Chapter 16 - Auditing Operations and Completing the Audit
Chapter 16
Auditing Operations and Completing the Audit
True / False Questions
1. Analytical procedures are often used for verification of income statement accounts.
True False
2. The Miscellaneous Revenue account should only be analyzed if it is material in amount.
True False
3. Internal control over payroll is enhanced when the personnel department distributes payroll checks.
True False
4. The auditors have a responsibility to report on all FASB-required supplementary information.
True False
5. Subsequent events that provide additional evidence as to conditions that existed at the balance sheet date may result in adjusting journal entries.
True False
6. Dual dating of an audit report extends the auditors' liability for disclosure through the later date for all areas of the financial statements.
True False
7. If management fails to list an unasserted claim in the letter of inquiry to a lawyer, the lawyer is not required to inform the auditors of the omission.
True False
8. Normally, general risk contingencies need not be disclosed in the financial statements.
True False
9. If not adjusted, a situation in which the total likely misstatement in the financial statements exceeds a material amount is likely to lead to an audit report modification.
True False
10. Common to future purchase commitments is the fact that they should be recorded as liabilities at discounted values as of year-end.
True False
Multiple Choice Questions
11. Analytical procedures are required as a part of the
A. Detailed tests of balances.
B. Internal control assessment.
C. Overall review at the conclusion of the audit.
D. Substantive testing.
12. The statement that best expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of his audit 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 performing a general review of events occurring in the subsequent period.
13. Shortly after year-end Zero Corporation was informed of the bankruptcy of Bingo. Zero Corporation showed a receivable of $10,000 due from Bingo as of year-end—none of which seems recoverable. The receivable had been questionable for some time as Bingo had been experiencing financial difficulties for the past several years. Yet, Bingo's bankruptcy did not occur until after Zero Corporation's year-end. Under these circumstances:
A. Option A
B. Option B
C. Option C
D. Option D
14. In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable?
A. Sales and Cost of Goods Sold.
B. Interest and Bad Debt Expense.
C. Sales and Bad Debt Expense.
D. Interest and Cost of Goods Sold.
15. Auditors should perform audit procedures relating to subsequent events?
A. Through year end.
B. Through issuance of the audit report.
C. Through the last day of field work.
D. For a reasonable period after year end.
16. Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?
A. Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements.
B. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement.
C. Determine whether reportable conditions have corrected.
D. Develop an estimate of the total likely misstatement in the financial statements.
17. Which of the following ledger accounts would be least likely to be analyzed in detail by auditors?
A. Miscellaneous revenue.
B. Professional fees.
C. Travel expense.
D. Repairs and maintenance.
18. When auditing the statement of cash flows of a profitable, growing company which combination is most likely?
A. Option A
B. Option B
C. Option C
D. Option D
19. The audit of which of the following balance sheet accounts does not normally result in verification of an income statement account?
A. Cash.
B. Accounts receivable.
C. Property, plant and equipment.
D. Intangible assets.
20. An example of an internal control weakness is to assign the payroll department the responsibility for:
A. Preparing the payroll expense distribution.
B. Preparing the payroll checks.
C. Authorizing increases in pay.
D. Preparing journal entries for payroll expense.
21. An example of an internal control weakness is to assign the personnel department responsibility for:
A. Distribution of paychecks.
B. Hiring personnel.
C. Authorizing deductions from pay.
D. Interviewing employees for jobs.
22. Which of the following audit procedures is aimed at determining whether every name on the company payroll is an employee actually on the job?
A. A surprise observation of a paycheck distribution.
B. A test of payroll extensions.
C. Analytical comparisons of budgeted to actual payroll expense.
D. Comparison of payee names on canceled payroll checks with the payroll register.
23. Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?
A. Obtaining a lawyers' letter.
B. Confirming accounts payable.
C. Reviewing the minutes of board of directors' meetings.
D. Review correspondence with banks.
24. Which of the following types of matters do not generally require disclosure in the financial statements?
A. General risk contingencies.
B. Commitments.
C. Loss contingencies.
D. Liabilities to related parties.
25. Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. These considerations will affect the audit report as follows:
A. If a loss has been recorded in accordance with these criteria, the auditor may issue an unqualified opinion but is required to point out the contingency in an explanatory paragraph of the report.
B. If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but is required to point out the contingency in an explanatory paragraph of the report.
C. If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but should consider adding an explanatory paragraph as a means of emphasizing the disclosure.
D. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements rather than being recorded therein, the auditor may issue an unqualified opinion.
26. A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in:
A. Confirmation of related lawsuits with the claimants.
B. Qualification of the audit report.
C. An assessment that loss of the litigation is probable.
D. An adverse opinion.
27. If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first:
A. Attempt to determine whether their report is still being relied upon by third parties.
B. Notify regulatory agencies.
C. Notify legal counsel.
D. Wait until the beginning of the next year's audit to determine whether misstatements have occurred.
28. Which of the following is not a procedure that auditors typically perform to search for significant events during the subsequent period?
A. Review minutes of board of directors' meeting.
B. Review the latest available interim financial statements.
C. Inquire about any unusual adjustments made subsequent to the balance sheet date.
D. Review changes in internal control during the period subsequent to the balance sheet date.
29. Which of the following subsequent events might require an adjustment to the client's financial statements?
A. A business combination with another company.
B. Loss on the sale of a closely-held investment.
C. Loss of plant and equipment due to a fire.
D. Retirement of bonds payable at a loss.
30. Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors?
A. Dividends.
B. New debt issuance.
C. New bank accounts.
D. Writeoff of trade accounts receivable.
31. Which of the following is not a procedure normally performed while completing the audit?
A. Obtain a lawyer's letter.
B. Obtain a representations letter.
C. Perform an overall review using analytical procedures.
D. Obtain confirmation of capital stockholdings from shareholders.
32. Auditors must communicate internal control "significant deficiencies" to:
A. The audit committee.
B. The shareholders.
C. The SEC.
D. The Federal Trade Commission.
33. Which of the following procedures is not a procedure that is completed near the end of the engagement?
A. Review cash transactions.
B. Review to identify subsequent events.
C. Obtain the lawyer's letter.
D. Obtain the letter of representations.
34. Which of the following information must be reported on in the auditors' report?
A. FASB-required supplementary information.
B. Other information in client-prepared documents.
C. Information accompanying financial statements in auditor-submitted documents.
D. GASB-required supplementary information.
35. In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate:
A. Likely misstatements in the financial statements.
B. Known misstatements in the financial statements.
C. Known, projected and other estimated misstatements in the financial statements.
D. Known, projected and potential misstatements in the financial statements.
36. Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n):
A. Extrapolation difference.
B. Known misstatement.
C. Likely misstatement.
D. Projected misstatement.
37. The review of audit working papers by the audit partner is normally completed:
A. Prior to year-end.
B. Immediately as each working paper is completed.
C. Near the completion of field work.
D. After issuance of the audit report, but prior to required subsequent event review procedures.
38. Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The known misstatement in this situation is:
A. $0
B. $30,000
C. $40,000
D. $50,000
39. Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The likely misstatement in this situation is:
A. $0
B. $30,000
C. $40,000
D. $50,000
40. An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements during the current year (and not considering any unadjusted previous year misstatements) is referred to as the:
A. Evaluation materiality approach.
B. Iron curtain approach.
C. Projected misstatement approach.
D. Rollover approach.
41. An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current or previous years is referred to as the:
A. Evaluation materiality approach.
B. Iron curtain approach.
C. Projected misstatement approach.
D. Rollover approach.
42. A client's previous two years of financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit $100,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is:
A. $0
B. $60,000
C. $110,000
D. $140,000
43. A client's previous two years financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit $55,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is:
A. $0
B. $60,000
C. $110,000
D. $140,000
44. One reason why the independent auditors perform analytical procedures on the client's operations is to identify:
A. Weaknesses of a material nature in internal control.
B. Non-compliance with prescribed control procedures.
C. Improper separation of accounting and other financial duties.
D. Unusual transactions.
45. Which of the following is an analytical procedure that should be applied to the income statement?
A. Select sales and expense items and trace amounts to related supporting documents.
B. Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement.
C. Obtain from the proper client representatives, the beginning and ending inventory amounts that were used to determine costs of sales.
D. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.
46. 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. Distribution of paychecks to employees.
47. Which of the following is the best reason why the auditors should consider observing a client's distribution of regular payroll checks?
A. Separation of payroll duties is less than adequate for effective internal control.
B. Total payroll costs are a significant part of total operating costs.
C. The auditors did not observe the distribution of the entire regular payroll during the audit in the prior year.
D. Employee turnover is excessive.
48. To minimize the opportunities for fraud, unclaimed cash payroll should be:
A. Deposited in a safe deposit box.
B. Held by the payroll custodian.
C. Deposited in a special bank account.
D. Held by the controller.
49. The purpose of segregating the duties of distributing payroll checks and hiring personnel is to:
A. Separate the custody of assets from the accounting for those assets.
B. Establish clear lines of authority and responsibility.
C. Separate duties within the accounting function.
D. Separate the authorization of transactions from the custody of related assets.
50. A CPA reviews a client's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for:
A. Reviewing and approving time reports for subordinate employees.
B. Distributing payroll checks to employees.
C. Hiring subordinate employees.
D. Initiating requests for salary adjustments for subordinate employees.