Audit Chapter 3: Acctg 5110 CPA - High-Quality Questions with Expert Answers, Exams of Auditing

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Audit Chapter 3, Acctg 5110 CPA: High-Quality

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Which of the following is the most logical order of performing steps I through III below? I. Tests of controls II. Understanding of internal control III. Substantive procedures A.) II, III, I. B.) I, II, III. C.) II, I, III. D.) I, III, II. - CORRECT ANSWER- - C In obtaining an understanding of internal control, the auditor may trace several transactions through the control process, including how the transactions interface with any service organizations whose services are part of the information system. The primary purpose of this task is to A.) Replace substantive procedures. B.) Determine whether the controls have been implemented. C.) Detect fraud. D.) Determine the effectiveness of the control procedures. - CORRECT ANSWER- - B

In an audit of financial statements, an auditor's primary consideration regarding an internal control is whether the control A.) Relates to operational objectives. B.) Affects management's financial statement assertions. C.) Reflects management's philosophy and operating style. D.) Provides adequate safeguards over access to assets. - CORRECT ANSWER- - B Which of the following is a management control method that most likely could improve management's ability to supervise company activities effectively? A.) Monitoring compliance with internal control requirements imposed by regulatory bodies. B.) Supporting employees with the resources necessary to discharge their responsibilities. C.) Limiting direct access to assets by physical segregation and protective devices. D.) Establishing budgets and forecasts to identify variances from expectations. - CORRECT ANSWER- - D Internal control can provide only reasonable assurance of achieving an entity's control objectives. The likelihood of achieving those objectives is affected by which limitation inherent to internal control? A.) The cost of internal control should not exceed its benefits. B.) The board of directors is active and independent. C.) Management monitors internal control. D.) The auditor's primary responsibility is the detection of fraud. - CORRECT ANSWER- - A

A.) Timing of the tests to be performed. B.) Achievement of the objectives of internal control. C.) Comparison of recorded accountability with assets. D.) Relationship of the costs of internal control and its benefits. - CORRECT ANSWER- - B The ultimate purpose of understanding internal control is to contribute to the auditor's evaluation of the risk that A.) Tests of controls may fail to identify controls relevant to assertions. B.) Material misstatements may exist in the financial statements. C.) Specified controls requiring segregation of duties may be circumvented by collusion. D.) Entity policies may be overridden by senior management. - CORRECT ANSWER- - B The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with A.) Knowledge necessary for audit planning. B.) An evaluation of the consistency of application of management's policies. C.) A basis for modifying tests of controls. D.) Evidence to use in assessing inherent risk. - CORRECT ANSWER- - A Proper segregation of duties reduces the opportunities to allow persons to be in positions both to A.) Establish internal control and authorize transactions. B.) Perpetrate and conceal fraud and error.

C.) Journalize entries and prepare financial statements. D.) Record cash receipts and cash disbursements. - CORRECT ANSWER- - B The control environment may decrease the effectiveness of control activities when A.) The board of directors is independent of management. B.) The audit committee actively oversees the financial reporting process. C.) The internal auditor reports directly to the audit committee. D.) Management has substantial incentives for meeting earnings projections. - CORRECT ANSWER- - D Which of the following is an inherent limitation in internal control? A.) Faulty human judgment. B.) Lack of segregation of duties. C.) Lack of an audit committee. D.) Incompatible duties. - CORRECT ANSWER- - A Internal control cannot be designed to provide reasonable assurance that A.) Transactions are executed in accordance with management's authorization. B.) The recorded accountability for assets is compared with the existing assets at reasonable intervals. C.) Fraud will be eliminated. D.) Access to assets is permitted only in accordance with management's authorization. - CORRECT ANSWER- - C

D.) Situations with routine errors that can be predicted and corrected. - CORRECT ANSWER- - C Which of the following procedures is an auditor most likely to include in the planning phase of a financial statement audit? A.) Identify specific controls designed to prevent fraud. B.) Evaluate the reasonableness of the entity's accounting estimates. C.) Obtain an understanding of the entity's risk assessment process. D.) Perform cutoff tests of the entity's sales and purchases. - CORRECT ANSWER- - C In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would A.) Review the entity's descriptions of inventory policies and procedures. B.) Analyze inventory turnover statistics to identify slow-moving and obsolete items. C.) Perform test counts of inventory during the entity's physical count. D.) Analyze monthly production reports to identify variances and unusual transactions. - CORRECT ANSWER- - A An auditor is evaluating a client's internal controls. Which of the following situations would be the most difficult internal control issue for an auditor to detect? A.) The technology department writes a program that does not properly implement the control due to a lack of understanding. B.) Someone erroneously disables edit checks in a software program designed to identify control exceptions.

C.) The accounting staff neglects the control due to increased transactions to be processed. D.) Two employees, who work in different departments, are circumventing an internal control. - CORRECT ANSWER- - D At October 31, Dingo, Inc., had cash accounts at three different banks. One account balance is segregated solely for a November 15 payment into a bond sinking fund. A second account, used for branch operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance. How should these accounts be reported in Dingo's October 31 classified balance sheet? - CORRECT ANSWER- - The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability. The underlying Bond sinking fund is long term in nature thus the segregated account should be reported as a noncurrent asset, the regular account is the cash balance available for daily use and thus it is current asset and last account is overdrawn thus a bank overdraft. ECG Company recorded two sales on March 1 of $20,000 and $30,000 under credit terms of3/10, n/30. Payment for the $20,000 sale was received March 10. Payment for the $30,000 sale was received on March 25. Under the gross method and the net method, net sales in the March income statement should appear as which of the following amounts? - CORRECT ANSWER- - Gross Method: $49, Net Method: $48, When the allowance method of recognizing uncollectible accounts is used, the entries at the time of collection of a small account previously written off: - CORRECT ANSWER- - Increase the allowance for uncollectible accounts

beginning balance - $36,000 write-offs + $4,000 recovered). The balance should be $50, ($700,000 year-end A/R - $650,000 NRV based on aging). Thus, the allowance account should be credited and bad debt expense debited for $22,000 ($50,000 desired balance - $28,000) Turner Co. estimates its uncollectible accounts expense to be 2% of credit sales. Turner's credit sales for the year were $1,000,000. During the year, Turner wrote off $18,000 of uncollectible accounts. Turner's allowance for uncollectible accounts had a $15, balance on January 1. In its December 31 income statement, what amount should Turner report as bad debt expense? - CORRECT ANSWER- - $20, Burr Company had the following account balances at December 31, Year 1: Cash in banks $2,250, Cash on hand 125, Cash legally restricted for additions to plant (expected to be disbursed in Year 2) 1,600, Cash in banks includes $600,000 of compensating balances related to short-term borrowing arrangements. The compensating balances are not legally restricted as to withdrawal by Burr. In the current assets section of Burr's December 31, Year 1, balance sheet, total cash should be reported at - CORRECT ANSWER- - $2,375, Inch Co. had the following balances at December 31, Year 4: Cash in checking account $ 35, Cash in money market account 75,

U.S. Treasury bill, purchased 12/1/Yr 4, maturing 2/28/Yr 5 200, U.S. Treasury bill, purchased 12/1/Yr 3, maturing 5/31/Yr 5 150, Inch's policy is to treat as cash equivalents all highly-liquid investments with a maturity of 3 months or less when purchased. What amount should Inch report as cash and cash equivalents in its December 31, Year 4, balance sheet? - CORRECT ANSWER- - $310, The following are held by Smite Co.: Cash in checking account $20, Cash in bond sinking fund account 30, Post-dated check from customer dated one month from balance sheet date 250 Petty cash 200 Commercial paper (matures in two months) 7, Certificate of deposit (matures in six months) 5, What amount should be reported as cash and cash equivalents on Smite's balance sheet?

• CORRECT ANSWER- - $27, Ral Corp.'s checkbook balance on December 31, Year 7, was $5,000. In addition, Ral held the following items in its safe on that date:

In preparing its August 31 bank reconciliation, Apex Corp. has the following information available: Balance per bank statement, 8/ $18, Deposit in transit, 8/ 3, Return of customer's check for insufficient funds, 8/ 600 Outstanding checks, 8/ 2, Bank service charges for August 100 At August 31, Apex's cash balance is A. $18, B. $17, C. $17, D. $17,550 - CORRECT ANSWER- - $18, Cook Co. had the following balances at December 31, Year 1: Cash in checking account $350, Cash in money-market account 250,

U.S. Treasury bill, purchased 12/1/Yr 1, maturing 2/28/Yr 2 800, U.S. Treasury bond, purchased 3/1/Yr 1, maturing 2/28/Yr 2 500, Cook's policy is to treat as cash equivalents all highly liquid investments with a maturity of 3 months or less when purchased. What amount should Cook report as cash and cash equivalents in its December 31, Year 1, balance sheet? - CORRECT ANSWER- - $1,400, The following information relates to Jay Co.'s accounts receivable for the year just ended: Accounts receivable, 1/ $ 650, Credit sales for the year 2,700, Sales returns for the year 75, Accounts written off during the year 40, Collections from customers during the year 2,150, Estimated future sales returns at 12/ 50, Estimated uncollectible accounts at 12/ 110, What amount should Jay report for accounts receivable, before allowances for sales returns and uncollectible accounts, at December 31? - CORRECT ANSWER- - $1,085,

Sale of company products for the period to customers with net 30-day terms amounting to $150,000. Sale of company products for the period to a customer, supported by a note for $25,000, with special terms of net 180 days. Balance of trade receivables at the end of the last period was $300,000. Collections of open trade receivables during the period was $200,000. Rental income for the period, both earned and accrued but not yet collected, from the Able Employees' Credit Union for use of company facilities was $2,000. The open trade receivables balance to be shown on the statement of financial position for the period is - CORRECT ANSWER- - $250, Which of the following is a false statement about balance sheet disclosure of accounts receivable? - CORRECT ANSWER- - That portion of installment accounts receivable from customers which falls due more than 12 months from the balance sheet date usually would be excluded from current assets. ECG Company recorded two sales on March 1 of $20,000 and $30,000 under credit terms of 3/10, n/30 (3% discount if paid within 10 days, entire balance due in 30 days). Payment for the $20,000 sale was received on March 8. Payment for the $30,000 sale was received on March 25. - CORRECT ANSWER- - $49, $48, ECG Company recorded two sales on March 1 of $20,000 and $30,000 under credit terms of 3/10, n/30 (3% discount if paid within 10 days, entire balance due in 30 days). Payment for the $20,000 sale was received on March 8. Payment for the $30,000 sale was received on March 25. - CORRECT ANSWER- - $50, $48, West Retailers purchased merchandise with a list price of $20,000, subject to trade discounts of 20% and 10%, with no cash discounts allowable. West should record the cost of this merchandise as - CORRECT ANSWER- - $14,

A shoe retailer allows customers to return shoes within 90 days of purchase. The company estimates that 5% of sales will be returned within the 90-day period. During the month, the company has sales of $200,000 and returns of sales made in prior months of $5,000. What amount should the company record as net sales revenue for new sales made during the month? - CORRECT ANSWER- - $190, On August 15, Benet Co. sold goods for which it received a note bearing the market rate of interest on that date. The 4-month note was dated July 15. Note principal, together with all interest, is due November 15. When the note was recorded on August 15, which of the following accounts increased? - CORRECT ANSWER- - Interest receivable. Jole Co. lent $10,000 to a major supplier in exchange for a noninterest-bearing note due in three years and a contract to purchase a fixed amount of merchandise from the supplier at a 10% discount from prevailing market prices over the next 3 years. The market rate for a note of this type is 10%. On issuing the note, Jole should record - CORRECT ANSWER- - $45, On January 1, Ott Company sold goods to Fox Company. Fox signed a noninterest-bearing note requiring payment of $60,000 annually for 7 years. The first payment was made on January 1. The prevailing rate of interest for this type of note at date of issuance was 10%. Information on present value factors is as follows: Present Value of Present Value Ordinary Annuity Periods of 1 at 10%

How should the note payable be presented in the statement of financial position? - CORRECT ANSWER- - At the face amount minus a discount calculated at the imputed interest rate. Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year note that required five equal, annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of $19,485. What should be the total interest revenue earned by Leaf over the life of this note? - CORRECT ANSWER-

• $5, An auditor uses the knowledge provided by the understanding of internal control and the assessed risks of material misstatement primarily to A.) Determine whether procedures and records concerning the safeguarding of assets are reliable. B.) Modify the initial assessments of inherent risk and judgments about materiality levels for planning purposes. C.) Determine the nature, timing, and extent of substantive procedures for financial statement assertions. D.) Determine whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized. - CORRECT ANSWER- - C Which of the following activities by small business clients best demonstrates management integrity in the absence of a written code of conduct? A.) Emphasizing ethical behavior through oral communication and management example. B.) Documenting internal control procedures using flowcharts rather than narratives. C.) Reporting regularly to the board of directors about operations and finances. D.) Developing and maintaining formal descriptions of accounting procedures. - CORRECT ANSWER- - A

An auditor uses the audit evidence provided by the understanding of internal control and the assessment of the risks of material misstatement to determine the nature, timing, and extent of A.) Further audit procedures. B.) Attribute tests. C.) Compliance requirements. D.) Tests of controls. - CORRECT ANSWER- - A