CHAPTER 14   

1.Which of the following is not an account affected by the sales and collection cycle?
d.  Gross margin
  
2.Which of the following is not one of the five classes of transactions included in the sales and collection cycle?
d.  Depreciation expense
  
3.What event initiates a transaction in the sales and collection cycle?
d.  Customer request for goods.
  
4.A _________ is a document that indicates a request for merchandise by a customer.
c.  customer order

5.A _________ is a document that communicates the description, quantity, and related information for goods ordered by a customer.
a.  sales order 
  
6.What critical event must take place before goods can be shipped?
b.  Credit approval
    
7.Before goods are shipped on account, a properly authorized person must:
c.  approve the customer’s credit.
  
8.A document prepared to initiate shipment of the goods sold is the:
b.  bill of lading.
  

9.The document used to indicate to the customer the amount of a sale and payment due date is the:
a.  sales invoice.
  
10.At what point in the sales and collection cycle does the company first give up assets?
d.  Shipment of goods
  
11.Most companies recognize sales revenue when:
c.  goods are shipped.
    
12.Which of the following is not a business function within the “Sales” class of transactions?
c.  Processing and recording sales returns and allowances.
  
13.The total of the individual account balances in the accounts receivable master file equals the:
d.  balance of the accounts receivable account in the general ledger.
  
14.A listing of amounts owed by customer which shows how long each component part has been due is the:
d.  aged accounts receivable trial balance.
  
15.A document sent to each customer showing his or her beginning accounts receivable balance and the amount and date of each sale, cash payment received, any debit or credit memo issued, and the ending balance is the:
b.  monthly statement.
  
16.The document that accompanies the customer’s payment is the:  
b.  remittance advice.

17.The document that supports reductions in accounts receivable is the:
c.  credit memo.


18.A document that initiates shipment of goods and indicates the description of the merchandise, the quantity shipped, and customer name and address is the:
a.  bill of lading.
  
19.When designing audit procedures, the direction of tests is a crucial step in satisfying the:
c.  completeness objective.
  
  
20.Which of the following documents is not commonly associated with the “cash receipts” class of transactions?
b.  Sales order.
  
  
21.The process which postpones entries for the collection of receivables to conceal an existing cash shortage is referred to as:
b.  lapping.
  
  
22.When sales invoices are automatically calculated and posted by a computer, the auditor may be able to reduce substantive tests of transactions for which, if any, objective?
a.  Accuracy
  
  
23.The ____________ is a contract between a carrier (e.g., a trucking company) and the seller of goods that dictates the details surrounding the shipment of goods.
a.  bill of lading
  
 
24.Some companies have customers send payments directly to an address maintained by a bank. This is called a(n) _______ system.
c.  lockbox
  
25.In many audits, no substantive tests of transactions are made for the ________ objective on the grounds that understatement of sales is not a concern.
c.  completeness
  
  
26.The most important aspects of the billing function include all but which of the following?
b.  Making sure that no shipment has been billed more than twice.

27.For the most part, the audit of the sales and collection cycle: 
c.  can be performed independently of the audit of other cycles.

  
28.An audit procedure that compares the name, amount, and dates shown on remittance advices with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting:
b.  lapping.
    
29.In which of the following will sales return and allowances not be recorded?
c.  Cash receipts journal
  
  
30.For most firms, the function of indicating credit approval is recorded on the:
a.  sales order.

  
31.The document used as the basis for recording sales transactions and updating the accounts receivable master file is the:
d.  sales invoice.
  
 

32.When posting the sales journal, details of the journal are posted to “x” and journal totals are posted to “y.”
  c.  x = the accounts receivable master file.  y = the general ledger.
  
  
33.Credit memos are normally issued for what purpose(s)?
d.  Both a and b. (a.To maintain control of returned merchandise and b.To facilitate record keeping)
  
34.Proper auditing requires that an account receivable must be charged off by the client when:
d.  the client company concludes that an amount is no longer collectible.
  
35.Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts?
c.  Bank employees.
  
  
36.A document used to indicate authority to write an account receivable off as uncollectible is the: 
b.  uncollectible account authorization form.
    
37.After the auditor has identified the key internal controls and deficiencies and assessed control risk for a private company, it is appropriate to decide whether:
a.  substantive tests will be reduced sufficiently to justify costs of performing tests of controls.
    
38.Management’s assertions for sales and collection activities are _____ when sales are generated via e-commerce activities.
a.  unchanged
 
39.  To prevent fraud, management should deny cash access to anyone responsible for:
c.both a and b.(a.entering sales transactions. and b.entering cash receipts transactions)
  
40.One key internal control to prevent fictitious transactions in the sales and collection cycle is:
a.  to include a list of customer numbers in the computer files.
  
41. The credit-granting function should be separated from which of the following?
c.  Sales function
  
42.Which one of the following statements is true? In deciding on substantive tests of transactions:
a.  some procedures are commonly employed on every audit regardless of the circumstances.

43.To test for recorded sales for which there were no actual shipments, the auditor traces from the:
b.  sales journal to the bill of lading.
  
44.An effective procedure to test for unbilled shipments is to trace from the:
b.  shipping documents to the sales journal.
    
45.The auditor traces items from the source documents to the journals to satisfy the:
b.  completeness objective.
    
46.In many audits of sales transactions, no substantive tests of transactions are performed for the completeness objective because:
b.  overstatements of assets and income are a greater concern than understatements.

47.To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with:
b.  an approved price list.
  
48.Which of the following is not a point at which the auditor deems authorization to be critical?
d.  Each of the above is an important point for authorization.
  
49.With respect to sales, prenumbered documents are intended to:
c.  both a and b. (a.prevent the failure to bill or record sales and b.prevent duplicate billings or recordings of sales)
    
50.Prenumbered documents will only be useful for control purposes if:
b.  the sequence is accounted for periodically.
  
51.It is important that sales be billed and recorded in the journal as soon as possible after:
d.  the shipment takes place.
  
52._______ tests for omitted transactions, while _____ tests for nonexistent transactions.
a.  Tracing, vouching
  
53.The audit procedure referred to as proof of cash receipts is useful to test:
b.  whether all recorded cash receipts have been deposited in the bank.
    
54.Which of the following procedures would ordinarily be best expected to find unrecorded sales?
a.  Compare shipping documents with sales records.

55.At which point in an ordinary sales transaction would a lack of specific authorization be of least concern to the auditor?
d.  Selling of goods for cash.
  
56.Smith Manufacturing Company’s accounts receivable clerk has a friend who is also a Smith’s customer. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to:
b.  require receiving reports to support all credit memorandums before they are approved.
  
  
57.Generally, audit evidence gathered from the sales and collection cycle is combined with evidence from other parts of the audit:
a.  as the evidence accumulation process proceeds.

  
58.Proper separation of duties is useful to prevent various types of misstatements. Which of the following is not an essential separation of duties?
a.  Persons having access to cash should not have access to marketable securities.
  
  
59.Which one of the following is not an auditor’s concern about a key authorization point in the sales/collection cycle?
a.  The receiving room must have authorization before releasing items to inventory control.

60.Transaction-related audit objectives are essentially the same for processing credit memos as for sales with certain differences. Which of the following are two key differences?
d.  Materiality and emphasis on the occurrence objective.
  
61.Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?
a.  Understating the sales journal.
   
62.Which of the following would be the best protection for a company that wishes to prevent the “lapping” of trade accounts receivable?
c.  Have customers send payments directly to the company’s depository bank.

  
63.A proof of cash is not useful in discovering differences in the actual and reported cash balances due to:
c.  cash receipts that were not recorded in the relevant journals.
  
64.When designing substantive tests of transactions for sales, the auditor is concerned with the possibility of several types of misstatements. Which of the following is not one of the types of these misstatements?
b.  Sales to related parties, such as officers and subsidiaries.
  

65.An auditor needs to determine whether all customers of an electric utility company are being billed. The auditor should test from the:
d.  meter department records to the sales register.
  
66.Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?
c.  The cashier posts the receipts to the accounts receivable subsidiary ledger cards.

CHAPTER 15   

1.A sample in which the characteristics of the sample are the same as those of the population is a(n):
b.  representative sample.

2.When the auditor decides to select less than 100 percent of the population for testing, the auditor is said to use:
a.  audit sampling.
    
3.In practice, auditors _________ know if a sample is truly a representative one.
d.  never
  
4.To determine if a sample is truly representative, an auditor must:
c.  audit the entire population.
    
5.One of the ways to eliminate nonsampling risk is through:
b.  proper supervision and instruction of the audit team.
  
6.One cause of nonsampling risk is:
a.  ineffective use of audit procedures.
  
7.An auditor can increase the likelihood that a sample is representative by using care in:
d.  performing all of the above.

8.When the auditor goes through a population and selects items for the sample without regard to their size, source, or other distinguishing characteristics, it is called:
b.  haphazard selection.
    
9.When auditors wish to evaluate a sample statistically, the only acceptable selection method is:
a.  probabilistic selection.

  
10.A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a:
a.  random sample.

11.The process which requires the calculation of an interval and then selects the items based on the size of the interval is:
c.  systematic sample selection.
  
12.________ is the risk that audit tests will not uncover existing exceptions in a sample.
b.  Nonsampling risk.
  
13.________ is the risk that an auditor will reach an incorrect conclusion because a sample is not representative of the population.
a.  Sampling risk
  
14.In systematic sample selection, the population size is divided by the number of sample items desired in order to determine the:
a.  sampling interval.
    
15.Sampling risk may be controlled by:
d.  both a and c. (a.adjusting the sample size and c.using whatever sample selection technique is appropriate for the population)
  
16.Which of the following occurrences would be least likely to attract the auditor’s attention?
b.  Deviations from client’s budgeted values.
    
17.Which of the following statements is correct?
d.  The use of inappropriate audit procedures is a significant cause of nonsampling risk.
  
18.The risk which the auditor is willing to take in accepting a control as being effective when the true population exception rate is greater than a tolerable rate is the:
c.  acceptable risk of assessing control risk too low.

  
19.The exception rate the auditor will permit in the population and still be willing to reduce the assessed level of control risk is called the:
a.  tolerable exception rate.
  
  
20.If the auditor decides to assess control risk at the maximum level in a private company audit, tests of controls are:
c.  not performed.
    
21.Which of the following is not one of the basic phases in audit sampling?
d.  Each of the above is a phase in audit sampling.
  
22.Attributes sampling would be an appropriate method to use on which one of the following procedures in an audit program?
c.  Examine a sample of duplicate sales invoices for credit approval by the credit manager.

23.When the computed upper exception rate is greater than the tolerable exception rate, it is necessary for the auditor to take specific action. Which of the following courses of action would be most difficult to defend if the auditor is ever subject to review by a court?
a.  Reduce the tolerable exception rate so as to accept the sample results.

  
24.Which of the following is not generally considered in determining sample size for tests of controls?
d.  Population size.
  
25.Which of the following statement is correct with respect to the quantification of sampling risk?
c.  Sampling risk can be quantified only when probabilistic selection techniques are used to select the sample.
  
  
26.The auditor may use which of the following criteria when using the directed sample selection technique?
d  a.  Items most likely to contain misstatements.
  b.  Items containing selected population characteristics.
  c.  Large dollar coverage.
  d.  Any of the above.
  
27.Non-sampling errors occur when audit tests do not uncover existing exceptions in the:
b.  sample.
    
28.Which of the following statements is correct with respect to the evaluation of sample results?
c.  It is never acceptable to evaluate a non-probabilistic sample as if it were a statistical one.
    
29.Which of the following statements is a valid criticism of non-statistical sampling?
d.  Conclusions may be drawn in more precise ways when using statistical sampling methods.
  
30.Which of the following methods of sample selection is appropriately used when selecting a random sample?
d.  Both a and b, but not c. (a.Use of random number tables and b.Use of computer generated random numbers)
  
31.Correspondence is established between the random number table and the population by:
b.  deciding the number of digits to use in the random number table and their association with the population numbering system.
    
32. (Public)The acceptable risk of assessing control risk to low will normally be assessed at a ____ level when auditing a public company.
c.  lower
  
33.Which of the following statements is not correct?
b.  It is impossible to draw a six-digit random number from a table that is separated into columns of five digits.
  
34.Which of the following is not one of the types of computer tools used to generate random samples?
d.  Random application search software.
  
35.Auditors are concerned with which type of exceptions?
d.  Auditors are concerned with all of these exceptions.
  
36.In using audit sampling for exception rates, the auditor is primarily interested in determining the _____ the exception rate might be.
d.  none of the above
  
37.The highest estimated exception rate in the population at a particular acceptable risk of assessing control risk too low is:
c.  the computed upper exception rate.
  
38.The advantage of systematic sample selection is that:
a.  it is easy to use.

39.A statistical method used to estimate the proportion of items in a population containing an attribute of interest is:
a.  attributes sampling.
  
40.The exception rate that the auditor will permit in the population and still be willing to use the preliminary control risk assessment is called the:
d.  tolerable exception rate.
  
41.The auditor’s best estimate of the population exception rate is the:
a.  current year’s sample exception rate.
  
42. Place the following steps in their proper order:
4.  State the objectives of the audit test
3.  Define attributes and exception conditions
5.  Specify the tolerable exception rate
2.  Select the sample
1.  Analyze exceptions
c.  4,3,5,2,1.

43.If an auditor judgmentally selects a sample of one hundred items from a population and finds two exceptions, the auditor:
a.  can conclude that the sample exception rate is 2%.

44._________ represents the auditor’s measure of sampling risk.
b.  ARACR
  
  
45.For which of the following audit procedures is audit sampling not appropriate?
a.  Review sales transactions for large and unusual amounts.

46.Which of the following statements about the process of defining the population is not correct?
d.  The auditor can randomly sample from any part of the population that she chooses.
  
47.Which of the following is the exception rate that the auditor expects to find before testing?
b.  Estimated population exception rate.
  
48.Which of the following is not determined until after a sample is tested and evaluated?
c.  Computed exception rate.
  
49.The relationship of tolerable exception rate (TER) to sample size is:
b.  inverse (larger TER = smaller sample).
  
50.Which of the following must be set prior to testing a sample?
d.  Tolerable exception rate.
  
51.The relationship of acceptable risk of accessing control risk too low (ARACR) to sample size is:
c.  inverse (larger ARACR = smaller sample).

52.In attributes sampling, an estimate of the expected population exception rate is necessary to plan the sample size. The relationship of expected population exception rate (EPER) to sample size is:
a.  direct (small EPER = small sample).
    
53.The initial sample size is so called because:
d.  exceptions must be evaluated before deciding whether the sample is sufficiently large to achieve the objectives.
  
54.The sample exception rate equals:
c.  the number of exceptions in the sample divided by the sample size.
  
55.Before the population can be considered acceptable based on the acceptable risk of assessing control risk too low, the computed upper exception rate must be:
c.  less than or equal to the tolerable exception rate.
  
56.Which of the following combinations of attributes and exception conditions is not appropriate?
d.  Evidence that pricing is checked – Lack of initials on duplicate sales invoice indicating that extensions were checked.
  
57.Which of the following statements is not true?
a.  Random selection is statistical measurement.
  
58.An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of:
d.  completeness.
  
 59.The acceptable risk of assessing control risk too low is:
d.  both b and c, but not a. (b.the risk that the auditor is willing to take of accepting a control as effective when it is ineffective and c.the auditor’s measure of sampling risk)
  
60.When using statistical sampling, the auditor would probably require a smaller sample if the:
b.  desired reliability decreases.

61.A principal advantage of statistical methods of attributes sampling over nonstatistical methods is that they provide a scientific basis for establishing the:
d.  sample size.
  
62.In performing a review of a client’s cash disbursements, an auditor uses systematic sample selection with a random start. The primary disadvantage of this technique is population items:
c.  may occur in a systematic pattern, thus negating the randomness of the sample.
  
63.In estimation sampling for attributes, which one of the following must be known to evaluate the sample results?
d.  Sample size.
  
64.Which of the following statements is not correct regarding probabilistic and non-probabilistic sample selection?
b.  It is not acceptable to make non-probabilistic evaluations using probabilistic selection.

65.Non-probabilistic selection methods are not based on mathematical probabilities; therefore:
a.  the extent to which a sample is representative may be difficult to determine.

66.Which of the following statements regarding block sampling is not true?  
c.  A “reasonable number” for most situations is probably at least six blocks from six different periods, locations, divisions, and so forth.
  
67.A means of reducing the potential bias in systematic sample selection is to:
a.  use multiple starts.

68.When deciding on the acceptable risk of assessing control risk too low, the auditor should:
a.  rely on his/her professional judgment.

69.Which of the following statements is true?
d.  The same audit procedures are performed in the same manner for either statistical or nonstatistical sampling.
  
70.When audit procedures have been completed for an attributes sampling application, the auditor must generalize from the sample to the population. Which of the following statements would be incorrect regarding this process?
b.  The computed upper exception rate is the highest exception rate in the population that the auditor is willing to accept.
  
71.When performing tests of controls and tests of transactions for sales, the auditor generally defines the population as:
b.  all sales invoices for the year.
  
72.The difference between the tolerable exception rate and the estimated population exception rate is called: 
c.  precision of the initial sample estimate.
  
73.If an auditor, planning to use statistical sampling, is concerned with the number of a client’s sales invoices that contain mathematical errors, the auditor would most likely utilize:
b.  sampling for attributes.
  
74.If the result obtained from a particular sample is critical to the formation of an audit opinion, which of the following is the most important to the auditor?
a.  Acceptable risk of assessing control risk too low.
  
75.The tolerable rate of exceptions for tests of controls is generally:
b.  higher than the expected rate of errors in the related accounting records.
    
76.An advantage of using statistical sampling techniques is that such techniques:
a.  mathematically measure risk.

77.Auditors who prefer statistical to nonstatistical sampling believe that the principal advantage of statistical sampling flows from its unique ability to:
a.  provide a mathematical measurement of uncertainty.
  
78.Which of the following is an advantage of systematic sample selection over random number sampling?
d.  It does not require establishment of correspondence between random numbers and items in the population.
  
79.What is an auditor’s evaluation of a statistical sample for attributes when a test of 100 documents results in four exceptions if the tolerable exception rate is 5%, the expected population exception rate is 3%, and the allowance for sampling risk is 2%?
b.  Modify planned reliance on the control because the sample exception rate plus the allowance for sampling risk exceeds the tolerable rate.
  
80.In the evaluation of the results of an attributes sample, the fact that the exception rate in the sample was 2% rather than the estimated population exception rate of 4% would cause the computed upper exception rate to:
a.  be less than the tolerable exception rate.
  
81.If the size of the sample to be used in a test of attributes is not determined by using statistical concepts, but the sample is chosen in accordance with random selection procedures:
c.  the auditor may or may not achieve the tolerable exception rate at the acceptable risk of assessing control risk too low.

CHAPTER 16   

1.Which of the following is not a balance-related audit objective evaluated in the audit of accounts receivable?
a.  Timing
  
2.The two primary classes of transactions in the sales and collection cycle are:
b.  sales and cash receipts.
    
3.The appropriate evidence to be obtained from tests of details must be decided on a(n):
c.  audit objectives basis.

4.Which of the following is not a balance-related audit objective evaluated in the audit of accounts receivable?
d.  Each of the above is a balance-related audit objective
  
5.Tests of which balance-related audit objective are normally performed first in an audit of the sales and collection?
d.  Detail tie-in
  
6.For most audits, inherent risk for accounts receivable is moderate or low except for which balance-related audit objectives? 
d.  Realizable value and cutoff.
  
7.Which of the following types of receivables would not deserve the special attention of the auditor?
d.  Each of the above would receive special attention.
  
8.A listing of the balances in the accounts receivable master file at the balance sheet date, by total balance outstanding and by the amount of time the component parts have been outstanding, is the:
b.  aged trial balance.
  
9.Testing the information on the aged trial balance for detail tie-in is a necessary audit procedure, which would normally include:
d  a.  test footing the total column and the columns depicting the aging.
  b.  comparing the total of the trial balance with the general ledger accounts receivable account.
  c.  none of the above.
  d.  all of the above.
  
10.Auditors are often concerned with three aspects of internal controls related to the sales and collection cycle.  Which of the following is not one of those controls?
c.  Controls over acquisitions.

11.Cutoff misstatements occur when:
d.  both b and c above, but not a.(b.subsequent period transactions are recorded in the current period and c.current period transactions are recorded in the subsequent period)
    
12.Cutoff misstatements occur:
a.  either by error or fraud.
  
13.Generally accepted accounting principles require that material sales returns and allowances be:
c.  matched with related sales.

14.Communication addressed to the debtor requesting him or her to confirm whether the balance as stated on the communication is correct or incorrect is a:.
d.  positive confirmation.
  
15.A type of positive confirmation known as a blank confirmation:
a.  requests the recipient to fill in the amount of the balance.

16.For sales, the occurrence transaction-related audit objective affects the ______ balance-related audit objective.
a.  existence
  
17.For cash receipts, the occurrence transaction-related audit objective affects the ______ balance-related audit objective.
b.  completeness
  
18.Which of the following is likely to be performed first when doing tests of details for accounts receivable?
b.  Accounts receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger.
    
19.Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor will:
a.  reduce the extent of tests of details of balances.
  
20.The most important test of details of accounts receivable is the:
c.  confirmation of accounts receivable.
  
21.The extent of the testing of detail tie-in of an aged trial balance depends on all but which of the following?
d.  The extent of testing depends on each of the above.
  
22.Tests of details of balances are directed to:
a.  balance sheet accounts for all cycles.

23.The most important test of details of balances for accounts receivable is:
a.  confirmations.

24.Most tests of accounts receivable and the allowance for uncollectible accounts are based on the:
d.  aged trial balance.
  
25.The most important test of details of balances to determine the existence of recorded accounts receivable is:
d.  the confirmation of customers’ balances.
  
26.When should auditors not perform alternative procedures in testing the accounts receivable balance?
c.  When confirmations are too costly to use.
  
27.Because of its central role in auditing of accounts receivable, the ______________ is one of the first items tested.
c.  aged trial balance
  
28.If accounts receivable accounts with credit balances are significant, they should be:
c.  reclassified as accounts payable.
  
29.Most tests of accounts receivable are based on what schedule, file, or listing?
b.  Aged accounts receivable trial balance.
  
30.An auditor discovers that the client records sales returns and allowances in the accounting period in which they occur, under the assumption of approximately equal offsetting errors at the beginning and end of each period.
c.  This is acceptable as long as the amounts are not significant.
   
31.If the client’s internal control for recording sales returns and allowances is evaluated as ineffective:
a.  a larger sample is needed to verify cutoff.
    
32.A customer mails and records a check to a client for payment of an unpaid account on December 30. The client receives and records the amount on January 2. The records of the two organizations will be different on December 31. 
b.  This is a timing difference.
    
33.Which of the following audit procedures would not likely detect a client’s decision to pledge or factor accounts receivable?
c.  Confirmation of receivables.
    
34.When do most companies record sales returns and allowances?
b.  During the accounting period in which the return occurs.

35.Cutoff misstatements can occur for:
d  a.  sales.
  b.  sales returns and allowances.
  c.  cash collections.
  d.  any of the above.
  
36.The most important aspect of evaluating the client’s method of obtaining a reliable cutoff is to:
b.  evaluate the client’s control procedures around cutoff.

  
37.A positive confirmation is more reliable evidence than a negative confirmation because:
d.  follow-up procedures can be performed if a response is not received from the debtor.
  
38.The advantage of using the negative form of confirmations is that:
a.  larger sample sizes can be used without increasing the costs above what would have been required for positive confirmations.

39.Which of the following procedures do most auditors perform when auditing the allowance for doubtful accounts?.
d.  Auditors generally perform all of the above procedures.
  
40.When positive confirmations are used, auditing standards require follow-up procedures for confirmations not returned by the customer. In such a situation, which of the following would not be classified as an alternative procedure?
a.  Send a second confirmation request.
  
41.Generally accepted accounting principles require that sales returns and allowances be matched with related sales:
c.  if the amounts are material.
    
42.For which of the following accounts is cutoff least important?
c.  Cash collections
  
43.What are the possible disadvantages of evaluating the allowance for doubtful accounts by reviewing individual non-current balances?
c  a.  Current accounts receivable may be ignored.
  b.  It is difficult to compare results of the current and prior years if such an unstructured approach is used.
  c.  Both a and b.
    
44.Which of the following most likely would be detected by a review of a client’s sales cutoff?
b.  Unrecorded sales for the year.
    
45.The positive (as opposed to the negative) form of receivables confirmation is preferred when:
b.  there is reason to believe that a substantial number of accounts may be in dispute.

46.An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:
a.  no reply to a positive confirmation request is received.

47.  How might the auditor determine whether a client has limited rights to accounts receivable?
d.  Any of the above may be used for this purpose.
  
48.Confirmation of accounts receivable balances normally provides evidence concerning the:
c.  existence of the balances.

49.If the auditor decides not to confirm accounts receivable, the auditor should:
c.  document the reasons for such a decision in the audit files.
    
50.The understatement of sales and accounts receivable is best uncovered by:
c.  test of transactions for shipments made but not recorded.
  
51.You are reviewing sales to discover cutoff problems. If the client’s policy is to record sales when title to the merchandise passes to the buyer, then the books and records would contain errors if the December 31 entries were for sales recorded:
a.  before the merchandise was shipped.
  
52.It is easy to test for a cash receipts cutoff error by:
d.  tracing recorded cash receipts to bank deposits on the bank statement of a different period.
   
53.The most reliable evidence from confirmations is obtained when they are sent:
a.  as close to the balance sheet date as possible.
  
54.Which of the following is not an important consideration in determining the sample size of confirmations?
a.  The types of confirmations being sent; that is, positive or negative.
  
55.An auditor learns that collections of accounts receivable during the first ten days of January were debited to cash and credited to accounts receivable as of December 31. The effect generally will be to:
d.  leave both working capital and the current ratio unchanged at December 31.

56.For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve:
c.  write-offs of customer accounts.
  
57.For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the improper cutoff of cash:
c.  affects on the cash and accounts receivable balances on the balance sheet and does not affect net income.
    
CHAPTER 18   

1.The payroll cycle consists of how many classes of transactions?
a.  One
  
2.Payroll policies should require a competent, independent person to:
d  a.  recalculate actual hours worked.
  b.  review for the proper approval of all overtime.
  c.  examine time cards for erasures and alterations.
  d.  do all of the above.
  
3.Which of the following statements is false?
b.  Balance sheet accounts related to payroll are generally more significant than related   transactions.
    
4.Which of the following is not an important control consideration in the processing of payroll?
b.  A check-signing machine should not be used to replace a manual signature.
  
5.Which of the following statements about the payroll and personnel cycle is correct?
c.  Internal controls over payroll are effective for almost all companies, even small ones.
  
6.Which of the following types of audit procedures is ordinarily emphasized the least when auditing payroll?
d.  Tests of details of balances
  
7.A form issued for each employee summarizing the earnings and income tax deductions for the calendar year is the:
d.  W-2 form.

8.The payroll and personnel cycle begins with which of the following events?
b.  Hiring a new employee.
    
9.Most systems of internal control for payroll are:
c.  highly structured and well controlled.
  
10.The payroll and personnel cycle ends with which of the following events?
d.  Issuance of paychecks.
  
11.The retirement savings deductions, number of exemptions for withholding allowances, union dues deductions, and other deductions are found on what form?
b.  Deduction authorization form
  
12. A ____________ includes all payroll transactions processed by the accounting system for a given period of time.
b.  payroll transaction file

13.  An imprest payroll account ordinarily carries a ______ balance.
c.  small
    
14.Records that include data such as employment date, performance ratings and pay rates are the: 
a.  personnel records.
  
15.In audits of companies in which payroll is a significant portion of inventory, the improper account classification of payroll can:
c  a.  increase asset valuations.
  b.  decrease asset valuations.
  c.  either a or b.

16.To minimize the opportunity for fraud, unclaimed salary checks should be:
a.  deposited in a special bank account.
  
17.Which of the following type of employee typically does not complete time cards.
b.  Salaried employees.
  
18.When examining payroll transactions, an auditor is primarily concerned with the possibility of:
b.  overpayments and unauthorized payments.
  
19.For which of the following functions is the use of prenumbered documents least important?
a.  Use of prenumbered time cards in the payroll function.

20.Which of the following statements about payroll checks is correct?
b.  As soon as a payroll check is signed by an authorized employee, it becomes an asset.
  
21.Which of the following is not an advantage of using an imprest payroll account?
c.  Companies have fewer banking transactions.
    
22.No individual with access to time cards, payroll records, or checks should also be permitted access to:
c.  personnel records.
  
23.The file for recording each payroll transaction for each employee and maintaining total employee wages paid for the year to date is the:
a.  payroll master file.
  
24.Many companies use outside payroll services to process payroll. Auditors _____ rely on the internal controls of these outside payroll services.
d.  can often
  
25.The total of the individual employee earnings in the payroll master file equals the total:
a.  balance of gross payroll in general ledger accounts.

26.If auditors rely on the internal controls of an outside payroll service provider, they will receive a(n) _____ report.
b.  SAS 70
  
27.Most companies use an imprest account to pay the payroll. Which of the following is not an advantage of such an account?
d.  It eliminates the requirement of keeping a minimum balance in a checking account.
  
28.The careful and timely preparation of all payroll tax returns is necessary to avoid penalties and criminal charges. The most important control in the timely preparation of these returns is:
b.  a well-defined set of policies that indicate when each form must be filed.
  
29.Which of the following types of audit tests is usually emphasized due to a lack of independent third-party evidence related to payroll transactions?
c.  Tests of controls
    
30.The most important means of verifying account balances in the payroll and personnel cycle are:
a.  tests of controls and tests of transactions.

31.Tests of payroll are usually not extensive because:
d  a.  employees will likely complain if underpaid.
  b.  payroll transactions are uniform and uncomplicated.
  c.  payroll transactions are subject to audit by federal and state governments.
  d.  all of the above.
  
32.If an auditor wishes to test the completeness transaction-related audit objective in the payroll and personnel cycle, which of the following would be a reasonable test of control?
a.  Account for a sequence of payroll checks.
    
33.Which of the following is a substantive test of transactions?
c.  Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement.
  
34.As a part of the auditor’s responsibility for ____________, the auditor should review the preparation of at least one of each type of payroll tax form the client is responsible for filing.
d.  understanding the client’s internal controls.
  
35.Which of the following is not an assertion related to the classes of transactions underlying the payroll cycle?
c.  Existence
  
36.Which of the following circumstances would not cause an auditor to extend payroll procedures considerably?
d.  There is a lack of independent third-party evidence, such as confirmations.
  
37.When labor is a material factor in inventory valuation, the auditor should place special emphasis on testing the internal controls concerning:
c.  proper valuation and allocation of balances.
  
38.Which of the following is not a procedure that can be performed on canceled checks in an effort to detect defalcations?
d.  Examine the payroll records in subsequent periods to determine that terminated employees are no longer being paid.
  
39.What potential problems may arise when an auditor considers the relationship between payroll and inventory valuation?
d.  All of the above are potential problems.
  
40.The primary concern in testing payroll-related liabilities is to make sure that:
c.  there are no understated or omitted accruals.
  
41.Which department should be authorized to add and delete employees from the payroll or change pay rates and deductions?
c  a.  The supervising department
  b.  The accounting department
  c.  The human resources department
  d.  Any of the above

42.Which of the following is not a reasonable combination of analytical procedure and possible misstatement?
a  a.  Compare payroll expense with prior year – Misstatement of direct labor and inventory.
    
43.Paychecks should be distributed by someone:
c  a.  independent of the payroll function.
  b.  independent of the timekeeping function.
  c.  Both a and b.
  
44. Verification of the legitimacy of year-end unpaid bonuses to officers and employees can be accomplished by comparing the recorded accrual to the amount:
c.  authorized in the minutes of the board.
  
45.Which of the following errors gives the auditor the least concern in auditing payroll transactions?
d.  Each of the above gives the auditor significant concern.
  
46. (Public)The usual audit test for a public company’s officer compensation is to obtain the authorized salary of each officer from the minutes of the board of directors and compare it with:
d.  any of the three above.

47.Auditors may extend their tests of payroll in which of the following circumstances?
d  a.  Payroll materially affects the valuation of inventory.
  b.  The auditor is concerned there may be nonexistent employees on the payroll.
  c.  There is an increased risk of employees being paid for fraudulent hours.
  d.  All of the above.
  
48.To check the accuracy of hours worked, an auditor would ordinarily compare clock cards with:
b.  job time tickets.
  
49.A surprise payroll payoff in which employees must pick-up and sign for their pay check is one means of: 
c.  testing for nonexistent employees.
    
50.Which of the following is the best way for an auditor to determine that every name on a company’s payroll is that of a bona fide employee presently on the job?
c.  Make a surprise observation of the company’s regular distribution of paychecks.
  
51.Inherent risk is typically _____ for balance-related audit objectives as they relate to payroll.
b.  low
    
52.It would be appropriate for the payroll department to be responsible for which of the following functions?
d.  Preparation of governmental reports as to employees’ earnings and withholding taxes.
  
53.What are the two major balance-related audit objectives in testing payroll liabilities?
d.  Accuracy and cutoff
 
54.Which of the following best describes proper internal control over payroll?
c.  The duties of hiring, payroll computation, and payment to employees should be segregated.

55. The periodic payment from the general cash account to the payroll account for net payroll should be tested for at least one payroll period. The primary audit procedure is a(n):
d.  test of transactions that the check is prepared for the proper amount and deposited before payroll checks are handed out.
  
56.Once the auditor determines that the company’s policy for accruing wages is consistent with prior years, the appropriate audit procedure to test for accuracy and cutoff is:
a.  recalculating the client’s accrual.
    
57.In auditing payroll, which of the following procedures will ordinarily require the least amount of auditor time under normal circumstances?
d.  Tests of details of balances.
  
58.A weak internal control system allows a department supervisor to “clock in” for a fictitious employee and then approve the employee’s time card at the end of the pay period. This fraud would be detected if other controls were in place, such as having an independent party:
a.  distribute paychecks.
  
59.The most important consideration in evaluating the fairness of the amounts accrued for vacation pay, sick pay, and other benefits is the:
a.  consistent accrual of these liabilities relative to those of preceding periods.
  
60.Effective internal accounting control over unclaimed payroll checks that are kept by the company would include accounting department procedures that require:
d.  periodic accounting for the actual checks representing unclaimed wages.
  
61.Which of the following internal controls in the payroll and personnel cycle is generally least important to an auditor?
d.  Notice of the termination date of employees no longer working for the company.
  
62.Which of the following statements is correct?
d.  The valuation of inventory is affected if the direct labor cost of individual employees is improperly charged to the wrong job or process.
  
63.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?
d.  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.
  
64.Once the auditor has determined the company’s policy for accruing wages and knows it is consistent with that of previous years, the appropriate audit procedure to test for cutoff and accuracy is to:
a.  recalculate the client’s accruals.
  
CHAPTER 19   

1.The classes of transactions in the acquisition and payment cycle include acquisition of:
d.  goods and services, cash disbursements, and purchase returns and allowances.
  
2.The overall objective in the audit of the acquisition and payment cycle is:
c.  to evaluate whether the affected accounts are fairly stated in accordance with GAAP.
    
3.The audit of the acquisition and payment cycle often takes ____ time to audit than other cycles.
c.  more
    
4.What typically initiates the acquisitions and payment cycle?
a.  Issuance of a purchase requisition or request for purchase of goods/services.
  
5.What typically ends the acquisitions and payment cycle?
b.  Issuance of a payment to a vendor.
    
6.The receipt of goods and services in the normal course of business represents the date clients normally recognize:
b.  the liability.
    
7.Which of the following accounts is not included in the acquisitions class of transactions?
c.  Purchase discounts.

8.A document indicating a reduction in the amount owed to a vendor because of returned goods is:
a.  a debit memo.
  
9.A document used by organizations to establish a formal means of recording and controlling acquisitions which usually contains a package of documents about the acquisition is the:
a.  voucher.
    
10.The accounts payable account includes obligations for the acquisition of:
d  a.  raw materials.
  b.  equipment.
  c.  utilities.
  d.  all three of the above.
  
11.Comparing expenses to prior years is an effective analytical procedure for accounts payable because expenses from year to year are:
d.  relatively stable.
  
12.The overall objective in the audit of accounts payable is to determine whether accounts payable:
a.  is fairly stated and properly disclosed.
  
13.At what point do most companies recognize liabilities in the acquisition and payment cycle?
c.  Receipt of goods or services.
    
14.This computer-generated file records acquisitions, disbursements and allowances for each vendor.
a.  Accounts payable master file
  
15.This is a computer-generated file that includes all acquisition transactions during a given period.
c.  Acquisitions transaction file.

16.The major balance sheet account in the acquisition and payment cycle is:
c.  Accounts payable.
    
17.Which of the following business functions is not considered to be part of the acquisitions class of transactions?
d.  Processing cash disbursements.
  
18.It usually takes more time to audit the acquisition and payment cycle than other cycles because:
c.  of the large number of accounts affected.
  
19.A written purchase order is a legal document that is:
a.  an offer to buy.
  
20.For good internal control, the purchasing department should not be responsible for:
d.  authorizing the acquisition of goods.
  
21.Once a check is signed by an authorized person it is: 
b.  an asset
  
22.The accounts payable department usually has responsibility for verifying the propriety of acquisitions by comparing the details on the:
c.  purchase order, receiving report, and vendor’s invoice.
  
23.Tests of controls for the acquisition and payment cycle are usually divided into:
d.  tests of acquisitions and disbursements.
  
24.Many companies do not maintain an accounts payable master file by vendor. These companies pay on the basis of:
b.  individual vendors’ invoices.
    
25.An important control in the accounts payable and IT departments is to ensure that those personnel who record acquisitions do not have access to:
d.  cash, marketable securities, and other easily convertible assets.
  
26.Which of the following is not a key control in the acquisition and payment cycle?
b.  Authorization of credit.
    
27.Proper authorization for acquisition is essential because it:
c.  ensures that goods/services are for authorized company purposes.
    
28.Which department should initiate a report when goods arrive from a vendor?
b.  Receiving
  
29.After a purchase requisition is approved, a _________ must be initiated to purchase the goods or services.
a.  purchase order
  
30.When a client uses perpetual inventory records, the tests of details of balances for inventory can be significantly reduced if the auditor believes the perpetuals are accurate. The controls over the acquisitions included in the perpetuals are normally tested as a part of the:
b.  tests of controls and tests of transactions.
  
31.Which of the following acquisition transactions is least likely to be covered by a general authorization by company policy?
d.  Both A and B are likely to be covered by a general authorization.

32.The auditor’s internal control objective to determine that “recorded acquisitions are for goods and services received” satisfies the audit objective of:
b.  occurrence.
  
33.  Failure to record the acquisition of goods is a violation of which audit objective?
d.  Completeness
  
34.Once the auditor has decided on the specific procedures, the acquisitions tests and the cash disbursements tests are typically performed:
a.  concurrently.
  
35.The internal control that requires that “checks are prenumbered and accounted for” satisfies the objective of:
c.  completeness.
  
36.The most important controls over cash disbursements include all but which of the following?
b.  Random examination of the supporting documents by the authorized check signer before signing checks.
    
37.Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements, it is common in this audit area to use:
c.  attributes sampling.
    
38. Because many of the types of errors and irregularities that may be found in the acquisition and payment cycle represent a misstatement of earnings and are of significant concern to the auditor, the tolerable exception rate selected by the auditor will be:
a.  low.
   
39. The main focus taken by the auditor in verifying liability balances is on the discovery of:
c.  understated or omitted liabilities.
  
40.Which of the following tests of controls is least useful in assessing the transaction-related audit objective related to occurrence?
c.  Account for sequence of vouchers.
    
41.The test of details of balances procedure to “trace from account payable list to vendors’ invoices and statements” satisfies the objective of:
a.  occurrence.
  
42.By tracing receiving reports issued at and before year-end to vendors’ invoices and making sure they are included in accounts payable, the auditor is testing for:
b.  unrecorded obligations.
  
43.The extent of a search for unrecorded liabilities largely depends on: 
b.  materiality and control risk.
  
44.A failure to record acquisitions of goods most likely will affect all but which of the following?
d.  Cash.
  
45.When the client’s physical inventory occurs before the last day of the year, it is still necessary to perform an accounts payable cutoff at the time of the count.  In addition, the auditor must verify whether all acquisitions taking place between the count and the end of the year were added to:
d.  the physical inventory and Accounts payable.
  
46.When the auditor uses sampling to examine transactions in the acquisition and payment cycle, the tolerable exception rate is typically set at a(n) _______ level.
a.  low.

47.Which of the following is most reliable for verifying the correct balance of accounts payable?
c.  Confirmations.
  
48.Vendors’ statements and vendors’ invoices are both relatively reliable evidence because they:
b.  originate from a third party.
  
49.For effective internal control, the accounts payable department should compare the information on each vendor’s invoice with the:
c.  receiving report and the purchase order.
  
50.Which of the following is the most effective control procedure to detect vouchers that were prepared for the payment of goods that were not received?
b.  Match purchase order, receiving report, and vendor’s invoice for each voucher in accounts payable department.
  
51.Cutoff information for acquisitions should be obtained during:
c.  the physical observation of inventory.
  
52.Assume that during cutoff testing you determined that the last receiving report number for inventory was 24986. Which of the following receiving report numbers would you not expect to be included in inventory and accounts payable at year-end?
d.  24990
  
53.Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:
b.  there is likely to be other reliable external evidence available to support the balances.
  
54.Under which of the following circumstances would it be advisable for the auditor to confirm accounts payable with creditors?
c.  Creditor statements are not available and internal control over payables is unsatisfactory.
  
55.Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the:
b.  receiving department.
    
56.Which of the following should sign checks under conditions of effective internal control?
a.  Treasurer.

57.Which of the following is an effective internal accounting control over cash payments?
a.  Signed checks should be mailed under the supervision of the check signer.
  
58.When assets are being verified, auditors focus much of their attention on making sure that the accounts are not overstated. Alternatively, auditors focus their efforts on understatement when auditing liabilities. What is the primary reason for this difference in focus?
a.  Auditors’ legal liability.
  
59.Internal controls that are likely to prevent the client from including as a business expense those transactions that primarily benefit management or other employees rather than the entity being audited satisfy the control objective that: 
d.  recorded acquisitions are for goods and services received.
  
60.A company failed to record an acquisition of merchandise and its related liability, but the merchandise was included in ending inventory. The effect on the financial statements was to:
d.  understate liabilities, and overstate both net income and owners’ equity.
  
61.The test of transactions which requires one to “reconcile recorded cash disbursements with the cash disbursements on the bank statement” satisfies the objective of:
b.  completeness.
  
62.Which of the following statements is false?
d.  The success of the auditor’s search for unrecorded liabilities is not dependent upon the materiality of the potential balance in the account.
  
63.The purpose of the audit procedure to “examine underlying documentation for subsequent cash disbursements” is to:
c.  uncover payments made in a subsequent accounting period for liabilities that existed at the balance sheet date.
  
64.To test for overstatement cutoff errors in liabilities, the auditor should trace, to vendors’ invoices, the receiving reports issued:
a.  after year-end.
    
65.In determining that the accounts payable cutoff is correct, it is essential that the cutoff tests be coordinated with the:
c.  observation of inventory.
  
66.An inventory acquisition is received late in the afternoon of December 31 after the physical inventory is completed. If the acquisition is included in accounts payable and purchases, but excluded from inventory, the result:
a.  is an understatement of net earnings.
  
67.When an acquisition is on an FOB origin basis, the inventory and related accounts payable must be recorded in the current period if the goods were:
b.  shipped prior to the balance sheet date.
  
  
68.The auditor gets highly reliable evidence about individual transactions by examining:
a.  vendors’ invoices.
  
69.Which of the following documents is best for verifying the correct balance in accounts payable?
d.  Vendors’ statements.
  
70.When goods are received, the receiving clerk should match the goods with the:
c.  vendor’s shipping document and the purchase order.
    
71.For effective internal control purposes, the vouchers payable department generally should:
c.  establish the agreement of the vendor’s invoice with the receiving report and purchase order.
  
72.An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all:
b.  vendors’ invoices.
  
73.Matching the supplier’s invoice, the purchase order, and the receiving report normally should be the responsibility of the: 
c.  general accounting function.

 74.A CPA learns that his client has paid a vendor twice for the same shipment, once based upon the original invoice and once based upon the monthly statement. A control procedure that should have prevented this duplicate payment is:
a.  attachment of the receiving report to the disbursement report.
  
75.With respect to a small company’s system of purchasing supplies, an auditor’s primary concern should be to obtain satisfaction that supplies ordered and paid for have been:
c.  received, counted, and checked to quantities and amounts on purchase orders and invoices.
  
CHAPTER 20   

1.Which of the following accounts is associated with a transaction cycle other than acquisition and payment?
a.  Common stock.
  
2.Property, plant, and equipment are assets that:
d.  meet all of the requirements stated above.
  
3.Which of the following expenses is not typically evaluated as part of the audit of the acquisition and payment cycle?
c.  Bad debts expense.
    
4.Debits to manufacturing equipment arise from which cycle?
c.  Acquisition and disbursement
  
5.It should ordinarily be unnecessary to examine supporting documentation for each addition to property, plant, and equipment, but it is customary to verify: 
d.  all three of the above.
  
6.The auditor must know the client’s capitalization policies to determine whether acquisitions are:
c.  both of the above.
  
7.To be capitalized as part of property, plant and equipment, assets must:
d  a.  have expected useful lives of more than one year.
  b.  not be acquired for resale.
  d.  a and b, but not c.
  
8.The primary accounting record for manufacturing equipment and other fixed assets is the:
b.  fixed asset master file.
  
9.Which of the following statements about the audit of fixed assets is not correct? 
b.  Manufacturing equipment and current assets are normally audited in the same fashion regardless of the activity within a particular account.
  
10.During the audit of prepaid insurance, the auditor should keep in mind that the amount in insurance expense is based on:
d  a.  the beginning balance in prepaid insurance.
  b.  the payment of premiums during the year.
  c.  the ending balance in prepaid insurance.
  d.  all three of the above.
  
11.Which of the following is not a category of tests commonly associated with the audit of manufacturing equipment?
d.  Verification of the beginning balance in accumulated depreciation.
  
12.The audit procedure that requires an auditor to “foot the acquisition schedule” relates to which balance-related audit objective?
b.  Detail tie-in.
  
13.Which of the following audit objectives is not typically a major objective in the audit of current year fixed asset additions?
c.  Existence.
  
14.The extent to which auditors verify current period acquisitions of property, plant and equipment normally depends upon:
c  a.  assessed control risk for acquisitions.
  b.  tolerable misstatement.
  c.  Both a and b.
  
15.Inadequate controls and misstatements discovered through tests of controls and substantive tests of transactions are an indication of the likelihood of misstatements in:
d.  both the income statement and the balance sheet.
  
16.
medium  Failure to capitalize a fixed asset at the correct amount affects __________ until the company disposes of the asset.
a.  the balance sheet
  
17.Which of the following tests are typically not necessary when auditing a client’s schedule of recorded disposals?
d  a.  Footing the schedule.
  b.  Tracing schedule totals to the general ledger.
  c.  Tracing cost and accumulated depreciation of the disposals to the property master file.
  d.  All of the above are necessary.
  
18.Which of the following is not likely to be a test related to the audit of manufacturing equipment?
b.  Observe current year disposals.
    
19.A set of records for each piece of equipment that includes descriptive information, date of acquisition, original cost, current year depreciation, and accumulated depreciation is the:
c.  fixed asset master file.
  
20. In the audit of property, plant, and equipment, it is helpful to separate the tests into all but which one of the following categories?
a.  Verification of the beginning balance.
    
21.Methods used to determine if there are legal encumbrances related to fixed assets include all but which of the following?
d  a.  Reading terms of loan and credit agreements.
  b.  Reviewing loan confirmations received from banks.
  c.  Inquiring of the client regarding possible legal encumbrances.
  d.  All of the above may be used to identify legal encumbrances.

22.The test of details of balances procedure which requires a “recalculation of investment credit” satisfies the audit objective of:
d.  accuracy.
  
23.The test of details of balances procedure to “examine vendors’ invoices of closely related accounts such as repairs to uncover items that should be property, plant, and equipment” satisfies the audit objective of:
a.  classification.
    
24.The auditor’s starting point for verifying disposals of property, plant, and equipment is the:
c.  client’s schedule of recorded disposals.

25.Failure to capitalize a fixed asset at the correct amount will affect ___________ until the asset is fully depreciated.
d.  both the income statement and the balance sheet
  
26.Because the failure to record disposals of property, plant, and equipment can significantly affect the financial statements, the search for unrecorded disposals is essential. Which of the following is not a procedure used to verify disposals?
c.  Test the valuation of fixed assets recorded in prior periods.
  
27.In rare cases, the auditor may believe it is necessary that a complete physical inventory of fixed assets be taken to make sure they actually exist. If an inventory is taken, the auditor normally:
c.  observes the count.
  
28.A major consideration in verifying the ending balance in fixed assets is the possibility of existing legal encumbrances. Tests to identify possible legal encumbrances would satisfy the audit objective for: 
b.  presentation and disclosure.
  
29.When auditing depreciation expense, the two major concerns related to the accuracy audit objective are:
c.  correctness of calculations and consistent application of depreciation method.

30.Which type of audit procedure is often sufficient for purposes of auditing prepaid expenses and deferred charges?
d.  Analytical procedures.
  
31.Depreciation expense is one of the few expense accounts that is not verified as a part of:
d  a.  tests of controls.
  b.  tests of transactions.
  d.  a and b, but not c.
  
32.Changing circumstances may require a change in the useful life of an asset. When this occurs, it involves a change in:
a.  accounting estimate rather than a change in accounting principle.
  
33.The auditor ___________ to test the accuracy or classification of fixed assets recorded in prior periods.
c.  normally does not need
  
34.The auditor normally does not need to test the accuracy or classification of fixed assets recorded in prior periods because:
c.  they are verified in previous audits.
  
35.Internal controls for prepaid insurance are typically categorized into all but which of the following?
d  a.  Controls over the acquisition and recording of insurance.
  b.  Controls over the insurance register.
  c.  Controls over the charge-off of insurance expense.
  d.  All of the above.
  
36.A record of insurance policies in force and the due date of each policy is contained in the:
b.  insurance register.
  
37.Insurance expense for the period is a function of which of the following?
a.  The beginning prepaid balance, current premium payments and the ending prepaid balance.

38.Expense accounts analysis is closely related to tests of controls and substantive tests of transactions. The major difference is:
b.  the degree of concentration on an individual account.
  
39.In connection with a review of the prepaid insurance account, auditors would typically not perform which of the following procedures?
c.  Confirm premium rates with an independent insurance broker.
  
40.Which of the following audit procedures would be least likely to lead the auditor to find an unrecorded fixed asset disposal?
b.  Review of repairs and maintenance expense.
  
41.To achieve effective internal accounting control over fixed asset additions, a company should establish procedures that require:
a.  authorization and approval of major fixed asset additions.
  
42.Which of the following is a customary audit procedure for the verification of the legal ownership of real property?
d.  Examination of deeds and title guaranty policies on hand.
  
43.Once the initial audit of a newly constructed industrial plant has been performed, with respect to consistency, which of the following is of least concern to the continuing auditor in the following year?
b.  Prior years’ capitalization costs.
  
44.Controls over the acquisition and recording of insurance are a part of the ________.
d.  acquisition and payment cycle
  
45.The approach used to verify manufacturing equipment is different than the one used to verify:
a.  current assets.

46.Which balance-related audit objective is not relevant to an audit of prepaid expenses?
d.  Realizable value.
  
47.The failure to capitalize a permanent asset, or the recording of an asset acquisition at the improper amount, affects the balance sheet:
d.  until the firm disposes of the asset.
  
48.The failure to capitalize a permanent asset, or the recording of an asset acquisition at the improper amount, affects the income statement:
b.  for the depreciable life of the asset.
  
49.____________ both have the effect of simultaneously verifying balance sheet and income statement accounts.
b.  Tests of controls and substantive tests of transactions
  
50.The tests of details of balances procedure for fixed assets which require the auditor to examine vendors’ invoices of closely related accounts such as repairs and maintenance to uncover items that should be fixed assets would satisfy the audit objective of:
d.  completeness.
 
51.The erroneous inclusion of transactions that should properly be recorded as assets into accounts such as repairs expense, lease expense, or supplies is a common client error. The auditor should evaluate the likelihood of these types of misclassifications in conjunction with:
a.  obtaining an understanding of internal control.
  
52.If the client fails to record disposals of property, plant, and equipment, both the original cost of the asset account and the net book value will be incorrect.
b.  The original cost will be overstated indefinitely, and the net book value will be overstated until the asset is fully depreciated.
  
53.Income statement accounts resulting from allocations are typically verified as a part of:
c.  analytical procedures.
  
54.Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account?
a.  Extraordinary repairs have lengthened the life of an asset.
  
55.An auditor would be least likely to use confirmations in connection with the examination of: 
c.  property, plant, and equipment.
  
56.Which of the following is the most important internal control procedure over acquisitions of property, plant, and equipment?
b.  Using a budget to forecast and control acquisitions and retirements.
  
57.The auditor interviews the plant manager. The auditor is most likely to rely upon this interview as primary support for an audit conclusion on:
c.  the necessity to record a provision for deferred maintenance costs.
  
58.The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because:
d.  accrued liabilities usually pertain to services of a continuing nature, whereas accounts payable are the result of completed transactions.