materiality threshold.
D) only the attorney who represents the client in proceeding where the client is defendant.

13) While there is no professional requirement to do so on audit engagements, CPAs frequently


issue a formal "management" letter to clients. The primary purpose of this letter is to provide
A) evidence indicating whether the auditor is reasonably certain that 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) the client with the CPA's recommendations for improving any part of the client's business.
D) a summary of the auditor's observations that resulted from the auditor's special study of
internal control.

14) The auditor's primary concern relative to presentation and disclosure-related objectives is
A) accuracy.
B) existence.
C) completeness.
D) occurrence.

15) When performing an operational audit, the internal audit team must first determine that
A) a financial audit has been performed by an independent auditor.
B) a financial audit has been performed by an internal auditor.
C) a review was performed by either an independent or an internal auditor.
D) specific criteria are developed to define effectiveness.

16). A check returned by the bank marked "NSF" means


A). no service fee.
B). no signature found.
C). not satisfactorily filled-out.
D). not sufficient funds.

17) Which of the following is not a "cash equivalent"?


A) time deposits
B) certificates of deposit
C) money market funds
D) marketable securities

18) Which of the following is most correct regarding external auditors use of internal auditors
directly on the audit engagement?
A) discourage
B) prohibit
C) require
D) compete

19) A CPA firm can issue a compilation report


A) only if the partners are independent.
B) only if all the partners and the staff in the office performing the engagement are independent.
C) if the partners have no material or direct immaterial interest in client.
D) even if it is not independent.

20). A company maintains the asset account, Cash in Bank, on its books, while the bank
maintains an account which is
A). a contra-asset account.
B). a liability account.
C). also an asset account.
D). an equity account.

21) What distinguishes internal control evaluation and testing for financial and operational
auditing?
A) purpose of the work
B) scope of the work
C) both A and B
D) neither A nor B

22). Related selling activities do not include


A). ordering the merchandise.
B). making a sale.
C). shipping the goods.
D). billing the customer.

23). Control over cash disbursements is generally more effective when


A). all bills are paid in cash.
B). disbursements are made by the accounts payable subsidiary clerk.
C). payments are made by check.
D). all purchases are made on credit.

24). Which one of the following is not an objective of a system of internal controls?
A). Safeguard company assets
B). Overstate liabilities in order to be conservative
C). Enhance the accuracy and reliability of accounting records
D). Increase efficiency of operations

25) ________ is the degree to which the organization's objectives are accomplished.
A) Effectiveness
B) Efficiency
C) Goal optimization
D) Performance

26) Which of the following best describes an audit that emphasizes how efficiently and
effectively functions interact?
A) operational
B) compliance
C) financial
D) organizational

27) The audit firm issues an audit report for its client. The auditors have no obligation to make
further inquiries with respect to the client's audited financial statements unless
A) a development occurs that may affect the company's long term viability as a company.
B) final resolution was made on disclosed contingency for which no liability needed to be
accrued.
C) new information comes to the auditor's attention concerning an event that occurred prior to
the date of the audit report that, if known, would have impacted the audit opinion.
D) a lawsuit, in which the risk of loss was considered remote, was resolved in the company's
favor.

28) Which of the following is not one of the three phases in an operational audit?
A) planning
B) training and supervising employees
C) evidence accumulation and evaluation
D) reporting and follow-up

29). Doraemon is warehouse custodian and also maintains the accounting record of the
inventory held at the warehouse. An assessment of this situation indicates
A). documentation procedures are violated.
B). independent internal verification is violated.
C). segregation of duties is violated.
D). establishment of responsibility is violated.

30) Contingent liability disclosure in the footnotes of the financial statements would normally be
made when
A) the outcome of the accounting event is deemed probable, but a reasonable estimation as to
the amount cannot be made by the client or auditor.
B) a reasonable estimation of the loss can be made, but the outcome is not probable.
C) the outcome of the accounting event is deemed probable, and a reasonable estimation as to
the amount can be made.
D) the outcome of the accounting event as well as a reasonable estimation of the loss cannot be
made.

31). If employees are bonded


A). it means that they are not allowed to handle cash.
B). they have worked for the company for at least 10 years.
C) they have been insured against misappropriation of assets.
D). it is impossible for them to steal from the company.

32). The custodian of a company asset should


A). have access to the accounting records for that asset.
B). be someone outside the company.
C). not have access to the accounting records for that asset.
D). be an accountant.

33). Physical controls to safeguard assets do not include


A). cashier department supervisors.
B). vaults.
C). television monitors.
D). security guards.

34) ________ is the degree to which the organization's objectives are accomplished.
A) Effectiveness
B) Efficiency
C) Goal optimization
D) Performance
35). A bank statement
A). lets a depositor know the financial position of the bank as of a certain date.
B). is a credit reference letter written by the depositor's bank.
C). is a bill from the bank for services rendered.
D). shows the activity which increased or decreased the depositor's account balance.

36) Which of the following audit procedures would most likely assist an auditor in identifying
conditions and evnts 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 customers
C) reconciliation of interest expense with debt outstanding
D) confirmation of bank balances

37). In large companies, the independent internal verification procedure is often assigned to
A). computer operators.
B). management.
C). internal auditors.
D).. external auditors.
38) Two of the types of services provided in connection with the Statements on Standards for
Accounting and Review Services are
A) audit and examination services.
B) compilation and review services.
C) examination and review services.
D) management advisory services and compilations.

39). If an attorney refuses to provide the auditor with information about material existing lawsuits
or unasserted claims,
A) the attorney may face sanctions from the American Bar Association.
B) the auditors must modify their audit report to reflect the lack of available evidence.
C) the attorney can no longer represent the client.
D) the auditor must withdraw from the engagement.

40). Reconciling the bank statement monthly is an example of


A). segregation of duties.
B). independent internal verification.
C). establishment of responsibility.
D). documentation procedures.

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