Chapter 9: Auditing the Revenue Cycle Questions: 1) When posting the Sales Journal, details of a journal are posted to “X” and journal totals are posted to “Y”, ergo, X Y a) Sales Account General Ledger b) Accounts Receivable Master File General Ledger c) Sales Account Accounts Receivable Subsidiary Ledger d) Accounts Receivable in General Ledger Sales in General Ledger 284V-MEBC Answer: B 2) Tedori Manufacturing Company received a substantial sales return on December 30, 2011, but the credit memorandum for the return was not prepared and recorded until March 4, 2012. The returned merchandise was included in the year-end physical inventory taken on December 31, 2011. 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 memoranda. c) Reconcile the subsidiary accounts receivable ledger with the general ledger control account monthly. d) Prepare and numerically control receiving reports for all materials received. 306V-MEBC Answer: D 3) 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. To determine the validity of the accounts receivable 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. 307V-MEBC Answer: B 4) 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) Collectibility of the receivables is dubious or in doubt. d) Pledging of the receivables is probable.
Transcript
Chapter 9: Auditing the Revenue Cycle
Questions:
1) When posting the Sales Journal, details of a journal are posted to “X” and journal totals are posted to “Y”, ergo,
X Ya) Sales Account General Ledgerb) Accounts Receivable Master File General Ledgerc) Sales Account Accounts Receivable Subsidiary Ledgerd) Accounts Receivable in General Ledger Sales in General Ledger
284V-MEBCAnswer: B
2) Tedori Manufacturing Company received a substantial sales return on December 30, 2011, but the credit memorandum for the return was not prepared and recorded until March 4, 2012. The returned merchandise was included in the year-end physical inventory taken on December 31, 2011. 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 memoranda.c) Reconcile the subsidiary accounts receivable ledger with the general ledger control
account monthly.d) Prepare and numerically control receiving reports for all materials received.
306V-MEBCAnswer: D
3) 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. To determine the validity of the accounts receivable 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.
307V-MEBCAnswer: B
4) 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) Collectibility of the receivables is dubious or in doubt.d) Pledging of the receivables is probable.
308V-MEBCAnswer: A
5) 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 the internal control over credit sales.b) Test the accuracy of recorded charge sales.c) Estimate credit losses.d) Verify the validity of the recorded receivables.
309V-MEBCAnswer: C
6) Skates, an independent auditor, was engaged to perform an examination of the financial statements of Apex Inc. one month after its fiscal year had 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 unqualified opinion and an explanatory middle paragraph.c) Either a qualified opinion or a disclaimer of opinion.d) A standard unqualified opinion.
310V-MEBCAnswer: D
7) It is sometimes impracticable or impossible for an auditor to use normal accounts receivable confirmation procedures. In such situations, the best alternative procedure the auditor might resort to would be
a) Examining subsequent receipts of year-end accounts receivable.b) Reviewing accounts receivable aging schedules prepared at the balance sheet date
and at a subsequent date.c) Requesting that management increase the allowance for uncollectible accounts by an
amount equal to some percentage of the balance in those accounts that cannot be confirmed.
d) Performing an overall analytic review of accounts receivable and sales on a year-to-year basis.
311V-MEBCAnswer: A
8) A corporation is holding securities as collateral for an outstanding accounts 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.
312V-MEBCAnswer: C
9) 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 that customer on each validated deposit slip for the two months following the balance sheet date. The major fallacy in the auditor’s procedure is that
a) Checking of subsequent collections is not an 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 month period.314V-MEBC
Answer: B
10) The cashier diverted cash received over the counter from a customer to his own use and wrote off the receivable as a bad debt. Select the control that should have prevented the error.
a) Aging schedules of accounts receivable 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.305V-MEBC
Answer: B
Chapter 10: Auditing the Cash and Marketable Securities
Questions:
1) Which of the following errors would not be discovered during the tests of the bank reconciliation?
a) Cash received by the client subsequent to the 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) Payments to an employee for more hours than he worked.315V-MEBC
Answer: D2) Which of the following controls would most likely reduce the risk of diversion of customer
receipts by a client’s employees?
a) A bank lockbox system.b) Prenumbered remittance advises.c) Monthly bank reconciliations.d) Daily deposit of cash receipts.
251V-MEBCAnswer: A
3) The auditor suspects that a client’s cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare the
a) Details of deposit slips with details of credits to customer accounts.b) Daily cash summaries with the sums of the cash receipts journal entries.c) Individual bank deposit slips with the details of the monthly bank statements.d) Dates uncollectible accounts are authorized to be written off with the dates the write-
offs are actually recorded.258V-MEBC
Answer: A4) In order to guard against the misappropriation of company-owned marketable securities, which
of the following is the best course of action that can be taken by a company with a large portfolio of marketable securities?
a) Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept.
b) Requirement that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their 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 or stockbroker that will act as a custodial agent.
259V-MEBCAnswer: D
5) Honey Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The best person or persons to make periodic reviews of the investment activity would be:
a) An investment committee of the board of directors.b) The chief operating officer.c) The corporate controller.d) The treasurer.
260V-MEBCAnswer: A
6) You have been assigned to the year-end audit of financial institution and are planning the timing of audit procedures relating to cash. You decided that it would be preferable to
a) Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end.
b) Coordinate the count of cash with the cutoff of accounts payable.c) Coordinate the count of cash with the count of marketable securities and other
negotiable assets.d) Count the cash immediately upon the return of the confirmation letters from the
financial institutions.255V-MEBC
Answer: C
7th and 8th Questions
The information below was taken from the bank transfer schedule prepared during the audit of Prime Co. financial statements for the year ended December 31, 2011. Assume all checks are dated and issued on December 30, 2011.
Check No. Bank Accounts Disbursement Date Receipt Date
7) Which of the following checks might indicate kiting?
a) 101 and 303b) 202 and 404c) 101 and 404d) 202 and 303
179V-MEBCAnswer: B
8) Which of the following checks illustrate deposits/transfers in transit at December 31, 2011?
a) 101 and 202b) 101 and 303c) 202 and 404d) 303 and 404
180V-MEBCAnswer: B
9th and 10th Questions
The information below are the bases for the said questions:
Miles CompanyBank Transfer Schedule
December 31, 2011
Check No. Bank Accounts Amount Disbursement Date Receipt Date
From To Books Bank Books Bank
2020 FEB PNB 32,000 12/31 1/5* 12/31 1/3^2021 FEB PNB 21,000 12/31 1/4* 12/31 1/3^3217 PCIB FEB 6,700 1/3 1/5 1/3 1/60659 PCIB FEB 5,500 12/30 1/5* 12/30 1/3^
9) The mark * most likely indicates that the amount was traced to the
a) December cash disbursements journal.b) Outstanding check lists of the applicable bank reconciliation.c) January cash disbursements journal.d) Year-end bank confirmations.
184V-MEBCAnswer: B
10) The mark ^ most likely indicates that the amount was traced 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.
185V-MEBCAnswer: A
Chapter 11: Auditing the Acquisition and Payment Cycle for Inventory, Goods and Services
Questions:
1) Which of the following is least likely to be among the auditor’s objectives in the audit of inventories and cost of goods sold?
a) Determine that the valuation of inventories and cost of goods sold is arrived at by appropriate methods.
b) Determine the existence of inventories and the occurrence of transactions affecting cost of goods sold.
c) Establish that the client includes only inventory on hand at year-end in inventory totals.
d) Establish completeness of inventories.316V-MEBC
Answer: C2) Instead of taking a physical inventory count on the balance sheet date, the client may take
physical counts prior to the year-end if internal control is adequate and
a) Well-kept records of perpetual inventory are maintained.b) Inventory is slow-moving.c) Computer error reports are generated for missing prenumbered inventory tickets.d) Obsolete inventory items are segregated and excluded.
321V-MEBCAnswer: A
3) The auditor’s analytical procedures will be facilitated if the client:
a) Uses standard cost system that produces variance reports.b) Segregates obsolete inventory before the physical inventory count.c) Corrects material weaknesses in internal control before the beginning of the audit.d) Reduces inventory balances to the lower of cost or market.
322V-MEBCAnswer: A
4) Which of the following is the best audit procedure for the discovery of damaged merchandise in a client’s ending inventory?
a) Compare the physical quantities of slow-moving items with corresponding quantities in the prior year.
b) Observe merchandise and raw materials during the client’s physical inventory taking.c) Review the management’s inventory representation letters for accuracy.d) Test overall fairness of inventory values by comparing the company’s turnover ratio
with the industry average.324V-MEBC
Answer: B5) Maganda Corporation does not make an annual physical count of year-end inventories, but
instead, makes weekly test counts on the basis of a statistical plan. During the year, Sam Morales, CPA, observes such counts as she deems necessary and is able to satisfy herself to the reliability of the client’s procedures. In reporting on the results of her examination, Morales:
a) Can issue an unqualified opinion without disclosing that she did not observe year-end inventories.
b) Must comment in the scope paragraph as to her inability to observe year-end inventories, but can nevertheless issue an unqualified opinion.
c) Is required, if the inventories are material, to disclaim an opinion on the financial statements taken as a whole.
d) Must, if the inventories are material, qualify her opinion.325V-MEBC
Answer: A6) An auditor should request that an audit client send a letter of inquiry to those attorneys who
have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to
a) Opine of a specialist as to whether loss contingencies are possible, probable or remote.b) Provide a description of litigation, claims, and assessments that have reasonable
possibility of unfavorable outcomes.c) Provide an objective appraisal of management’s policies and procedures adopted for
identifying and evaluating legal matters.
d) Corroborate the information furnished by management concerning litigation, claims and assessments.
217V-MEBCAnswer: D
7) Which of the following is not an audit procedure that the independent auditor would perform concerning litigation, claims, and assessments?
a) Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are probable of assertion and must be disclosed.
b) Confirm directly with the client’s lawyer that all claims have been recorded in the financial statements.
c) Inquire of and discuss with management the policies and procedures adopted for identifying, evaluating, and accounting for litigation, claims and assessments.
d) Obtain from management a description and evaluation of litigation, claims and assessments existing at the balance sheet.
218V-MEBCAnswer: B
8) 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 in order to obtain reasonable
assurance that inventory quantities are reasonably accurate.326V-MEBC
Answer: B9) 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 redeposit.
330V-MEBCAnswer: B
10) The receiving department is least likely to be responsible for the:
a) Determination of quantities of goods received.b) Detection of damaged or defective merchandise.c) Preparation of a shipping document.d) Transmittal of goods received to the store’s department.
317V-MEBCAnswer: C
Chapter 12: Auditing Long-Lived Assets
Questions:
1) To assure accountability for fixed asset retirements, management should implement an internal control that includes
a) Continuous analysis of miscellaneous revenue to locate any cash proceeds from the sale of plant assets.
b) Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired.
c) Utilization of serially numbered retirement work orders.d) Periodic observation of plant assets by the internal auditors.
366V-MEBCAnswer: C
2) Which of the following is an internal control weakness related to factory equipment?
a) Checks issued in payment of purchases of equipment are not signed by the controller.b) All purchases of factory equipment are required to be made by the department in need
of the equipment
c) Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired.
d) Proceeds from sales of fully depreciated equipment are credited to other income.368V-MEBC
Answer: B3) 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 balances in accumulated depreciation accounts are reasonable, considering
expected useful lives of property units and possible net salvage values.390V-MEBC
Answer: C4) The failure to capitalize a permanent asset, or the recording of an asset acquisition at the
improper amount, affects the income statement
a) Forever.b) For the depreciable life of the asset.c) Until the firm disposes of the asset.d) For the current period.
395V-MEBCAnswer: B
5) An area of special concern to the auditor occurs when client disposes of assets affected by the investment credit recapture provisions. 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.
405V-MEBCAnswer: C
6) 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 acquisitionsb) Capital acquisitionsc) Disposal of assetsd) Accumulated depreciation
414V-MEBCAnswer: C
7) Which of the following combinations of procedures would an auditor most likely perform to obtain evidence about fixed asset additions?
a) Inspecting documents and physically examining assets.b) Recomputing calculations and obtaining written management representations.c) Observing operating activities and comparing balances to prior period balances.
d) Confirmation ownership and corroborating transactions through inquiries of client personnel.
196V-MEBCAnswer: A
8) An auditor analyzes repairs and maintenance expense accounts primarily to obtain evidence in support of the audit assertion that all
a) Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.
b) Expenditures for property and equipment have not been charged to expense.c) Noncapitalizable 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.
197V-MEBCAnswer: B
9) 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 is considered (ending
balance).d) All three of the above.
391V-MEBCAnswer: B
10) Which of the following statements is not typical of property, plant and equipment as compared to most current asset accounts?
a) A property, plant and equipment cutoff error near year-end has a more significant effect on net income.
b) Relatively few transactions occur in property, plant and equipment during the year.c) The assets involved with property, plant and equipment during the year.d) Property, plant and equipment accounts typically have high monetary value.
372V-MEBCAnswer: A
Chapter 13: Auditing Debt Obligations and Stockholders’ Equity Accounts
Questions:
1) Which of the following is least likely to be an audit objective for debt?
a) Determine the existence of recorded debt.b) Establish the completeness of recorded debt.c) Determine that the client has rights to receive proceeds relating to the redemption of
debt.d) Determine that the valuation of debt is in accordance with financial reporting
standards.416V-MEBC
Answer: C2) The auditor can best verify a client’s bond sinking fund transactions and year-end balances by:
a) Recomputation of interest expense, interest payable, and amortization of bond discount or premium.
b) Confirmation with individual holders of retired bonds.c) Confirmation with the bond trustee.d) Examination and count of the bonds retired during the year.
423V-MEBCAnswer: C
3) Which of the following is most likely to be an audit objective in the audit of owner’s equity?
a) Establish that recorded owners’ equity includes all long-term debt and equity balances.b) Determine that ordinary share is valued at current market value.c) Determine that the presentation and disclosure of owners’ equity is appropriate.d) Determine that the existence of recorded owners’ equity is in conformity with the
equity accounting rule valuations.426V-MEBC
Answer: C4) Treetop Corporation acquired a building and arranged mortgage financing during the year.
Verification of the related mortgage acquisitions costs would be least likely to include an examination of the related
a) Deedb) Cancelled Checksc) Closing Statementsd) Interest Expense
199V-MEBCAnswer: A
5) When a client does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning
a) Restrictions on the payment of dividends.b) The number of shares issued and outstandingc) Guarantees of preferred stock liquidation valued) The number of shares subject to agreements to repurchase
206V-MEBCAnswer: B
6) During and audit of an entity’s stockholders’ equity accounts, the auditor determine whether there are restrictions on retained earnings from loans, agreements or law. This audit procedure most likely is intended to verify management’s assertion of
a) Existence or occurrenceb) Completenessc) Valuation or Allocationd) Presentation and Disclosure
205V-MEBCAnswer: D
7) An audit program for the examination of the retained earnings account should include a step that requires verification of the
a) Market value used to charge the retained earnings to account for a 2-1 stock split.b) Approval of the adjustment to the beginning balance as a result of a write down of an
account receivable.c) Authorization for both cash and stock dividends.d) Gain or loss resulting from disposition of treasury shares.
208V-MEBCAnswer: C
8) Which of the following audit procedures would be least effective for detecting contingent liabilities?
a) Abstracting the minutes of the meetings of the board of directors.b) Reviewing the bank confirmation letter.c) Examining confirmation replies from customers.d) Confirming pending legal matters with the corporate attorney.
430V-MEBC
Answer: C9) A transfer agent and a registrar are most likely to provide the auditor with evidence on:
a) Restrictions on the payment of accounts payable.b) Shares issued and outstanding.c) Preferred stock liquidation value.d) Transfers occurring between management and related parties.
419V-MEBCAnswer: B
10) A likely reason that consideration of client compliance with debt provisions is important to an audit is that violation of such debt provisions may affect the total recorded:
a) Number of debt restrictionsb) Current Liabilitiesc) Long-Term Assetsd) Share Capital
418V-MEBCAnswer: B
Chapter 14: Activities Required in Completing a Quality Audit
Questions:
1) 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 of Opinion “Except for” Qualified Opiniona) Yes Yesb) No Noc) No Yesd) Yes No
429V-MEBCAnswer: D
2) Management furnishes the independent auditor with information concerning litigations, claims and assessments. Which of the following is the auditor’s primary means of initiating actions to corroborate such information?
a) Request that client lawyers undertake a reconsideration of matters of litigation, claims and assessments with which they were consulted during the period under examination.
b) Request that the client management send a letter of audit inquiry to those lawyers with whom management consulted concerning litigations, claims and assessments.
c) Request that client lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate and account for litigations, claims and assessments.
d) Request that client management engage outside attorneys to suggest wording of the text of a footnote explaining the nature and probable outcome of existing litigation, claims and assessments.
431V-MEBCAnswer: B
3) 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 meeting 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.
435V-MEBCAnswer: A
4) Although there are no professional requirements to do so on audit engagements, 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.
440V-MEBCAnswer: C
5) A client has a calendar year-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 accelerated 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.
448V-MEBCAnswer: B
6) 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 performing a general review of events occurring in the subsequent period.
451V-MEBCAnswer: D
7) An auditor’s decision about 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 (unaudited) subsequent to the date of
the auditor’s report.d) Assume responsibility for events subsequent to the issuance of the auditor’s report.
438V-MEBCAnswer: A
8) K. Perez audited the financial statements of Dalandan Company for the year ended December 1, 2011. He completed gathering sufficient appropriate evidence on January 30 and later learned of a stock split voted by the BODs on February 5. The financial statements were changed to reflect the split, and he now needs to dual date the report on the company’s financial statements before sending it to the company. Which of the following is the proper form?
a) December 31, 2011, except as to Note X, which is dated January 30, 2011.b) January 30, 2011, except as to Note X, which is dated February 5, 2011.c) December 31, 2010, except as to Note X, which is dated February 5, 2011.d) February 5, 2011, except for the audit completion date, for which date is January 30,
2011.5VII-MEBC
Answer: B9) Santos accepted an engagement to audit the Year 1 financial statements of ABC Company.
ABC completed the preparation of the Year 1 financial statements on February 13, Year 2, and Santos began the field work on February 17, Year 2. Santos completed gathering sufficient appropriate audit evidence on March 24, Year 2, and completed the report on March 28, Year 2. The management representations normally would be dated:
a) February 13, Year 2b) February 17, Year 2c) March 24, Year 2d) March 28, Year 2
16VII-MEBCAnswer: C
10) An auditor accepted an engagement to audit the 2011 financial statements of Hero Corporation and began the fieldwork on September 30, 2011. Hero gave the auditor the 2011 financial statements on January 17, 2012. The auditor completed the audit on February 10, 2012, and delivered the report on February 16, 2012. The client’s representation letter normally would be dated:
a) December 31, 2011b) January 17, 2012c) February 10, 2012d) February 16, 2012
30VII-MEBCAnswer: C
Chapter 15: Audit Reports on Financial Statements
Questions:
1) When reporting under Philippine Standards on Auditing (PSA), certain statements are required in all auditor’s reports (explicit) and others are required only under certain conditions (implicit). Which of the following combinations that follow correctly describe the auditor’s responsibilities for reporting under the following standards?
2) The Rotter Company changed accounting principles in 2012 from those followed in 2011. The auditor believes that the new principles are not in conformity with Financial Reporting Standards, and ergo that the 2012 financial statements are misleading. The change (including its peso effect) has been described in the notes to the 2012 statements, which are being presented by them. Under these circumstances in reporting on the 2012 financial statements, the auditor should
a) Express an adverse opinion with an explanatory paragraph disclosing the reason (the accounting change) for the opinion.
b) Express an unqualified opinion with an explanatory paragraph, and disclose the accounting change from 2011 and its effect on the financial statements.
c) Disclaim an opinion and explain all of the reasons therefore.d) Express an adverse opinion regarding the 2012 financial statements, but do not
include an explanatory paragraph disclosing the reason therefore, since it will be included in the notes to the statements.
110VIII-MEBCAnswer: A
3) When component auditors are involved in the current audit of parts of the entity’s business, the group engagement team partner may issue a report that
a) Mentions the component auditors, describes the extent of the component auditor’s work, and expresses an unqualified opinion.
b) Does not mention the component auditors and expresses an unqualified opinion in a standard audit report.
c) Places primary responsibility for the reporting on the component auditors.d) Names the component auditors, describes their work, and presents only the principal
auditor’s report.7VIII-MEBC
Answer: A4) Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had
ended. The timing of green’s appointment as auditor and the start of field work made confirmation of accounts receivable by direct communication with the debtors ineffective. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green’s auditor’s report most likely contained a(an)
a) Unqualified opinionb) Unqualified opinion with explanatory languagec) Qualified opinion due to a scope limitationd) Qualified opinion due to departure from auditing standards.
243VIII-MEBCAnswer: A
5) Clark Medina, CPA, compiled and properly reported on the financial statements of Leah Olivar Co, a nonpublic entity, for the year ended March 31, 2011. These financial statements omitted substantially all disclosures required by the Philippine Financial Reporting Standards (PFRS). Leah Olivar asked Clark Medina to compile the statements for the year ended March 31, 2012, and to include all PFRS disclosures for the 2012 financial statements only, but otherwise present both years’ financial statements in comparative form. What is Clark Medina’s responsibility concerning the proposed engagement?
a) Clark Medina may not report on the comparative financial statements because the 2011 statements are not comparable to the 2012 statements that include the PFRS disclosures.
b) Clark Medina may report on the comparative financial statements provided the 2011 statements do not contain any obvious material misstatements.
c) Clark Medina may report on the comparative financial statements provided an explanatory paragraph is added to Clark Medina’s report on the comparative financial statements.
d) Clark Medina may report on the comparative financial statements provided Clark updates the report on the 2011 statements that do not include the PFRS disclosures.
206mVIII-MEBCAnswer: A
6) An entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year’s financial statements, but is reasonably certain to have a substantial effect in later years. If the changes is disclosed in the notes to the financial statements, the auditor should issue a report with a(an)
7) Sue, an independent auditor was engaged to perform an examination of the financial statements of Barn Inc. one month after its fiscal year had ended. Although the inventory
count was not observed by Sue, and accounts receivable were not confirmed by direct communication with debtors, Sue was able to gain satisfaction by applying alternative auditing procedures. Sue’s auditor’s report will probably contain
a) A standard unqualified opinionb) An unqualified opinion and an explanatory paragraphc) Either a qualified opinion or a disclaimer of opiniond) An “except for” qualification
91VIII-MEBCAnswer: A
8) On September 30, 2012, Miller was asked to reissue an auditor’s report, dated March 31, 2012, on a client’s financial statements for the year ended December 31, 2011. Miller will submit the reissued report to the client in document that contains information in addition to the client basic financial statements. However, Miller discovered that the client suffered substantial losses on receivables resulting from conditions that occurred since March 31, 2012. Miller should
a) Request the client to disclose the event in a separate, appropriately labeled note to the financial statements and reissue the original reports with its original date.
b) Request the client to restate the financial statement and reissue the original report with a dual date.
c) Reissue the original report with its original date without regard whether the event is disclosed in a separate note to the financial statements.
d) Not reissue the original report but issue a “subject to” qualified opinion that discloses the event in a separate explanatory paragraph.
168VIII-MEBCAnswer: A
9) Wilson, CPA, completed the field work if the audit of Abco’s December 31, 2011 financial statements on March 6, 2012. A subsequent event requiring adjustment to the 2011 financial statements occurred on April 10, 2012, and came to Wilson’s attention on April 24, 2012. If the adjustment is made without disclosure of the event, Wilson’s report ordinarily should be dated
a) March 6, 2012b) April 10, 2012c) April 24, 2012d) Using dual dating
166VIII-MEBCAnswer: A
10) Management believes and the auditor is satisfied that the chance of a material loss resulting from the resolution of a lawsuit is more than remote but less than probable. Which of the following matters should the auditor consider in deciding whether to add an explanatory paragraph?
Likelihood that loss is closer Magnitude by which the loss to probable than remote exceeds the auditor’s materiality
1) The aggregated misstatement in the financial statement is made up of:
Known/Likely Projected Othera) Yes Yes Yesb) Yes Yes Noc) No Yes Nod) No Yes Yes
27VII-MEBC
Answer: A
2) Which of the following events occurring on January 5, 2012, is most likely to result in an adjusting entry to the 2011 financial statements?
a) A business combinationb) Early retirement of bonds payablec) Settlement of litigationd) Plant closure due to a strike
33VII-MEBCAnswer: C
3) Which of the following is an effective internal accounting control used to prove that production department employees are properly validating payroll time cards at a 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 to 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.
365V-MEBCAnswer: C
4) Although the validity of the evidential matter is dependent on the circumstances in which it is obtained, there are three assumptions which have some usefulness. The situations given below indicate the relative degrees of reliability a CPA has assigned to two types of evidence obtained in different situations. Which describes an exception to one of the general assumptions?
a) The CPA places more reliance on the balance in the scrap sales account at Plant A where the CPA has made limited tests of transactions because of good internal control than at Plant B where the CPA has made extensive tests of transactions because of poor internal control.
b) The CPA places more reliance on the CPA’s computation of interest payable on outstanding bonds than on the amount confirmed by the trustee.
c) The CPA places more reliance on the report of an expert on an inventory of precious gems than on the CPA’s physical observation of the gems.
d) The CPA places more reliance on a schedule of insurance coverage obtained from the company’s insurance agent than on one prepared by the internal audit staff.
161V-MEBCAnswer: A
5) Which of the following statements is correct concerning related party transactions?
a) In the absence of evidence to the contrary, related party transactions should be assumed to be outside the ordinary course of business.
b) An auditor should determine whether a particular transaction would have occurred of the parties had not been related.
c) An auditor should substantiate that related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transaction.
d) The audit procedures directed toward identifying related party transactions should include considering whether transactions are occurring, but are not being given proper accounting recognition.
223V-MEBCAnswer: D
6) 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 share capital 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 event giving rise to the claim took place after the
balance sheet date.442V-MEBC
Answer: C7) George Green, CPA, is preparing a report on internal control. He has already discussed the
internal control weaknesses with the appropriate client officials. During these discussions the client stated that, given its circumstances, there was no practicable corrective action which could be taken for one of the major weaknesses and therefore asked that it not be included in Green’s report. In the final analysis, Green concurred that no corrective action by management is practicable. Which of the following is the most appropriate course of actions for Green to take?
a) He must include this weakness in his report; otherwise, he will be in violation of the Philippine Standards on Auditing.
b) He may omit this weakness from his report without any further mention.c) He may omit this weakness from his report but should send a confidential memo to the
Board of Directors pointing out the nature of the weakness and why it was omitted from his report.
d) He may omit this weakness from his report but should clearly state that the report is restricted to material weaknesses for which corrective action by management may be practicable in the circumstances.
116IV-MEBCAnswer: B
8) The most important consideration in evaluating the fairness of the amount 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 expense incurred for the prior period.c) The amount expended to date in the current period.d) The profitability of the client which will enable these liabilities to be met.
356V-MEBCAnswer: C
9) In considering materiality for planning purposes, an auditor believes that misstatements aggregating P10,000 would have a material effect on an entity’s income statement; but that misstatements would have to aggregate P20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate
a) P10,000b) P15,000c) P20,000d) P30,000
160III-MEBCAnswer: A
10) 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 financial reporting standards. 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.
446V-MEBCAnswer: A
Chapter 17: Other Services Provided by Audit Firms
Questions:
1) Which of the following is a general standard of generally accepted attestation standards but not a fundamental auditing principle?
a) Appropriate competence and capabilityb) Adequate knowledge in the subject matterc) Independenced) Due Care
2X-MEBCAnswer: B
2) In performing an attestation engagement on prospective financial information (PFI), which of the following is not required?
a) If the basis of the PFI is different than the financial statements, a reconciliation of the two must be provided.
b) Management must disclose all significant assumptions used.c) Management must disclose significant accounting policies and procedures used in
generating the PFI.d) Management must disclose the probability of obtaining the results included in the PFI.
3X-MEBCAnswer: D
3) When an auditor reports on financial statements prepared on an entity’s income tax basis, the auditor’s report should:
a) Disclose that the income tax basis is a comprehensive basis of accounting other than the financial reporting standards.
b) Disclaim an opinion on whether the statements were examined in accordance with the Philippine Standards on Auditing.
c) Not express an opinion on whether the statements are presented in conformity with the comprehensive basis of accounting used.
d) Include an explanation on how the results of operations differ from the cash receipts and disbursements basis of accounting.
102X-MEBCAnswer: A
4) An accountant has been asked to compile the financial statements of a nonpublic company on a prescribed form that omits substantially all the disclosures required by financial reporting standards. If the prescribed form is a standard preprinted form adopted by the company’s industry trade association, and is to be transmitted only to such association, the accountant
a) Need not advise the industry trade association of the omission of all disclosures.b) Should disclose the details of the omissions in separate paragraphs of the compilation
report.c) Is precluded from issuing a compilation report when all disclosures are omitted.
d) Should express limited assurance that the financial statements are free of material misstatements.
50X-MEBCAnswer: A
5) The term “special reports” may include all of the following, except reports on financial statements:
a) Of a partnership which follows accounting practices used to file its tax return.b) Prepared for limited purposes such as a report that relates to certain aspects of
financial statements.c) Of an organization that has limited the scope of the auditor’s examination.d) Of an organization which maintains its accounts and prepares its statements on a cash
or other comprehensive basis of accounting which is materially at variance with accounting practices customarily followed in preparing accrual-basis statements.
90X-MEBCAnswer: C
6) You are a CPA retained by the manager of a cooperative retirement village to do “write-up work”. You are expected to prepare unaudited financial statements with each page marked “unaudited” and accompanied by a disclaimer of opinion stating no audit was made. In performing the work, you discover that there are invoices to support P25,000 of the manager’s claimed disbursements. The manager informs you that all the disbursements are proper. What should you do?
a) Submit the expected statements but omit P25,000 of unsupported disbursements.b) Include the unsupported disbursements in the statements, since you are not expected
to make an audit.c) Obtain, from the manager, a written statement that you informed him of the missing
invoices and include his assurance that the disbursements are proper.d) Notify the owners that some of the claimed disbursements are unsupported; and
withdraw if the situation is not satisfactorily resolved.68X-MEBC
Answer: D7) An auditor has been asked to report on the balance sheet of Kane Company but not on the
other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor
a) May accept the engagement because such engagements merely involve limited reporting objectives.
b) May accept the engagement but should claim an opinion because of an inability to apply procedures considered necessary.
c) Should refuse the engagement because there is a client-imposed scope limitation.d) Should refuse the engagement because of a departure from standards on auditing.
55X-MEBCAnswer: A
8) In the course of an engagement to prepare unaudited financial statements, the client requests that the CPA perform normal accounts receivable audit confirmation procedures. The CPA agrees and performs such procedures. The confirmation procedures
a) Are part of an auditing service that change the scope of the engagement to that of an audit in accordance with the Philippine Standards on Auditing (PSA).
b) Are part of an accounting service and are not performed for the purpose of conducting an audit in accordance with the Philippine Standards on Auditing (PSA).
c) Are not permitted when the purpose of the engagement is to prepare unaudited financial statements and the work to be performed is not in accordance with the standards on auditing.
d) Would require the CPA to render a report that indicates that the examination was conducted in accordance with the Philippine Standards on Auditing (PSA), but was limited in scope.
66X-MEBCAnswer: B
9) One example of a “special report” as defined by Philippine Standards on Auditing (PSA) is a report issued in connection with
a) A feasibility studyb) A limited review of interim financial informationc) Price-level basis financial statementsd) Compliance with a contractual agreement not related to the financial statements.
64X-MEBCAnswer: C
10) One of the conditions required for an accountant to submit a written personal financial plan containing unaudited financial statements to a client without complying with the requirements of PSRS and PSRE (Compilation and Review of Financial Statements) is that the
a) Client agrees that the financial statements will not be used to obtain creditb) Accountant compiled or reviewed the client’s financial statements for the immediate
prior yearc) Engagement letter acknowledges that the financial statements will contain departures
from financial reporting standardsd) Accountant expresses limited assurance that the financial statements are free of any
