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Questions and Answers

1.

As a result of analytical procedures, the auditor determines that the gross profit percentage has declined
from 30% in the preceding year to 20% in the current year. The auditor should:

A.

Express a qualified opinion due to inability of the client company to continue as a going concern

B.

Evaluate management's performance in causing this decline

C.

Require footnote disclosure

D.

Consider the possibility of a misstatement in the financial statements

2.

After a CPA has determined that accounts receivable have increased as a result of slow collections in a
"tight money" environment, the CPA will be likely to

A.

Increase the balance in the allowance for bad debt account

B.

Review the going concern ramifications

C.

Reciew the credit and collection policy

D.

Expand test of collectibility

3.

In connection with the review of key ratios, the CPA notes that Pyzi had accounts receivable equal to 30
days' sales at December 31, 2008, and to 4 days' sales at December 31, 2009. Assuming that there have
been no changes in economic conditions, clientele, or sales mix, this change most likely will indicate
A.

A steady increase in sales in 2009

B.

An easing of credit policies in 2009

C.

A decrease in accounts receivable relative to sales in 2009

D.

A steady decrease in sales 2009

4.

The negative form of accounts receivable confirmation request is useful except when

A.

Internal control surrounding accounts receivable is considered to be effective

B.

A large number of small balances are involved

C.

The auditor has reason to believe the persons receiving the requests are likely to give them
consideration

D.

Individual account balances are relatively large

5.

The return of a positive confirmation of accounts receivable without an exception attests to the

A.

Collectibility of the receivable balance

B.

Accuracy of the receivable balance

C.
Accuracy of the aging of accounts receivable

D.

Accuracy of the allowance for uncollectible accounts

6.

In confirming a client's accounts receivable in prior years, an auditor found that there were many
differences between the recorded accounts balances and the confirmation responses. These differences,
which were not misstatements, required substantial time to resolve. In defining the sampling unit for
the current year's audit, the auditor will most likely choose

A.

Individual overdue balances

B.

Individual invoices

C.

Small account balances

D.

Large account balances

7.

When evaluating the adequay of the allowance for uncollectible accounts, an auditor recviews the
entity's aging of receivables to support management's balance-related assertion of

A.

Exisence

B.

Completeness

C.

Valuation and allocation

D.

Rights and obligations


8.

Which of the following audit procedures will best uncover an understatement of sales and accounts
receivables?

A.

Test a sample of sales tranactions, selecting the sample from prenumbered shipping documents

B.

Test a sample of sales tranactions, selecting the sample from sales invoices recorded in the sales journal

C.

Confirm accounts receivable

D.

Review the aged receivable trial balance

9.

Mr. Murray decides to use stratified sampling. The reason for using stratified sampling rather than
unrestricted random sampling is to

A.

Reduce as much as possible the degree of variability in the overall population

B.

Give every element in the population an equal chance of being included in the sample

C.

Allow the person selecting the sample to use personal judgnment in deciding which elements should be
included in the sample

D.

Allow the auditor to emphasize larger items from the population

10.

In an audit of financial statements, a CPA wil generally find stratified sampling techniques to be most
applicable to

A.
Recomputing net wage and salary payments to employees

B.

Tracing hours woked from the payroll summary back to the individual time cards

C.

Confirming accounts recivable for residential customers at a large electric utility

D.

Review supporting documentation for additions to plant and equipment

11.

From prior experience, a CPA is aware that the accounts receivable trial balance contains a few unusually
large balances. In using statistical sampling, the CPA's best course of action is to

A.

Eliminate any unusually large balances that appear in the sample

B.

Continue to draw new samples until no unusually large balances appear in the sample

C.

Stratify the accounts receivable population so that the unusually large balances are reviewed separately

D.

Increase the sample size to lessen the effet of the unusually large balances.

12.

A number of factors influence the sample size for a substantive test of details of an account balance. All
other things being equal, which of the following would lead to a larger sample size?

A.

Greater reliance on internal control

B.

Greater reliance on analytical procedures

C.
Smaller expected frequency of errors

D.

Smaller measure of tolerable misstatement

13.

An auditor uses audit sampling to perform tests of controls in the acquisition and payment cycle. Those
tests indicate that the related controls are operating effectively. The auditor plans to use audit sampling
to perform tests of details of balances for accounts payable. The auditor's acceptable risk of incorrect
acceptance (ARIA) for the test of details of balances for accounts payable will most likely be

A.

The same as the ARACR for test of controls

B.

Greater than the ARACR for tests of controls

C.

Less than the ARACR for tests of controls

D.

Totally independent from the ARACR used for test of controls

14.

Which of the following sample planning factors will influence the sample size for a test of details of
balances for a specific account?EXPECTED AMOUNT MEASURE OFOF MISSTATEMENTS
TOLERABLE MISSTATEMENT

A.

No, No

B.

Yes, Yes

C.

No, Yes

D.
Yes, No

15.

A client erroneously recorded a large purchse twice. Which of the following internal control measures
would be most likely to detect this error in a timely and efficient manner?

A.

Footing the purchases journal

B.

Reconciling vendors' monthly statements with subsidiary payable ledger accounts

C.

Tracing totals from the purchses journal to the ledger accounts

D.

Sending written quarterly confirmations to all vendors

16.

Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail hardware
store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a COD basis,
thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish
this because of Lake's poor internal control over

A.

Purchase requisitions

B.

Purchase orders

C.

Cash receipts

D.

Perpetual inventory records

17.
Which of the following is an internal control that will prevent paid cash disbursement documents from
being presented for payment a second time?

A.

The date on cash disbursement documents must be within a few dys of the date that the document is
presented for payment

B.

The official signing the check compares with the documents and should deface the documents

C.

Unsigned checks are prepared by individuals who are responsible for signing checks

D.

Cash disbursement documents are approved by at least two responsible management officials.

18.

In auditing accounts payable, an auditor's procedures most likely will focus primarily on management's
assertion of

A.

Existence

B.

Relizable value

C.

Completeness

D.

Valuation and allocation

19.

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

20.

When using confirmations to provide evidence about the completeness assertion for accounts payable,
the appropriate population most likely is

A.

Vendors with whom the entity has previously done business

B.

Amounts recorded in the accounts payable subsidiary ledger

C.

Payees of checks drawn in th emonth after year-end

D.

Invoices filed in the entity's open invoice file

21.

Which of the following controls most likely will justify a reduced assessed level of control risk concerning
plant and equipment acquisitions

A.

Periodic physical inspection of plant and equipment by the internal audit staff

B.

Comparison of current-year plant and equipment account balances with prior-year balances.
C.

Review of prenumbered purchase orders to detect unrecorded trade-ins

D.

Approval of periodic depreciation entries by a supervisor independent of the accounting department

22.

Which of the following is not an internal control deficiency related to factory equipment?

A.

Checks issued in payment of acquisitions of equipment are not signed by the controller

B.

All acquisitions of factory equipment are required to be made by the department in need of the
equipment

C.

Factory equipment replacements are generaly made when estimated usefullives, as indicated in
depreiation schedules, have expired

D.

Proceeds from sales of fully depreciated equipment are credited to other income

23.

With respect to an internal control measure that wil ensure accountability for fixed asset retirements,
management should implement controls that include

A.

Continuous analysis of miscellaneous revenue to locate any cash proceeds from sale of plant assets

B.

Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired

C.

Continuous use of serially numbered retirement work orders

D.

Periodic observation of plant assets by the inernal auditors


24.

Which of the following comparisons will be most useful to an auditor in aduting an entity's income and
expense accounts?

A.

Prior year accounts payable to current year accounts payable

B.

Prior year payroll expense to budgeted current year payroll expense

C.

Current year revenue to budgeted current year revenue

D.

Current year warranty expense to current year contingent liabilities

25.

The controler of Excello Manufacturing, Inc., wants to use analytical procedures to identify the possible
existence of idle equipment or the possibility that equipment has been disposed of without having been
written off. Which of the following ratios will best accomplish this objective?

A.

Depreciation expense/book value of manufacturing equipment

B.

Accumulated depreciation/book value of manufacturing equipment

C.

Repairs and maintenance cost/direct labor costs

D.

Gross manufacturing equpment cost/units produced

26.

Which of the following analytical procedures should be applied to the income statement?

A.

Select sales and expense items and trace amounts to related supporting documents
B.

Ascertain that the new tincome amount in the statement of cash flows agrees with the net income
amount in th eincome statement

C.

Obtain from the proper client representatives the beginning and ending inventory amounts that were
used to determine costs of sales

D.

Compare the actual revenues and expenses with the corresponding figures of the previous year and
investigate significant differences

27.

In testing for unrecorded retirements of equipment, an auditor most likely will

A.

Select items of equipment from the accounting records and then locate them during the plant tour

B.

Compare depreciation journal entries with similar prior-year entries in search of fully depreciated
equipment

C.

Inspect items of equipment observed during the plant tour and then trace them to the equipment
master file

D.

Scan the journal for unusual equipment additions and excessive debits to repairs and maintenance
expense.

28.

Analysis of which account is least likely to reveal evidence related to unrecorded retirement of
equipment?

A.

Accumulated depreciation

B.
Insurance expense

C.

Property, plant and equipment

D.

Purchase returns and allowances

29.

In connection with the audit of the prepaid insurance account, which of the following procedures is
usually not performed by the auditor?

A.

Recompute the portion of the premium that expired during the year

B.

Prepare exerpts of the insurance policies for audit documentation

C.

Confirm premium rates with an independent insurance broker

D.

Examine support for premium payments

30.

Which of the follwing audit procedures is least likely to detect an unrecorded liability?

A.

Analysis and recomputation of interest expense

B.

Analysis and recomputation of depreciation expense

C.

Mailing of standard bank confirmation forms

D.

Reading of the minutes of meetings of the board of directors


31.

Which of the following best describes the independent auditor's approach to obtaining satisfaction
concerning depreciation expense in the income statement?

A.

Verify the mathematical accuracy of the amounts charged to income as a result of depreciation expense

B.

Determine th emethod for computing depreciation expense and ascertain that it is in accordance with
GAAP

C.

Reconcile the amount of depreciation expense to those amounts credited to accumulated depreciation
accounts

D.

Establish the basis for depreciable assets and verify the depreciation expense

32.

Before expresing an opinion concerning the audit of income and expenses, the auditor will best proceed
with the audit of ithe income statement by

A.

Applying a rigid measurement standard designed to test for understatement of net income

B.

Analyzing the beginning and ending balance sheet inventory amounts

C.

Making net income comparisons to published industry trends and ratios

D.

Auditing income statement accounts concurrently with the related balance sheet accounts

33.

In a company with materials and supplies that include a great number of items, a fundamental deficiency
in control requirements will be indicated if
A.

The cycle basis for physical inventory taking was to be used

B.

Minor supply items were to be expensed when acquired

C.

A perpetual invenotry master file is not maintained for items of small value

D.

The storekeeping function were to be combined with production and record keeping

34.

For control purposes, the quantities of materials ordered may be omitted from the copy of the purchse
order that is

A.

Returned to the requisitioner

B.

Forwarded to the receiving department

C.

Forwarded to the accounting department

D.

Retained in the purchasing department's files

35.

Which of the follwoing procedures will best detect the theft of valuable items from an inventory that
consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of
dollars?

A.

Maintain a perpetual invenotry master file of only the more valuable items with frequent periodic
verification of the validity of the perpetuals

B.
Have an independent CPA firm prepare an internal control report on the effectiveness of the
administrative and accounting controls over inventory

C.

Have a separate warehouse space for the more valuable items with sequentially numbered tags

D.

Require an authorized officer's signture on all requisitions for the more valuable items

36.

When an auditor tests a client's cost accounting reords, the auditor's tests are primarily designed to
determine that

A.

Costs have been correctly assigned to finished goods, work-in-process, and cost of goods sold

B.

Quantities on hand have been computed based on acceptable cost account techniques that reasonable
approximate actual quantities on hand

C.

Physical inventories are in substantial agreement with book inventories

D.

The internal controls are in accordance with generally accepted accounting principles and are
functioning as planned

37.

The accuracy of perpetual inventory master files may be established, in part, by comparing perpetual
inventory records with

A.

Purchase requisitions

B.

Receiving reports

C.
Purchase orders

D.

Vendor payments

38.

When evaluating inventory controls with respect to segregation of duties, a CPA wil be lest likely to

A.

Make inquiries

B.

Inspect documents

C.

Observe procedures

D.

Consider policy and procedure manuals

39.

An auditor will be most likely to learn of slo-moving inventory through

A.

Inquiry of sales personnel

B.

Inquiry of store personnel

C.

Physical observation of inventory

D.

Review of perpetual inventory mater files

40.

An inventory turnover analysis is useful to the auditor because it may detect


A.

Inadequacies in inventory pricing

B.

Methods of avoiding cyclical holding costs

C.

The existence of obsolete merchandise

D.

The optimum automatic reorder points

41.

A CPA auditing inventory may appropriately apply attributes sampling to estimate the

A.

Average price of inventory items

B.

Percentage of lsow-moving inventory items

C.

Dollar value of inventory

D.

Physical quantity of inventory items

42.

The audit step mot likely to receal the existence of contingent liabilities is

A.

A review of vouchers paid during the month following the year-end

B.

An inquiry directed to legal counsel

C.
Accounts payable confirmations

D.

Mortgage-note confirmation

43.

When obtaining evidence regarding litigation against a client, the CPA will be lest interested in
determining

A.

The period in which the underlying cause of the litigation occurred

B.

The probability of an unfavorable outcome

C.

An estimate of when the matter wil be resolved

D.

An estimate of the potential loss

44.

When a contingency is resolved subsequent to the issuance of audited financial statements, which
correctly contained disclosure of the contingency in the footnotes base on information available at the
date of issuance, the auditor should

A.

Take no action regarding the event

B.

Insist that the client issue revised financial statements

C.

Inform the audit committee that the report cannot be relied on

D.

Inform the appropriate authorities that the report cannot be relied on

45.
A principal purpose of a letter of representation from management is to

A.

Serve as an introduction to company personnel and an authorization to examine the records

B.

Discharge the auditor from legal liability for the audit

C.

Confirm in writing management's approval of limitations on the scope of the audit

D.

Confirm in writing management's approval of limitations on the scope of the audit

E.

Remind management of its primary repsonsibility for financial statements

46.

The date of the management representation letter should coincide with the

A.

Balance sheet date

B.

Date of the auditor's report

C.

Date of the latest subsequent event referred to in the notes to the financial statement

D.

Date of the engagement agreement

47.

Management's refusal to furnish a written representation on a matter that the auditor considers
essential constitutes

A.

Prima facie evidence that the financial statements are not present fairly
B.

A violation of the Foreign Corrupt Practices Act

C.

An uncertainty sufficient to preclude an unqualified opinion

D.

A scope limitation sufficient to prelude an unqualified opinion

48.

Subsequent events for reporting purposes are defined as events that occur subsequent to the

A.

Balance sheet date

B.

Date of the auditor's report

C.

Balance sheet date but before the date of the auditor's report

D.

Date of the auditor's report and concern contigencies that are not reflected in the financial statements

49.

An example of an event occurring in the period of the auditor's field work subsequent to the end of the
year being audited that normally will not require disclosure in the financial statements or auditor's
report is

A.

Serious damage to the company's plant from a widespread flood

B.

Issuance of a widely advertisied capital stock issue with restrictive covenants

C.

Settlement of a large liability for considerably less than the amount recorded
D.

Decreased sales volume resulting from a general business recession

50.

Kar has audited the financial statements of Lurch Corporation for the year ended December 31, 2009.
Karr's field work was completed on February 27, 2010; Karr's auditor's report was dated February 28,
2010, and was received by the management of Lurch on March 5, 2010. On April 4, 2010, the
management of Lurch asked that karr approve inclusion of this report in their anual report to
stockholders, which will included unaudited financial statements for the first quarter ended March 31,
2010. Karr approved the inclusion of the auditor's report in the annual report to stockholders. Under
the circumstances, Karr is responsible for inquiring as to subsequent events occuring through

A.

February 27, 2010

B.

February 28, 2010

C.

March 31, 2010

D.

April 4, 2010

51.

Which of the following best describes the auditor's reporting responsibility concerning information
accompanying the basic financial statements in the auditor-submitted document?

A.

The auditor has no reporting responsibility concerning information accompanying the basic financial
statements

B.

The auditor should report on the information accompanying the basic financial statements only if the
auditor participated in its preparation

C.
The auditor should report on the information accompanying the basic financial statements only if the
auditor did not participate in its preparation

D.

The auditor should report on all the information included in the document

52.

Ansman, CPA, has been requested by a client, Rainco Corp., to prepare information in addition to the
basic financial statements for this year's audit. Which of the following is the best reason for Rainco's
requesting the additional information?

A.

To provide an opinion about the supplemental information when certain items are not in accordance
with GAAP

B.

To provide Rainco's creditors a greater degree of assurance as to the financial soundness of the company

C.

To provide Rainco's management with information to supplement and analyze the basic financial
statements

D.

To provide the documentation required by the SEC in anticipation of a public offering of Rainco's stock

53.

Ansman, CPA, has been requested by a client, Rainco Corp., to prepare additional information
accompanying the basic financial statements for this year's audit. In issuing the additional information,
Ansman must be certain to

A.

Issue a standard short-form report on the same audit

B.

Include a description of the scope of the audit in more detail than the description in the usual short-form
report

C.
State the source of any statistical data and that such data have not been subjected to the same auditing
procedures as the basic financial statements

D.

Maintain a clear-cut distinction between management's representations and the auditor's


representations