11. Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?
A. A bank lock box system.
B. Prenumbered remittance advices.
C. Monthly bank reconciliations.
D. Daily deposit of cash receipts.
A. A bank lockbox system.
12. The least crucial element of internal control over cash is
A. Separation of cash record-keeping from custody of cash.
B. Preparation of the monthly bank reconciliation.
C. Batch processing of checks.
D. Separation of cash receipts from cash disbursements.
C. Batch processing of checks.
13. Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions?
A. Proof of cash.
B. Bank reconciliation.
C. Cash confirmation.
D. Evaluate ratio of cash to current liabilities.
14. An unrecorded check issued during the last week of the
year would most likely be discovered by the auditor when the
A. Check register for the last month is reviewed.
B. Cutoff bank statement is reconciled.
C. Bank confirmation is reviewed.
D. Search for unrecorded liabilities is performed.
B. Cutoff bank statement is reconciled.
15. Which of the following is one of the better auditing
techniques that might be used by an auditor to detect kiting between inter-company banks?
A. Review the composition of authenticated deposit slips.
B. Review subsequent bank statements received directly from the banks.
C. Prepare a schedule of bank transfers.
D. Prepare year-end bank reconciliations.
C. Prepare a schedule of bank transfers.
16. An interbank transfer schedule
A. Is another name for the proof of cash.
B. Helps the auditor test for kiting.
C. Is on a standard bank confirmation.
D. Is used to examine client bank reconciliations.
B. Helps the auditor test for kiting.
17. If fraud is suspected, auditors may complete all of the following
procedures except:
A. Testing for kiting.
B. Footing the bank reconciliation and the outstanding checks listing.
C. Performing a proof of cash.
D. Performing extended bank reconciliation procedures, including detailed examination of reconciling items.
B. Footing the bank reconciliation and the outstanding checks listing.
18. Of the
following,which is the most efficient audit procedure for verification of interest earned on bond investments?
A. Tracing interest declarations to an independent record book.
B. Recomputing interest earned using the interest rate and bond amount.
C. Confirming the interest rate with the issuer of the bonds.
D. Vouching the receipt and deposit of interest checks.
B. Recomputing interest earned using the interest rate and bond amount.
19. An auditor testing long-term investments would ordinarily use substantive analytical procedures as the primary audit evidence to support the reasonableness of the
A. Valuation of marketable equity securities.
B. Classification of gains and losses on the disposal of securities.
C. Completeness of recorded investment income.
D. Existence and ownership of investments.
C. Completeness of recorded investment income.
20. To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would
A. Inspect the stock certificates evidencing the investment.
B. Examine the audited financial statements of the investee company.
C. Review the broker's advice or canceled
check for the investment's acquisition.
D. Obtain market quotations from financial newspapers or periodicals.
B. Examine the audited financial statements of the investee company.
21. An auditor usually tests the reasonableness of dividend income from investments in stock of public companies by computing the amounts that should have been
received by referring to
A. Dividend record books produced by investment advisory services.
B. Stock indentures published by corporate transfer agents.
C. Stock ledgers maintained by independent registrars.
D. Annual audited financial statements issued by the investee companies.
A. Dividend record books produced by investment advisory services.
22. Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?
A. Notes receivable and interest income.
B. Accrued interest receivable and accrued interest payable.
C. Notes payable and notes receivable.
D. Interest income and interest expense.
A. Notes receivable and interest income.
23. In confirming
with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of management's financial statement assertions regarding
A. Existence.
B. Rights and obligations.
C. Completeness.
D. All of the above.
24. All of the following can assist the auditor in testing the existence assertion for
investment securities except:
A. Physical examination.
B. Comparing fair value to cost.
C. Confirmation with the issuer.
D. Confirmation with the custodian.
B. Comparing fair value to cost.
25. An imprest cash account is
A. Used for investing in marketable securities.
B. The principal cash account for an entity.
C. One that
contains a stipulated amount of money and is used for limited purposes.
D. The principal checking account for a branch of an entity.
C. One that contains a stipulated amount of money and is used for limited purposes.
26. An auditor ordinarily should send a standard confirmation request to all banks with which the client has done business
during the year under audit, regardless of the year-end balance, because this procedure
A. Provides for confirmation regarding compensating balance arrangements.
B. Detects kiting activities that may not otherwise be discovered.
C. Seeks information about indebtedness to the bank.
D. Verifies securities held by the bank in safekeeping.
C. Seeks information about indebtedness to the bank.
27. Tracing a sample of remittance advices to entries in the cash receipts journal tests which of the following assertions for cash?
A. Occurrence.
B. Completeness.
C. Authorization.
D. Cutoff.
28. Examining a sample of cancelled checks for an authorized signature tests which of the following assertions for cash?
A. Authorization.
B. Completeness.
C. Cutoff.
D. Accuracy.
29. The cashier of Brooke Company covered a shortage in the cash working fund with cash obtained on December 31 from a local bank by cashing, but not recording, a check drawn on the company's out-of-town bank. How would the auditor discover this manipulation?
A. Confirming all December 31 bank balances.
B. Counting the cash working fund at the close of business on December 31.
C. Preparing independent
bank reconciliations as of December 31.
D. Preparing and detail testing a bank transfer schedule.
D. Preparing and detail testing a bank transfer schedule.
30. The auditor should ordinarily mail confirmation requests to all banks with which the client has conducted any business during the year, regardless of the year-end balance,since
A.
The confirmation form also seeks information about indebtedness to the bank.
B. This procedure will detect kiting activities that would otherwise not be detected.
C. The mailing of confirmation forms to all such banks is required by generally accepted auditing standards.
D. This procedure relieves the auditor of any responsibility with respect to non-detection of forged checks.
A. The confirmation form also seeks information about indebtedness to the bank.
31. An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily to
A. Verify the cash balance reported on the bank confirmation inquiry form.
B. Verify reconciling items on the client's bank reconciliation.
C. Detect lapping.
D. Detect kiting.
B. Verify reconciling items on the client's bank reconciliation.
32. An auditor should trace interbank transfers for the last part of the audit period and first part of the subsequent period to detect whether
A. The cash receipts journal was held open for a few days after the year-end.
B. The last checks recorded before the year end were actually mailed by the year-end.
C. Cash
balances were overstated because of kiting.
D. Any unusual payments to or receipts from related parties occurred.
C. Cash balances were overstated because of kiting.
33. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except the:
A. Cutoff bank statement.
B. Year-end bank statement.
C. Bank
confirmation.
D. General ledger.
34. A primary purpose of the proof of cash is to
A. Prevent fraud.
B. Reconcile actual cash receipts and disbursements to budgeted receipts and disbursements.
C. Investigate variances from expected cash balances.
D. Ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account.
D. Ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account.
35. A company has additional temporary funds to invest. The Board of Directors decided to purchase marketable securities and assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to make periodic reviews of the investment activity
authorized by that executive should be
A. An investment committee of the Board of Directors.
B. The chief operating officer.
C. The corporate controller.
D. The treasurer
A. An investment committee of the Board of Directors.
36. A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for collections
of periodic interest probably should be delegated to the
A. Chief Accountant.
B. Internal Auditor.
C. Cashier.
D. Treasurer.
37. Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities?
A. An independent trust company that has no direct contact with the employees who have record keeping responsibilities has possession of the
securities.
B. The internal auditor verifies the marketable securities in the entity's safe each year on the balance sheet date.
C. The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to the general ledger.
D. A designated member of the board of directors controls the securities in a bank safe-deposit box.
A. An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities.
38. Which of the following procedures most likely would give the greatest assurance that securities held as investments are safeguarded?
A. There is no access to securities between the year-end and the date of the auditor's security count.
B. Proceeds from the sale of investments are received by an employee
who does not have access to securities.
C. Investment acquisitions are authorized by a member of the Board of Directors before execution.
D. Access to securities requires the presence of two designated officials.
D. Access to securities requires the presence of two designated officials.
39. Which one of the following would the auditor
consider to be an incompatible operation if the cashier receives remittances from the mail room?
A. The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
B. The cashier makes the daily deposit at a local bank.
C. The cashier prepares the daily deposit.
D. The cashier endorses the checks.
A. The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
40. When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the
A. Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.
B. Securities are registered in the name of the trust company, rather than the entity itself.
C. Interest and dividend checks are mailed
directly to an entity employee who is authorized to sell securities.
D. Trust company places the securities in a bank safe-deposit vault under the custodian's exclusive control.
A. Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.
41. Ina manufacturing company, which one of
the following audit procedures would givethe least assurance for the existence of the general ledger balance ofinvestment in stocks and bonds at the audit date?
A. Confirmationfrom the broker.
B. Inspectionand count of stocks and bonds.
C. Vouchingall changes during the year to brokers' advices and statements.
D. Examination of canceledchecks issued in payment of securities purchased.
D. Examination of canceled checks issued in payment of securities purchased.
42. The auditor shouldinsist that a representative of the client be present during the physicalexamination of securities in order to
A. Lend authority to the auditor's directives.
B. Detect forged securities.
C. Coordinate the return of all securities toproper locations.
D. Acknowledge the receiptof securities returned.
D. Acknowledge the receipt of securities returned.
43. Whichof the following is not one of the auditor's primary objectives in anexamination of marketable securities?
A. To determine whethersecurities are authentic.
B. Todetermine whether securities are the property of the client.
C. Todetermine whether securities actually exist.
D. Todetermine
whether securities are properly classified on the balance sheet.
A. To determine whether securities are authentic.
44. Jones was engaged toexamine the financial statements of Virginia Corporation for the year endedJune 30. Having completed an examination of the investment securities, which ofthe following is the best method of verifying the
accuracy of recorded dividendincome?
A. Tracing recorded dividend income to cashreceipts records and validated deposit slips.
B. Utilizing analytical procedures and statisticalsampling.
C. Comparing recorded dividends with amountsappearing on federal information forms 1099.
D. Comparing recordeddividends with a standard financial reporting service's record of dividends.
D. Comparing recorded dividends with a standard financial reporting service's record of dividends.
45. Aclient has a large and active investment portfolio that is kept in a banksafe-deposit box. If the auditor is unable to examine and count the securitiesat the balance sheet date but will examine and count the securities shortlythereafter, the auditor most likely will
A. Requestthat the bank confirm to the auditor the contents of the safe-deposit
box atthe balance sheet date.
B. Examinesupporting evidence for transactions occurring during the year.
C. Countthe securities at a subsequent date and confirm with the bank whethersecurities were added or removed since the balance sheet date.
D. Request that the clienthave the bank seal the safe-deposit box until the auditor can count thesecurities at a subsequent date.
D. Request that the client have the bank seal the safe-deposit box until the auditor can count the securities at a subsequent date.
46. In establishing theexistence and ownership of a long-term investment in stock of a publicly tradedcompany, an auditor should inspect the securities or
A. Correspond with the investee company to verifythe number of shares owned.
B. Inspect the audited financial statements of theinvestee company.
C. Confirm the
number ofshares owned that are held by an independent custodian.
D. Determine that the investment is carried at thelower-of-cost-or-market.
C. Confirm the number of shares owned that are held by an independent custodian.
47. Examiningbrokers' advices for a sample of securities purchased during the year is a testfor the assertion of
A.
Completeness.
B. Disclosure.
C. Valuationand allocation.
D. Rights and obligations.
D. Rights and obligations.
48. Under which of thefollowing circumstances would an auditor be most likely to intensify anexamination of a $1,000 petty cash fund maintained on an imprest basis?
A. Reimbursement vouchers are not prenumbered.
B.
Reimbursement of thefund from the general cash account occurs twice or more each week.
C. The custodian occasionally uses the cash fund tocash employee checks.
D. The custodian endorses reimbursement checks.
B. Reimbursement of the fund from the general cash account occurs twice or more each week.
49. Asone of the year-end audit procedures,
the auditor instructed the client'spersonnel to prepare a standard bank confirmation request for a bank accountthat had been closed during the year. After the client's treasurer had signedthe request, it was mailed to the bank by the assistant treasurer. What is themajor flaw in this audit procedure?
A. Theconfirmation request was signed by the treasurer.
B. Sendingthe request was meaningless because the account was closed before the year-end.
C. The request was mailedby the assistant
treasurer.
D. TheCPA did not sign the confirmation request before it was mailed.
C. The request was mailed by the assistant treasurer.
50. The primary purposeof sending a standard confirmation request to financial institutions with whichthe client has done business during the year is to
A. Detect kiting activities that may otherwise notbe
discovered.
B. Corroborate informationregarding deposit and loan balances.
C. Provide the data necessary to prepare a proof ofcash.
D. Request information about contingent liabilitiesand secured transactions.
B. Corroborate information regarding deposit and loan balances.
51. Whichof the following control activities would an entity most
likely use to assistin satisfying the completeness assertion related to long-terminvestments?
A. Seniormanagement verifies that securities in the bank safe-deposit box are registeredin the entity's name.
B. The internal auditorcompares the securities in the bank safe-deposit box with recorded investments.
C. Thetreasurer vouches the acquisition of securities by comparing brokers' adviceswith canceled checks.
D. Thecontroller compares the current market prices of recorded investments
with thebrokers' advices on file.
B. The internal auditor compares the securities in the bank safe-deposit box with recorded investments.
52. Which of thefollowing controls would a company most likely use to safeguard marketablesecurities when an independent trust agent is not employed?
A. The investment committee of the board ofdirectors
periodically reviews the investment decisions delegated to thetreasurer.
B. Two company officialsmust be present to access marketable securities, which are kept in a banksafe-deposit box.
C. The internal auditor and the controllerindependently trace all purchases and sales of marketable securities from thesubsidiary ledgers to the general ledger.
D. The chairman of the board verifies themarketable securities, which are kept in a bank safe-deposit box, each year onthe balance sheet
date.
B. Two company officials must be present to access marketable securities, which are kept in a bank safe-deposit box.
53. Whenthere is a large number of negotiable securities in multiple locations, carefulplanning of the physical inspection and count of the securities by the auditoris necessary to guard against
A. Unauthorizednegotiation
of the securities before they are counted.
B. Unrecordedsales of securities after they are counted.
C. Substitution ofsecurities already counted at one location for other securities that should beon hand at a different location but are not.
D. Substitutionof authentic securities with counterfeit securities.
C. Substitution of securities already counted at one location for other securities that should be on hand at a different location but are not.
54. When an auditor isunable to inspect and count a client's investment securities until after thebalance sheet date, the bank where the securities are held in a safe-depositbox should be notified on or before the balance sheet date that it will beasked to
A. Verify any differences between the contents ofthe box and the balances in the client's subsidiary ledger.
B. Provide
a list of securities added and removedfrom the box between the balance sheet date and the security-count date.
C. Confirm that there hasbeen no access to the box between the balance sheet date and the security-countdate.
D. Count the securities in the box so that theauditor will have an independent direct verification.
C. Confirm that there has been no access to the box between the balance sheet date and the security-count date.
55. Whichof the following would provide the best form of evidential matter pertaining tothe annual valuation of a long-term investment in which the independentauditor's client owns a 45 percent voting interest?
A. Marketquotations of the investee company's stock.
B. Thecurrent fair value of the investee company's assets.
C. Historicalcosts of the investee company's assets.
D. Audited
financialstatements of the investee company.
D. Audited financial statements of the investee company.
56. Which of thefollowing procedures would be most important in the audit of an investmentvalued at fair value?
A. Compare the balance in the investment account tothe prior year.
B. Read the footnote disclosure related to
theinvestment.
C. Inquire of management's regarding the accuracyand reliability of the underlying data.
D. Develop an independentestimate of the fair value measurement.
D. Develop an independent estimate of the fair value measurement.
57. Auditorswill need to perform more substantive tests than normal to obtain sufficientappropriate
evidence that a financial instrument is fairly stated if which ofthe following conditions exist?
A. Managementis objective and transparent in their assumptions.
B. Management's keyassumptions are subject to volatility.
C. Theentity's portfolio is composed of only stocks issued by Fortune 100 firmstraded in an active market.
D. Theentity does not have control weaknesses in its valuation processes.
B. Management's key assumptions are subject to volatility.