MaoEn/USCPA_AUD_Data huggingface dataset:
Choice "C" is incorrect. The auditor should communicate the level of responsibility that he/she is assuming under GAAS.
Choice "D" is incorrect. Unless all those charged with governance are also involved with managing the entity, the auditor should inform those charged with governance about adjustments arising from the audit, regardless of whether or not management recorded them."
When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations:
A.
Lists of the customers' recent payments that the client has already recorded.
B.
Client-prepared statements of account that show the details of the account balances.
C.
Copies of the customers' purchase orders that support the account balances.
D.
Copies of the client's shipping documents that support the account balances.,"Choice "B" is correct. When confirming the total accounts receivable balance, it is beneficial to include a client-prepared statement of account that shows the details of the account balances so that the confirmation recipients can more easily verify the receivable balance.
Choice "A" is incorrect. Listing client payments that had already been recorded would generally not be relevant in confirming unpaid invoices.
Choice "C" is incorrect. The customer's purchase orders would not generally be helpful to allow a respondent to be able to confirm an existing balance.
Choice "D" is incorrect. The client's shipping documents would not generally be helpful to allow a respondent to be able to confirm an existing balance."
An auditor tests an entity's control of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of:
A.
Existence.
B.
Completeness.
C.
Valuation and allocation.
D.
Rights and obligations.,"Choice "C" is correct. By ensuring that credit approval is obtained before goods are shipped to customers, the auditor is testing management's assertion that accounts receivable are collectible (valuation or allocation).
Choice "A" is incorrect. Ensuring that credit approval is obtained before goods are shipped does not support the existence assertion.
Choice "B" is incorrect. Ensuring that credit approval is obtained before goods are shipped does not support the completeness assertion.
Choice "D" is incorrect. Ensuring that credit approval is obtained before goods are shipped does not support the rights and obligations assertion."
Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?
A.
Tracing inventory items from the tag listing back to the physical inventory quantities.
B.
Performing cutoff procedures for shipping and receiving.
C.
Examining paid vendor invoices.
D.
Scanning perpetual inventory, production, and purchasing records.,"Choice "B" is correct. Performing cutoff procedures provides assurance that goods in transit (shipped or received) are appropriately included or excluded from inventory and this procedure is most appropriate for testing the completeness assertion.
Choice "A" is incorrect. Tracing items from the tag listing back to the physical inventory quantities is a test for the existence of the inventory on the tag listing. For the completeness assertion, the auditor should trace from the physical inventory quantities to the tag listing.
Choice "C" is incorrect. Examining paid vendor invoices would exclude invoices from vendors for goods received but not yet billed by the vendor.
Choice "D" is incorrect. Scanning perpetual inventory, production, and purchasing records would only include transactions that have been recorded. The completeness assertion is focused on unrecorded transactions."
The primary responsibility of a bank acting as registrar of capital stock is to:
A.
Act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury stock.
B.
Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation.
C.
Account for stock certificates by comparing the total shares outstanding to the total in the shareholders subsidiary ledger.
D.
Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation.,"Choice "B" is correct. Large companies often use a registrar to provide registration services and maintain the stockholder list. The primary responsibility of the registrar is to verify that stock is issued only with proper authorization.
Choice "A" is incorrect. A registrar does not have the described responsibility with respect to mergers, acquisitions, and the sale of treasury stock.
Choice "C" is incorrect. Since the company's management is responsible for maintaining accurate accounting records, a responsible company employee (not the registrar) would periodically compare the recorded number of shares outstanding (per company records) with the total in the shareholders' subsidiary ledger (per the registrar).
Choice "D" is incorrect. The company's board of directors bears responsibility for proper declaration of dividends, not the stock registrar."
Which of the following matters would an auditor most likely include in a management representation letter?
A.
The reasonableness of significant assumptions used in making accounting estimates.
B.
Communications with those charged with governance concerning weaknesses in internal control.
C.
Plans to acquire or merge with other entities in the subsequent year.
D.
Management's acknowledgment of its responsibility for the detection of employee fraud.,"Choice "A" is correct. Specific written representations obtained by the auditor should include a statement that the significant assumptions used by management in making accounting estimates are reasonable.
Choice "B" is incorrect. Communications with those charged with governance are generally not included in the management representation letter, whereas communications from regulatory agencies regarding noncompliance with, or deficiencies in, financial reporting practices would be included.
Choice "C" is incorrect. Management's subsequent plans need not be included in the management representation letter, unless they will affect the carrying value or classification of assets and liabilities.
Choice "D" is incorrect. Management acknowledges its responsibility for the design, implementation, and maintenance of internal control to prevent and detect fraud, but does not acknowledge its responsibility to detect fraud."
To which of the following matters would materiality limits not apply when obtaining written client representations?
A.
Information about related party transactions.
B.
Disclosure of line-of-credit arrangements.
C.
Violations of state labor regulations.
D.
Instances of fraud involving management.,"Choice "D" is correct. Materiality limits do not apply to client representations involving management fraud. The management representation letter generally indicates that "we have no knowledge of fraud or suspected fraud involving management" (without reference to materiality). The only mention of material fraud relates to situations involving parties other than management.
Choice "A" is incorrect. Since GAAP requires disclosure of material related party transactions, materiality limits do apply to representations about such matters.
Choice "B" is incorrect. Since GAAP requires disclosure of material line-of-credit arrangements, materiality limits do apply to representations about such matters.
Choice "C" is incorrect. Materiality limits do apply to violations of state labor regulations. The management representation letter generally indicates that there are no violations of regulations "whose effects should be considered for financial statement disclosure"−and only material effects would typically be considered for disclosure."
Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
A.
Reconcile receiving reports with related cash payments made just prior to the year-end.
B.
Compare cash payments made after the balance sheet date with the accounts payable trial balance.
C.
Review the responses of accounts receivable confirmations for indications of disputes with customers.
D.
Examine a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.,"Choice "B" is correct. An auditor most likely would compare cash payments made after the balance sheet date with the accounts payable trial balance in searching for unrecorded payables. The auditor is looking for items that should have been recorded as of the balance sheet date, but were not.
Choice "A" is incorrect. Reconciling receiving reports with related cash payments made just prior to year-end would not help the auditor search for unrecorded payables. Cash payments for items received should result in the payable being eliminated.
Choice "C" is incorrect. Reviewing the responses of accounts receivable confirmations for indications of disputes with customers is a substantive procedure related to the revenue cycle, not the expenditure cycle.
Choice "D" is incorrect. An auditor most likely would compare a sample of creditor balances to supporting invoices, receiving reports, and purchase orders to verify that the accounts payable exist. The search for unrecorded payables is primarily used to support the completeness assertion."
A test of a payroll system involved comparing an individual's number of overtime hours a week with an average of weekly overtime during a similar period in a prior year and evaluating the results. This is an example of what type of test?
A.
Reasonableness test.
B.
Category test.
C.
Detail test.
D.
Range test.,"Choice "A" is correct. In a reasonableness test, data in two or more fields are checked for consistency. Comparing overtime hours in the current period to a prior period is one type of reasonableness test.
Choice "B" is incorrect. A category test is not a commonly used term when discussing application controls.
Choice "C" is incorrect. A test of details is one in which specific details are evaluated, whereas in a reasonableness test, two different fields are compared. A test of details with respect to overtime hours might involve looking at time sheets for that week, for example.
Choice "D" is incorrect. A range test identifies amounts that fall outside a predetermined range."
To which of the following matters would materiality limits not apply in obtaining written management representations?
A.
The availability of minutes of stockholders' and directors' meetings.
B.
The disclosure of compensating balance arrangements involving related parties.
C.
Reductions of obsolete inventory to net realizable value.
D.
Losses from purchase commitments at prices in excess of market value.,"Choice "A" is correct. Management's representations may be limited to matters that are considered either individually or collectively material to the financial statements, provided management and the auditor have reached an understanding of the limits of materiality for this purpose. Such limitations would not apply to those representations that are not directly related to amounts included in the financial statements, such as management's acknowledgment of its responsibility for the financial statements, availability of financial records, and completeness and availability of minutes.
Choice "B" is incorrect. The disclosure of compensating balances is directly related to amounts in the financial statements and thus is subject to materiality limits.
Choice "C" is incorrect. The reduction of obsolete inventory to net realizable value is directly related to amounts in the financial statements and thus is subject to materiality limits.
Choice "D" is incorrect. Losses from purchase commitments are directly related to amounts in the financial statements and thus are subject to materiality limits."
Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
A.
Examining unusual relationships between monthly accounts payable balances and recorded cash payments.
B.
Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date.
C.
Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
D.
Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports.,"Choice "C" is correct. Unrecorded trade accounts payable are best identified by reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
Choice "A" is incorrect. There is not usually a predictable relationship between accounts payable and cash payments, because management can pay cash or incur additional liabilities at its discretion.
Choice "B" is incorrect. Reconciling vendors' statements to the file of receiving reports would not identify unrecorded payables, as the vendor statement would still agree with the receiving report even if the payable were not recorded.
Choice "D" is incorrect. Investigating payables already recorded would not help identify unrecorded trade payables."
An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to:
A.
Determine that purchases were properly recorded.
B.
Test whether payments were for goods actually ordered.
C.
Verify that cash disbursements were for goods actually received.
D.
Identify unusually large purchases that should be investigated further.,"Choice "A" is correct. In general, an audit procedure can be restated as the question to be answered. In this case, tracing a sample of purchase orders and related receiving reports to the purchases journal and the cash disbursements journal seeks to answer the question, "Were all purchases properly recorded?" (the completeness assertion).
Choice "B" is incorrect. In order to verify that cash disbursements were for goods actually ordered, a sample of cash disbursements should be vouched back to purchase orders.
Choice "C" is incorrect. In order to verify that cash disbursements were for goods actually received, a sample of cash disbursements should be vouched back to receiving reports.
Choice "D" is incorrect. Tracing a sample of source documents to summary records would not identify unusually large transactions requiring additional attention."
In a well designed internal control, employees in the same department most likely would approve purchase orders, and also:
A.
Inspect goods upon receipt.
B.
Authorize requisitions of goods.
C.
Negotiate terms with vendors.
D.
Reconcile the open invoice file.,"Choice "C" is correct. In a well designed internal control, employees in the purchasing department most likely would approve purchase orders and also negotiate terms with vendors.
Choice "A" is incorrect. Employees in the receiving department inspect goods upon receipt while the purchasing agent approves purchase orders.
Choice "B" is incorrect. The stores department (personnel in the raw materials inventory area) authorize requisition of goods while the purchasing agent approves purchase orders.
Choice "D" is incorrect. Personnel in the accounts payable department reconcile the open invoice file while the purchasing agent approves purchase orders."
Under properly designed internal control, the same employee most likely would match vendors' invoices with receiving reports and also:
A.
Recompute the calculations on vendors' invoices.
B.
Reconcile the accounts payable ledger.
C.
Cancel vendors' invoices after payment.
D.
Post the detailed accounts payable records.,"Choice "A" is correct. Matching vendor's invoices with receiving reports provides authorization for payment and is generally performed in the accounts payable department. Recalculation of vendor invoices is compatible with this authorization function.
Choice "B" is incorrect. This review procedure (independent verification) should be performed by someone independent of the employee who approved the invoice for payment.
Choice "C" is incorrect. Payment and cancellation of vendor invoices should be performed by someone (generally the treasurer) other than the individual authorizing payment.
Choice "D" is incorrect. Posting the accounts payable records (recording) is incompatible with matching (authorization). Generally these functions would be performed by two different employees."
In performing a count of negotiable securities, an auditor records the details of the count on a security count worksheet. What other information is usually included on this worksheet?
A.
An acknowledgment by a client representative that the securities were returned intact.
B.
An evaluation of the client's internal control concerning physical access to the securities.
C.
An analysis of realized gains and losses from the sale of securities during the year.
D.
A description of the client's procedures that prevent the negotiation of securities by just one person.,"Choice "A" is correct. After performing a count of negotiable securities, the auditor would generally obtain an acknowledgment from the client that the securities were returned intact. This helps maintain accountability for the securities, and reduces the likelihood of employee misappropriation (e.g., if a client employee were to steal a security and blame the auditor).
Choice "B" is incorrect. The auditor generally would not include an evaluation of the client's internal control on a security count worksheet, although this information would be included elsewhere in the audit documentation.
Choice "C" is incorrect. The auditor generally would not include an analysis of realized gains and losses on a security count worksheet, although this information would be included elsewhere in the audit documentation.
Choice "D" is incorrect. The auditor generally would not include a description of the client's control procedures on a security count worksheet, although this information might be included elsewhere in the audit documentation."
An auditor scans a client's investment records for the period just before and just after the year-end to determine that any transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evidence about management's financial statement assertions of:
A.
Existence, and understandability of presentation and classification.
B.
Understandability of presentation and classification, and valuation and accuracy.
C.
Valuation and accuracy, and rights and obligations.
D.
Rights and obligations, and existence.,"Choice "B" is correct. Investments may be classified as trading, available-for-sale, or held-to-maturity. The classification of each investment into one of these three categories determines how it will be shown on the balance sheet (understandability of presentation and classification) and whether it will be valued at market or at amortized cost (valuation and accuracy).
Choices "D", "C", and "A" are incorrect. Reviewing transfers of investments between categories will not provide evidence regarding rights and obligations or existence. Rights and obligations and existence would be concerned with whether the securities actually exist and are owned by the client."
Which of the following procedures would the auditor most likely perform to determine that an interest rate swap contract is properly stated at fair value on the client's balance sheet?
A.
Comparing the contract amount with the fair value of the contract and calculating the unrealized gain or loss.
B.
Testing the data used to arrive at the fair value of the interest rate swap contract.
C.
Sending a positive confirmation to the interest rate swap contract custodian.
D.
Inspecting the minutes of the board of directors' meetings for approval of the interest rate swap contract.,"Choice “B” is correct. The auditor most likely would test the data used to arrive at the fair value of the interest rate swap contract to determine that an interest rate swap contract is properly stated at fair value on the client's balance sheet.
Choice “A” is incorrect. Comparing the contract amount with the fair value of the contract and calculating the unrealized gain or loss provides evidence for the amount of unrealized gain or loss that should be recorded in other comprehensive income or the income statement, but it would not help determine that the interest rate swap is properly stated at fair value on the balance sheet.
Choice “C” is incorrect. Confirmations are typically not sent to the interest rate swap custodian. In addition, there may be just two parties to the transaction with no designated custodian.
Choice “D” is incorrect. Inspecting the minutes of the board of directors' meetings for approval of the interest rate swap contract would not provide evidence that the contract is stated at fair value on the balance sheet. This would provide evidence related to the control that the swap was appropriately approved."
The negative request form of accounts receivable confirmation is useful particularly when the:
Assessed level
of control
risk relating to
receivables is
Number of
small
balances is
Consideration
by the
recipient is
A.
High
Many
Likely
B.
High
Few
Likely
C.
Low
Few
Unlikely
D.
Low
Many
Likely,"Choice "D" is correct. The negative request form of accounts receivable confirmation is useful particularly when:
The assessed level of control risk relating to receivables is low (if control risk is high, then positive confirmation requests would probably be sent),
There are many small balances (which would make it difficult to keep the number of positive confirmations to a reasonably low level), and
Consideration of the confirmation by the recipient is likely (since the auditor is relying on the customers' consideration as the sole basis of support for the confirmation).
Choices "C", "B", and "A" are incorrect, based on the above explanation."
An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by:
A.
A substantial fluctuation in the price of the investee's common stock on a national stock exchange.
B.
An error in recording the unrealized gain from an increase in the fair value of available-for sale securities in the income account for trading securities.
C.
The investee's decision to reduce cash dividends declared per share of its common stock.
D.
An error in recording amortization of the excess of the investor's cost over the investment's underlying book value.,"Choice "D" is correct. Under equity method accounting, the amortization of the excess of the investor's cost over the investment's underlying book value reduces the investor's income from the equity method investment. If amortization is calculated incorrectly (i.e., the amortization is too high), this could lower the return on the investment.
Choice "A" is incorrect. Equity method investments are not reported at fair value. Therefore, a substantial fluctuation in the price of the investee's common stock would have no impact on the investor's return on the equity method investment.
NOTE to students: The answer to this question (and your ability to perform a successful audit) depends on your knowledge of financial accounting concepts. If you are unfamiliar with equity method accounting, please consult the Financial 3 lecture in the Becker Financial materials.
Choice "B" is incorrect. Equity method investments are accounted for separate from investments classified as trading or available-for-sale. Therefore, an error in the accounting for trading and available-for-sale securities should have no impact on the calculated return on an equity method investment.
Choice "C" is incorrect. Under equity method accounting, dividends are recorded as a reduction of the investor's investment in the balance sheet, not as income on the income statement. Therefore, the lower dividend should not reduce the calculated return on the equity method investment."