Which of the following types of evidential matter generally is the most competent

1.           To be competent, evidence must be both

a)        Timely and substantial.

b)        Reliable and documented.

c)        Valid and relevant.

d)        Useful and objective.

Answer A is incorrect.  While evidence should be timely and substantial, these terms do not constitute the definition of competence of evidential matter.

Answer B is incorrect.  While evidence should be reliable and documented, these terms do not constitute the definition of competence of evidential matter.

Answer C is correct.  Evidence must be both valid and relevant to be competent.  Validity relates to the circumstances under which it was obtained.  For example, evidential matter obtained from independent sources outside the client enterprise is superior to evidential matter obtained from sources within the client enterprise.

Answer D is incorrect.  While evidence should be useful and objective, these terms do not constitute the definition of competence of evidential matter.

2.           Which of the following procedures would provide the most reliable audit evidence?

a)        Inquiries of client’s internal audit staff held in private.

b)        Inspection of prenumbered client purchase orders filed in the vouchers payable department.

c)        Analytical procedures performed by the auditor on the entity’s trial balance.

d)        Inspection of bank statements obtained directly from the client’s financial institution.

Answer A is incorrect as inquiries of the client's internal audit staff result in evidential matter secured solely within the entity.

Answer B is incorrect as inspection of purchase orders results in evidential matter generated by the entity.

Answer C is incorrect because the reliability of the results obtained using analytical procedures performed on the entity's trial balance are based upon internally secured information.

Answer D is correct because evidential matter obtained from independent sources outside the entity (such as bank statements received directly from a financial institution) provide greater assurance of reliability than that secured solely within the entity.

3.           Which of the following statements concerning audit evidence is correct?

a)        To be competent, audit evidence should persuasive or relevant, but need not be both.

b)  The measure of the validity of audit evidence lies in the auditor’s judgment.

c)  The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test.

d)  A client’s accounting data can be sufficient audit evidence to support the financial statements.

Answer A is incorrect because competent audit evidence is valid and relevant, not persuasive and relevant.

Answer B is correct because AU 326 states that the measure of the validity of audit evidence lies in the judgment of the auditor.

Answer C is incorrect because while auditors must attempt to perform their audits efficiently, the matter of difficulty and expense involved in testing a particular item is not in itself a valid basis for omitting a test.

Answer D is incorrect because, by itself, accounting data cannot be considered sufficient support of the financial statements--corroborating evidential matter is necessary.

4.           Which of the following statements concerning evidential matter is correct?

a)        Competent evidence supporting management’s assertions should be convincing rather than merely persuasive.

b)        Effective internal control contributes little to the reliability of the evidence created within the entity.

c)        The cost of obtaining evidence is not important consideration to an auditor in deciding what evidence should be obtained.

d)         A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.

Answer A is incorrect because competent evidence will generally be persuasive, not convincing.

Answer B is incorrect because effective internal control contributes significantly to the reliability of evidence through its effect on control risk.

Answer C is incorrect because the cost of obtaining evidence is an important consideration in deciding what evidence should be obtained as auditors attempt to obtain sufficient competent evidential matter in a cost effective manner.

Answer D is correct because AU 326 indicates that accounting data alone cannot be considered sufficient support for the financial statements.

5.           The third standard of fieldwork states that sufficient competent evidential matter may, in part, be obtained through inspection, observation, inquiries, and confirmations, to afford a reasonable basis for an opinion regarding the financial statements under examination.  The evidential matter required by this standard may, in part, be obtained through

a)        Analytical procedures.

b)        Auditor working papers.

c)         Review of the internal control.

d)        Proper planning of the audit engagement.

Answer A is correct.  The requirement is to determine which of the listed answers is included in the third fieldwork standard that specifies the need to obtain sufficient competent evidential matter during an audit.  Evidential matter required by the third fieldwork standard is obtained through two general classes of auditing procedures:  (1) tests of details of transactions and balances and (2) analytical procedures applied to financial information.

Answer B is incorrect because working papers are used to summarize and document the results of application of audit procedures and not to assist the auditor in obtaining evidence.

Answer C is incorrect because information on internal control pertains to the second fieldwork standard which is on internal control.

Answer D is incorrect because planning itself does not obtain evidence.

6.           In connection with the third generally accepted auditing standard of fieldwork, an auditor examines corroborating evidential matter which includes all of the following except

a)        Client accounting manuals.

b)        Written client representations.

c)        Vendor invoices.

d)        Minutes of board meetings.

Answer A is correct because client accounting manuals constitute underlying accounting data.  Corroborating evidence is that information which supports the underlying data, such as invoices, contracts, correspondences, etc.

Answer B is incorrect because written client representations constitute corroborating evidential matter.

Answer C is incorrect because vendor invoices constitute corroborating evidential matter.

Answer D is incorrect because the minutes of board meetings constitute corroborating evidential matter.

7.           Most of the independent auditor’s work in formulating an opinion on financial statements consists of

a)        Considering internal control.

b)        Obtaining and examining evidential matter.

c)        Examining cash transactions.

d)        Comparing recorded accountability with assets.

Answer A is incorrect because the auditor's consideration of internal control is encompassed in obtaining and examining evidential matter.  Thus, obtaining and examining evidential matter requires more work than the study of internal control.

Answer B is correct because the auditor's report is based upon evidential matter which is obtained through the application of audit procedures to the financial statements and underlying accounting records.

Answer C is incorrect because the examination of cash transactions is a specific substantive test which would not constitute most of the auditor's work in formulating an opinion.

Answer D is incorrect because comparing recorded accountability with assets is a specific test which would not constitute most of the auditor's work in formulating an opinion.

8.           Which of the following statements is generally correct about the competence of evidential matter?

a)        The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements.

b)        Competence of evidential matter refers to the amount of corroborative evidence obtained.

c)        Information obtained indirectly form independent outside sources is more persuasive than the auditor’s direct personal knowledge obtained through observation and inspection.

d)        Competence of evidential matter refers to the audit evidence obtained from outside the entity.

Answer A is correct because AU 326 states that the more effective an internal control, the more assurance it provides about the reliability of the accounting data and financial statements.  That section also states that evidential matter obtained from independent sources normally provides greater assurance of reliability than information secured solely within the entity, and that the auditor's direct personal knowledge is more persuasive than information obtained indirectly.

Answer B is incorrect because sufficiency, not competence, of evidential matter refers to the amount of corroborative evidence obtained.

Answer C is incorrect because information obtained indirectly will not in general be as persuasive as the auditor's direct personal knowledge.

Answer D is incorrect because competence refers to the validity and relevance of evidence, not whether it is obtained from outside the entity.

9.           Management prepares accounting estimates and the auditor is responsible for evaluating the reasonableness of the estimates.  Which of the following would not be an auditor’s objective when evaluating estimates?

a)        All accounting estimates which could be material to the financial statements have been developed.

b)        The accounting estimates developed by management are accurate with 100% certainty.

c)        The accounting estimates developed by management are reasonable.

d)        The accounting estimates are presented in accordance with generally accepted accounting principles.

Answer A is incorrect because the auditor would want to ensure that all estimates material to the financial statements have been developed.

Answer B is correct because no one accounting estimate can be considered accurate with certainty.

Answer C is incorrect because it is the responsibility of the auditor to determine the reasonableness of the estimates.

Answer D is incorrect because an overall objective of the auditor is to ensure that the financial statements are presented in accordance with GAAP.

10.          It is the responsibility of the auditor to evaluate the reasonableness of the accounting estimates made by management.  Which one of the following approaches would the auditor not use when evaluating the reasonableness of the estimate?

a)        Review and test management’s process to develop the estimate.

b)        Calculate an independent expectation of the estimate.

c)        Confirm the estimate with independent parties.

d)        Review subsequent events or transactions occurring prior to completion of fieldwork.

Answer A is incorrect because this is one of the approaches the auditor may use.

Answer B is incorrect because this is one of the approaches the auditor may use.

Answer C is correct.  Confirmation of most estimates (e.g., warranty liabilities) is not an appropriate approach for evaluating the reasonableness of the estimate.

Answer D is incorrect because this is one of the approaches the auditor may use.

11.          Of the following, which is the least persuasive type of audit evidence?

a)        Documents mailed by outsider to the auditor.

b)        Corresponding between auditor and vendors.

c)        Copies of sales invoices inspected by the auditor.

d)        Computations made by the auditor.

Answer A is incorrect because externally generated documents received directly by the auditor are considered more reliable evidence than internally generated evidence.

Answer B is incorrect because information obtained directly by the auditor from a third party source is considered more reliable than internally generated evidence.

Answer C is correct because copies of sales invoices represent internally generated evidence, which is considered less reliable than externally generated evidence received directly by the auditor.

Answer D is incorrect because computations made by the auditor represent direct personal knowledge, which is considered more persuasive than internally generated evidence.

12.          Which of the following is the least persuasive documentation in support of an auditor’s opinion?

a)        Schedules of details of physical inventory counts conducted by the client.

b)        Notation of inferences drawn from rations and trends.

c)        Notation of appraisers’ conclusions documented in the auditor’s working papers.

d)        Lists of negative confirmation requests for which no response was received by the auditor.

Answer A is correct because schedules of details of physical inventory counts conducted by the client is least persuasive because it is developed solely within the entity.

Answer B is incorrect because inferences drawn by the auditor from self-computed ratios and trends are more persuasive than those from solely the client's data.

Answer C is incorrect because an independent third party's conclusions are considered more persuasive than those generated by the client's internal sources.

Answer D is incorrect because no reply to a negative confirmation from an independent third party is considered to be support for the accuracy of the accounts receivable and is more persuasive than internally developed data.

13.          Failure to detect material peso errors in the financial statements is a risk which the auditor primarily mitigates by

a)      Performing substantive tests.

b)      Performing tests of controls.

c)      Evaluating internal control.

d)      Obtaining a client representation letter.

Answer A is correct because substantive tests are used to control the risk of incorrect acceptance of a population which is materially in error.  The auditor faces two separate risks.  The first risk is that material misstatements may occur in the accounting process, and the second risk is that material misstatements that have occurred will not be detected in the auditor's examination.  The auditor relies on internal control to reduce the first risk and substantive tests to reduce the second risk.

Answer B is incorrect because tests of controls relate more directly to the risk of assessing control risk too high or too low rather than the risk of failing to detect material peso errors.

Answer C is incorrect because the auditor relies on internal control to reduce the risk of misstatement occurring, not to detect a misstatement which has already occurred.

Answer D is incorrect because obtaining a client representation letter will not in any way mitigate the risk of failure to detect material misstatements.  Representation letters confirm the oral representations which have been made by management to the auditor but are not substitutes for any other audit procedures.

14.          While substantive tests may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because

a)        Substantive test rarely guarantee the accuracy of the records if only a sample of the transactions has been tested.

b)        The records may be accurate even though they are maintained by persons having incompatible functions.

c)        Substantive tests relate to the entire period under audit, but tests of controls ordinarily are confined to the period during which the auditor is on the client’s premises.

d)        Many computerized procedures leave no audit trail of who performed them, so substantive tests may necessarily be limited to inquiries and observation of office personnel.

Answer A is incorrect because while it is true that substantive tests of sampled transactions cannot guarantee accuracy of the entire population, it is not a reason why substantive tests do not address the segregation of duties.

Answer B is correct because while records may be accurate, information about maintenance of records by persons having incompatible functions may not be obtained.

Answer C is incorrect because tests of controls are not ordinarily confined to the period during which the auditor is on the client's premises.

Answer D is incorrect because the fact that no audit trail exists for many computerized procedures does not restrict the auditor from applying analytical procedures or other substantive tests on the resultant computerized information.

15.          Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess

a)        Control risk at below the maximum level.

b)        Inherent risk at the maximum level.

c)        The difficulty in controlling the incremental audit risk.

d)        Materiality for the accounts tested as insignificant.

Answer A is incorrect because while control risk will generally be assessed at below the maximum level in such circumstances, this is not required.

Answer B is incorrect because while inherent risk may be at the maximum level, the situation in which it is not is more likely, since a lower level of risk is more likely to lead to interim testing.

Answer C is correct because AU 313 requires that an auditor assess the difficulty in controlling the incremental audit risk.  In addition, the auditor should consider the cost of the substantive tests that are necessary to appropriately examine the remaining period.

Answer D is incorrect because the accounts tested need not be insignificant.

16.          An auditor’s decision either to apply analytical procedures as substantive tests or to perform tests of transactions and account balances usually is determined by the

a)        Availability of data aggregated at a high level.

b)        Relative effectiveness and efficiency of the tests.

c)        Timing tests performed after the balance sheet date.

d)        Auditor’s familiarity with industry trends.

Answer A is incorrect because data aggregated at a high level often obscures relationships used by analytical procedures.

Answer B is correct because the decision on the appropriate mix of substantive tests is based on the auditor's judgment on the expected effectiveness and efficiency of the available procedures.

Answer C is incorrect because timing of tests performed after the balance sheet date does not typically affect the decision on whether to apply analytical procedures as substantive tests or to perform tests of transactions and account balances.

Answer D is incorrect because familiarity with industry trends is only one factor involved in using analytical procedures and it does not adequately describe the basis for making this decision.

17.          As a result of analytical procedures, the independent 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)        Include an explanatory paragraph in the audit report due to the 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.

Answer A is incorrect because a decline in the gross profit percentage would not, by itself, require that an explanatory paragraph be added to an unqualified report.  The firm may still be in a profitable position and, thus, would not be a candidate for going concern problems.

Answer B is incorrect because the scope of a financial statement audit is not to explicitly evaluate management's performance.

Answer C is incorrect because a footnote may not be necessary and because it is not the role of an auditor to require a footnote; the financial statements are the representations of management.

Answer D is correct because a significant fluctuation in the gross profit percentage might be indicative of a misstatement.  Therefore, the auditor must consider the possibility of a misstatement in the financial statements.

18.          An auditor compares 2005 revenues and expenses with those of the prior year and investigates all changes exceeding 10%.  By this procedure the auditor would be most likely to learn that

a)        An increase in property tax rates has not been recognized in the client’s accrual.

b)        The 2005 provision for uncollectible accounts is adequate because of worsening economic conditions.

c)        Fourth quarter payroll taxes were not paid.

d)        The client changed its capitalization policy for small tools in 2005.

Answer A is incorrect because the lack of recognition of an increase in property tax rates is likely to make 2005 tax expenses approximately equal to the prior year and, therefore, no investigation will occur.

Answer B is incorrect because, if no adjustment for the worsening economic conditions has been made, the 2004 and 2005 bad debt expense for each will approximate one another and, therefore, no investigation will occur.

Answer C is incorrect because it pertains to a liability account, not a revenue or expense account.

Answer D is correct because a change in a capitalization policy is likely to have a large peso effect, even for small tools.  Thus, an investigation would occur and the auditor would learn of the change in policy regarding small tools.

19.          Which of the following factors would least influence an auditor’s consideration of the reliability of data for purposes of analytical procedures?

a)        Whether the data were processed in a computerized system or in manual accounting system.

b)        Whether sources within the entity were independent of those who are responsible for the amount being audited.

c)        Whether the data were subjected to audit testing in the current or prior year.

d)        Whether the data were obtained from independent sources outside the entity from sources within the entity.

Answer A is correct because whether the data were processed in a computerized system or in a manual accounting system will not in and of itself influence reliability--either type of system may provide reliable (or unreliable) information.

Answer B is incorrect because whether sources within the entity were independent of those who are responsible for the amount being audited does influence the auditor's consideration of the reliability of data for purposes of achieving audit objectives.

Answer C is incorrect.  It is a factor which influences the auditor's consideration of the reliability of data for purposes of achieving audit objectives.

Answer D is incorrect.  It is a factor which influences the auditor's consideration of the reliability of data for purposes of achieving audit objectives.

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

a)        Select sales and expense items and trace amounts to related documents.

b)        Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income 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.

Answer A is incorrect because tracing amounts to related documents is not an analytical procedure.  This procedure is a test of details of transactions and balances.

Answer B is incorrect because this is a test of the details of transactions and balances and is not considered an analytical procedure.

Answer C is incorrect because the inventory information suggested is available through balance sheet review procedures.

Answer D is correct because analytical procedures are used to gather evidence relative to relationships among various accounting and non-accounting data.  The procedure of comparison of the financial information with information of prior periods is a suggested analytical procedure.

21.          Analytical procedures used in planning an audit should focus on identifying

a)        Material weakness in the internal control structure.

b)        The predictability of financial data from individual transactions.

c)        The various assertions that are embodied in the financial statements.

d)        Areas that may represent specific risks relevant to the audit.

Answer A is incorrect because while analytical procedures may identify material weaknesses in the internal control structure, this is not a primary objective.

Answer B is incorrect because the predictability of financial data from individual transactions is a factor that would be taken into consideration when determining the extent of transaction testing.

Answer C is incorrect because AU 326 clearly identifies the assertions embodied in the financial statements, and analytical procedures perform no such role.

Answer D is correct.  The requirement is to determine the proper focus of analytical procedures used in planning the audit.  The objectives of analytical procedures during planning are (1) to enhance the auditor's understanding of the client, and (2) to identify areas that may represent specific risks relevant to the audit.

22.          Which of the following is ordinarily designed to detect possible material dollar errors on the financial statements?

a)        Compliance testing.

b)        Analytical procedures.

c)        Computer controls.

d)        Postaudit working paper review.

Answer A is incorrect because compliance testing is used to test whether controls work as prescribed.

Answer B is correct.  The requirement is to determine the audit procedure which is ordinarily designed to detect possible material dollar errors on the financial statements.  Analytical review procedures are substantive tests which can aid in the detection of material errors by identifying unexpected fluctuations or the absence of expected fluctuations in the relationships between data (see AU 329).

Answer C is incorrect because computer controls are a subset of internal controls.

Answer D is incorrect because a post audit working paper review is used to test whether the audit has been performed in conformity with GAAS.

23.          Which of the following is the most reliable analytical procedure to verify the year-end financial statement balances of a wholesale business?

a)        Verify depreciation expense by multiplying the depreciable asset balances by one divided by the depreciation rate.

b)        Verify commission expense by multiplying sales revenue by the company’s standard commission rate.

c)        Verify interest expense, which includes imputed interest, by multiplying long-term debt balances by the year-end prevailing interest rate.

d)        Verify IT tax liability by multiplying total payroll costs by the IT contribution rate in effect during the year.

Answer A is incorrect because depreciation expense would not be determined this way.  Therefore, this is not an analytical procedure.

Answer B is correct because if the firm has a standard commission rate, the commission expense would be directly related to the sales revenue.  Therefore, this would be a reliable analytical procedure.

Answer C is incorrect because the interest expense, including imputed interest, may not be directly related to the year-end prevailing interest rate.  Thus, interest expense could not be verified in this manner.

Answer D is incorrect because the IT tax liability would not be directly related to total payroll costs.  Thus, this would not be a reliable analytical procedure.

24.          Which of the following statements concerning analytical procedures is correct?

a)        Analytical procedures may be omitted entirely for some financial statement audits.

b)        Analytical procedures used in planning the audit should not use nonfinancial information.

c)        Analytical procedures usually are in effective and efficient for test of controls.

d)        Analytical procedures alone may provide the appropriate level of assurance for some assertions.

Answer A is incorrect because the performance of analytical procedures is required during the planning and overall review stages of audits.

Answer B is incorrect because analytical procedures used in planning the audit may use nonfinancial information (e.g., number of employees, square footage of selling space).

Answer C is incorrect because analytical procedures are not used to test controls.

Answer D is correct.  The requirement is to identify the correct statement about analytical procedures.  Analytical procedures may in certain circumstances provide the appropriate level of assurance for some assertions.

25.          Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests?

a)        Relationships involving balance sheet accounts.

b)        Transactions subject to management discretion.

c)        Relationships involving income statement accounts.

d)        Data subject to audit testing in the prior year.

Answer A is incorrect.  Relationships involving balance sheet accounts are not the most predictable measure.

Answer B is incorrect.  Relationships involving transaction subject to management discretion are often less predictable.  For example, management might incur maintenance expense rather than replace plant and equipment, or they may delay advertising expenditures.

Answer C is correct.  AU 329 indicates that relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts.

Answer D is incorrect.  Prior year's data is sometimes not a reliable predictor of subsequent year's data.

26.          The auditor notices significant fluctuations in key elements of the company’s financial statements.  If management is unable to provide an acceptable explanation, the auditor should

a)        Consider the matter a scope limitation.

b)        Perform additional audit procedures to investigate the matter further.

c)        Intensify the examination with the expectation of detecting management fraud.

d)        Withdraw from the engagement.

Answer A is incorrect because management has not restricted the scope of the audit; management simply cannot explain the fluctuations.

Answer B is correct because the auditor should investigate fluctuations that are not expected.  The investigation would ordinarily begin with inquiries of management.  If management is unable to provide an acceptable explanation, the auditor should perform additional procedures to investigate the fluctuation further.

Answer C is incorrect because management fraud is only one of many possible explanations.  Thus, an intensified examination would not be specifically planned to detect management fraud.

Answer D is incorrect because no information is given which would indicate the need for withdrawal from the engagement.

27.          Which of the following is not a typical analytical procedure?

a)        Study of relationship of the financial information with relevant nonfinancial information.

b)        Comparison of the financial information with similar information regarding the industry in which the entity operates.

c)        Comparison of recorded amounts of major disbursements with appropriate invoices.

d)        Comparison of the financial information with budgeted amounts.

Answer A is incorrect because it is specifically identified as an analytical procedure in AU 329.  An analytical procedure is used to gather evidence with respect to relationships among various accounting and nonaccounting data.

Answer B is incorrect because it is specifically identified as an analytical procedure in AU 329.  Analytical procedures are used to gather evidence with respect to relationships among various accounting and nonaccounting data.

Answer C is correct because it is an example of a test of details of transactions and balances rather than an analytical procedure.  Analytical procedures are used to gather evidence with respect to relationships among various accounting and nonaccounting data.

Answer D is incorrect because it is specifically identified as an analytical procedure in AU 329.  An analytical procedure is used to gather evidence with respect to relationships among various accounting and nonaccounting data.

28.          The objective of tests of details of transactions performed as substantive tests is to

a)        Detect material misstatements in the financial statements.

b)        Evaluate whether management’ policies and procedures operated effectively.

c)        Identify specific financial statement assertions that satisfy the uadit objectives.

d)        Verify that significant deficiencies in the accounting system are discovered.

Answer A is correct.  The requirement is to identify the objective of tests of details of transactions performed as substantive tests.  The objective of tests of details of transactions performed as substantive tests is to detect material misstatements in the financial statements.

Answer B is incorrect because tests of details do not emphasize an evaluation of whether management's policies and procedures operated effectively.

Answer C is incorrect because financial statement assertions are used to derive audit objectives, which are then used to determine appropriate tests of details.

Answer C is incorrect because financial statement assertions are used to derive audit objectives, which are then used to determine appropriate tests of details.

Answer D is incorrect because the auditor's consideration of internal control emphasizes deficiencies in the accounting system more than do tests of details.

29.          Which of the following is a basic tool used by the auditor to control the audit work and review the progress of the audit?

a)        Time and expense summary.

b)        Engagement letter.

c)        Progress flowchart.

d)        Audit program.

Answer A is incorrect because the time and expense summary accumulates data concerning hours worked and expenses charged but does not control the audit work.

Answer B is incorrect because the engagement letter provides documentation of the understandings between the auditor and client at the onset of the engagement.

Answer C is incorrect because a progress flowchart is not a legitimate term.

Answer D is correct because the audit program aids in instructing assistants in the work and includes audit procedures to accomplish the objectives of the examination.  Thus, it allows the auditor to control the audit work and to review the progress of the audit.

30.          Those procedures specifically outlined in an audit program are primarily designed to

a)        Prevent litigations.

b)        Detect all misstatements due to errors or fraud.

c)        Test internal structures.

d)        Gather evidence.

Answer A is incorrect because preventing litigation may be a benefit of completing an audit program but is not the primary objective.

Answer B is incorrect because detecting all misstatements due to errors and fraud, regardless of materiality, is not a practical audit objective.

Answer C is incorrect because testing internal structures will result from completing an audit program but this is not the primary objective.

Answer D is correct because audit procedures are primarily designed to gather audit evidence which forms the basis for the auditor's opinion.  Completion of the audit program and any additional audit procedures should provide sufficient competent evidential matter for an opinion on the financial statements as required by the third standard of fieldwork.

31.          Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?

a)        A written engagement letter formalizing the level of service to be rendered.

b)        A flowchart depicting the segregation of duties and authorization of transactions.

c)        A written audit program describing the necessary procedures to be performed.

d)        A memorandum setting forth the scope of the audit.

Answer A is incorrect.  While it may be desirable to use a written engagement letter, it is not required.

Answer B is incorrect.  Various other methods of documentation of the segregation of duties and authorization of transaction in addition to preparing flowcharts are acceptable.

Answer C is correct.  In planning the audit the auditor should consider the nature, extent, and timing of work to be performed and should prepare a written audit program.

Answer D is incorrect.  While a memorandum setting forth the scope of the audit may be helpful, it is not required.

32.          When auditing a publicly traded client, the auditor’s program for owner’s equity is least likely to include a step requiring:

a)        Analysis of the accounting for the proceeds of stock issuance.

b)        Confirmation of outstanding shares with an independent registrar.

c)        Reconciliation of the stock certificate book with the general ledger.

d)        Tests of the computation of earnings per share.

Answer A is incorrect because an analysis of the account for the proceeds of stock issuance is a step done to test the existence and valuation assertions of management.

Answer B is incorrect because confirmations of outstanding shares with an independent registrar verifies their existence.

Answer C is correct because the auditor is least likely to reconcile the stock certificate book with the general ledger for publicly traded companies due to the fact that most stock certificate books are maintained by independent registrars.

Answer D is incorrect because the auditor will test the computation of earnings per share to validate the valuation of the accounts.

33.          Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion?

a)        Auditor judgment.

b)        Materiality.

c)        Relative risk.

d)        Reasonable assurance.

Answer A is correct because the measure of the validity of evidence for audit purposes is based upon the judgment of the auditor.  This audit judgment is used to estimate levels of materiality (Answer B), and relative risk (Answer C).

Answer B is incorrect because estimating levels of materiality is only one aspect of audit judgment used to determine necessary auditing procedures.

Answer C is incorrect because evaluating relative risk is only one aspect of audit judgment used to determine necessary auditing procedures.

Answer D is incorrect because reasonable assurance is the general concept which states that the cost of internal control should not exceed the expected benefit.

34.          Which of the following best describes the primary purpose of audit procedures?

a)        To detect errors or fraud.

b)        To comply with generally accepted accounting principles.

c)        To gather corroborative evidence.

d)        To verify the accuracy of account balance.

Answer A is incorrect because it excludes procedures designed to test internal control.  Substantive tests are designed to detect errors and irregularities and to verify the accuracy of account balances.

Answer B is incorrect because under GAAP there is no requirement that audit procedures be performed.

Answer C is correct because audit procedures are primarily designed to gather corroborative audit evidence which becomes the basis of the auditor's report.

Answer D is incorrect because it excludes procedures designed to test internal control.  Substantive tests are designed to detect errors and irregularities and to verify the accuracy of account balances.

35.          Which of the following analyses appearing in a predecessor’s working papers is the successor auditor least likely to be interested in reviewing?

a)        Analysis of noncurrent balance sheet accounts.

b)        Analysis of current balance sheet accounts.

c)        Analysis of contingencies.

d)        Analysis of income statement accounts.

Answer A is incorrect because the successor auditor will normally review working papers of continuing accounting significance.  The noncurrent balance sheet accounts would be of continuing significance and should be reviewed.

Answer B is incorrect because the successor auditor will normally review working papers relating to matters of continuing accounting significance.  The current balance sheet accounts are of continuing significance and should be reviewed.

Answer C is incorrect because the successor auditor will normally review working papers relating to matters of continuing accounting significance.  Contingencies are of continuing significance and should be reviewed.

Answer D is correct because the successor will normally review working papers of continuing accounting significance.  Prior income statement accounts are less likely to have continuing significance than are balance sheet accounts and contingencies.

36.          Which of the following factors will least affect the independent auditor’s judgment as to the quantity, type, and content of working papers desirable for a particular engagement?

a)        Nature of the auditor’s report.

b)        Nature of the financial statement, schedules, or other information upon which the auditor is reporting.

c)        Need for supervision and review.

d)        Number of personnel assigned to the audit.

Answer A is incorrect because the nature of the auditor's report is listed in AU 339 as an important factor in this decision.

Answer B is incorrect because the nature of the financial statements will have an important impact on the auditor's judgment as to the workpapers desired for the engagement.

Answer C is incorrect because the need for supervision and review is an important factor in the auditor's judgment regarding workpapers.  This and other important factors are listed in AU 339.

Answer D is correct because the number of personnel assigned to an engagement will have the least affect on the auditor's judgment.  Those factors that will affect the auditor's judgment are listed in AU 339.

37.          An auditor’s working papers will generally be least likely to include documentation showing how the

a)        Client’s schedules were prepared.

b)        Engagement had been planned.

c)        Client’s internal control had been reviewed and evaluated.

d)        Unusual matters were resolved.

Answer A is correct because while client-prepared schedules will be identified, little detail will be provided as to how they were prepared.

Answer B is incorrect because working papers are to provide evidence relating to the planning of the audit.

Answer C is incorrect because working papers include documentation showing that the client's internal control has been reviewed and evaluated.

Answer D is incorrect because to provide support for the opinion, the manner in which unusual matters were resolved must be disclosed.

38.          Which of the following is generally included or shown in the auditor’s working papers?

a)        The procedures used by the auditor to verify the personnel financial status of members of the client’s management team.

b)        Analyses that are designed to be a part of, or a substitute for, the client’s accounting records.

c)        Excerpts from authoritative pronouncements that support the underlying generally accepted accounting principles used in preparing the financial statements.

d)        The manner in which exceptions and unusual matters disclosed by the auditor’s procedure were resolved or treated.

Answer A is incorrect because the personal financial status of the client's management team is not relevant to the fairness of the client company's financial statements.

Answer B is incorrect because audit workpapers may serve as a useful reference to the client but may not be regarded as a part of, or a substitute for, the client's accounting records.

Answer C is incorrect because reference to pertinent authoritative pronouncements in the audit workpapers is sufficient to support compliance with GAAP, excerpts from the pronouncements need not be provided.

Answer D is correct because audit workpapers generally include the manner in which exceptions and unusual matters were resolved.  The workpapers must contain support for the auditor's conclusions concerning significant aspects of the examination.

39.          During the course of an audit engagement an auditor prepares and accumulates audit working papers.  A primary purpose of the audit working papers is to

a)        Aid the auditor in adequately planning his work.

b)        Provide a point of reference for future audit engagements.

c)        Support the underlying concepts included in the preparation of the basic financial statements.

d)        Support the auditor’s opinion.

Answer A is incorrect because the primary purpose of audit workpapers is not to aid in adequately planning the examination.  Audit workpapers should, however, include documentation showing that the work was adequately planned and supervised.

Answer B is incorrect because providing a point of reference for future audits is not a primary purpose.  The workpapers would, however, be helpful when considering future examinations.

Answer C is incorrect because the primary purpose of audit workpapers is not to support the underlying concepts included in the preparation of the basic financial statements.  The audit workpapers could certainly be expected to include documentation supporting the opinion rendered, which is directly related to the fairness of the presentation of the statements in accordance with GAAP.

Answer D is correct because the primary purposes of audit workpapers are to support the auditor's opinion and to aid in conducting and supervising the audit engagement.

40.          Which of the following eliminates voluminous details from the auditor’s working trial balance by classifying and summarizing similar or related items?

a)        Account analyses.

b)        Supporting schedules.

c)        Control accounts.

d)        Lead schedules.

Answer A is incorrect because account analyses show the detailed changes in accounts during the year which normally would not appear on a working trial balance.

Answer B is incorrect since supporting schedules are normally included in account analyses.

Answer C is incorrect because control accounts eliminate details from the client's general ledger.

Answer D is correct because lead schedules serve to accumulate similar or related information before it is transferred to the working trial balance.

41.          The current file of an auditor’s working papers most likely would include a copy of the

a)        Bank reconciliation.

b)        Pension plan contract.

c)        Articles of incorporation.

d)        Flowchart of the internal control procedures.

Answer A is correct.  The requirement is to identify the document that would most likely be included in the current file of an auditor's working papers.  The current file will include items of particular significance to the current year's audit, such as bank reconciliations.

Answer B is incorrect.  A pension plan contract is a document that will affect many years' audits, and accordingly will be included in the permanent file.

Answer C is incorrect.  Articles of incorporation are documents that will affect many years' audits, and accordingly will be included in the permanent file.

Answer D is incorrect.  A flowchart of the internal control procedures is a document that will affect many years' audits, and accordingly will be included in the permanent file.

42.          Although the quantity and content of audit working papers vary with each particular engagement, an auditor’s permanent files most likely include

a)        Schedules that support the current year’s adjusting entries.

b)        Prior years’ accounts receivable confirmations that were classified as exceptions.

c)        Documentation indicating that the audit work was adequately planned and supervised.

d)        Analysis of capital stock and other owners’ equity accounts.

Answer A is incorrect because schedules that support the current year's adjusting entries will normally be retained in the current year files because of their direct relationship only to the current year audit.

Answer B is incorrect because the high turnover of receivables result in a situation in which receivable confirmation replies provide evidence typically related to only the year under audit.

Answer C is incorrect because most documentation on the planning and supervision of each year's audit will be retained in that year's current files.

Answer D is correct because permanent files include information affecting more than 1 year, such as analyses of capital stock and other owners' equity accounts.  While these accounts include few transactions annually, they have substantial balances which carry over to each following year.

43.          Which of the following circumstances would most likely cause an auditor to suspect that material fraud exists in a client’s financial statements?

a)        Property and equipment are usually sold at a loss before being fully depreciated.

b)        Significant fewer responses to confirmation requests are received than expected.

c)        Monthly bank reconciliation usually includes several in-transit items.

d)        Clerical errors are listed on a computer-generated exception report.

Answer A is incorrect because selling property and equipment at a loss before it is fully depreciated may simply reveal inadequate depreciation policies, as contrasted to material irregularities.

Answer B is correct because receiving significantly fewer responses to confirmation requests than were expected is considered a circumstance that should cause the auditor to consider whether material misstatements exist.

Answer C is incorrect because for many clients the existence of in-transit items is expected and proper.

Answer D is incorrect because the computer-generated report provides assurance to the auditor that internal controls are in place, since it provides a means of detecting errors.  The existence of good controls decreases the probability of misstated financials.

44.          To establish illegal “slush funds,” corporations may divert cash received in normal business operations.  An auditor would encounter the greatest difficulty in detecting the diversion of proceeds from

a)        Scrap sales.

b)        Dividends.

c)        Purchase returns.

d)        COD sales.

Answer A is correct because scrap sales are generally irregular in nature and these sales often are inadequately controlled by the internal control.  This lack of adequate internal control makes it difficult for the auditor to detect any irregularities.

Answer B is incorrect because transactions involving dividends are frequently recurring business transactions which are under the internal control.  Adequate internal controls will allow the auditor to detect the diversion of proceeds more easily.

Answer C is incorrect because transactions involving purchase returns are frequently recurring business transactions which are under the internal control.  Adequate internal controls will allow the auditor to detect the diversion of proceeds more easily.

Answer D is incorrect because transactions involving COD sales are frequently recurring business transactions which are under the internal control.  Adequate internal controls will allow the auditor to detect the diversion of proceeds more easily.

45.          Which of the following conditions would not normally cause the auditor to question whether material errors or fraud exist?

a)        Bookkeeping errors are listed on an computer-generated exception report.

b)        Differences exist between control accounts and supporting subsidiary records.

c)        Transactions are not supported by proper documentation.

d)        Differences are disclosed by confirmations.

Answer A is correct since the existence of a computer-generated exception report indicates that the firm is controlling and correcting errors.

Answer B is incorrect because differences between control accounts and subsidiary records indicate that one or both of the records are incorrect.

Answer C is incorrect since lack of proper documentation might indicate either an error or fraud.

Answer D is incorrect because differences on confirmation replies are often indicative of errors and/or fraud.

46.          When examining a client’s statement of cash flows for audit evidence, an auditor will rely primarily upon

a)        Determination of the amount of working capital at year-end.

b)        Cross-referencing to balances and transactions reviewed in connection with the examination of the other financial statements.

c)        Analysis of significant ratios of prior years as compared to the current year.

d)        The guidance provided by the PAS on the statement of cash flows.

Answer A is incorrect because determination of the amount of working capital at year-end will not provide much information for the auditor to rely on.  The statement of cash flows is not prepared on a working capital basis.

Answer B is correct because the auditor will be able to cross-reference balances on the statement of cash flows to the other financial statements since audit tests have already been performed on balance sheet and income statement accounts.

Answer C is incorrect because the pertinent ratios have already been calculated in auditing the balance sheet and income statement.

Answer D is incorrect because no auditing guidance is provided by the PAS regarding the statement of cash flows.

47.          On receiving the bank cutoff statement, the auditor should trace

a)        Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal.

b)        Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

c)        Deposits listed on the cut-off statement to deposits in the cash receipts journal.

d)        Checks dated subsequently to year-end to the outstanding checks listed on the year-end bank reconciliation.

Answer A is incorrect because comparing deposits in transit on the bank reconciliation with deposits in the cash receipts journal is a procedure which is not directly related to the bank cutoff statement.

Answer B is correct because comparing checks returned with the cutoff statement which was dated prior to year-end with the list of outstanding checks on the bank reconciliation will provide evidence as to the completeness of the listing of outstanding checks on the bank reconciliation.  This step facilitates a search for unrecorded liabilities.

Answer C is incorrect because only deposits for several days prior to and subsequent to year-end are compared.

Answer D is incorrect because checks dated subsequent to year-end would not be listed on the year-end bank reconciliation.

48.          An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order 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.

Answer A is incorrect because verifying the cash balance reported on the bank confirmation is a secondary objective.

Answer B is correct since a cutoff bank statement will include canceled checks and deposit slips for the period immediately following year-end.  The auditor is, therefore, able to test whether the reconciling items at year-end have been handled properly.

Answer C is incorrect because a cutoff bank statement, by itself, will provide limited assistance in detecting lapping.  Lapping is an embezzlement scheme in which cash collections from customers are stolen and is detected by the use of confirmations and analytical procedures.

Answer D is incorrect because a cutoff bank statement, by itself, will provide limited assistance in detecting kiting.  Kiting is the overstatement of cash by recording a deposit without a corresponding withdrawal at year-end and is best detected through the use of a bank transfer schedule.

49.          As one of the year-end audit procedures, the auditor instructed the client’s personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year.  After the client’s treasurer had signed the request, it was mailed by the assistant treasurer.  What is the major flaw in this audit procedure?

a)        The confirmation request was signed by the treasurer.

b)        Sending the request was meaningless because the account was closed before the year-end.

c)        The request was mailed by the assistant treasurer.

d)        The CPA did not sign the confirmation request before it was mailed.

Answer A is incorrect because the treasurer (or an appropriate client representative) must sign the confirmation request, thereby authorizing the bank to respond directly to the CPA.

Answer B is incorrect because additional information may be gathered with respect to the closed account including information of indebtedness to the bank, etc.

Answer C is correct because allowing the client to mail the confirmation directly violated the requirement that the confirmations remain under the auditor's control.  The auditor is unable to ascertain whether the confirmation reached the proper party.

Answer D is incorrect because independent auditors do not sign bank confirmations.

50.          When counting cash on hand the auditor must exercise control over all cash and other negotiable assets to prevent

a)        Theft

b)        Irregular endorsements.

c)        Substitution.

d)        Deposits-in-transit.

Answer A is incorrect because although the CPA will certainly attempt to avoid theft, such theft is unlikely at the time of the cash counting.

Answer B is incorrect because an irregular endorsement of securities is more limited, and therefore less complete than answer C.

Answer C is correct because the liquidity of these assets makes substitution (changing the form of the assets and thereby double counting them) possible.

Answer D is incorrect because deposits-in-transit are often not on hand during the cash count.

51.          An auditor compares information on canceled checks with information contained in the cash disbursement journal.  The objective of this test is to determine that

a)        Recorded cash disbursement transactions are properly authorized.

b)        Proper cash purchase discounts have been recorded.

c)        Cash disbursements are for goods and services actually received.

d)        No discrepancies exist between the data on the checks and the data in the journal.

Answer A is incorrect because a test of authorization is not being performed.

Answer B is incorrect because purchase discounts are not being recalculated.

Answer C is incorrect because no evidence of the receipt of goods (e.g., a receiving report) is being examined.

Answer D is correct because discrepancies between data on the checks and data in the journal would be found by a comparison of each.

52.          A cash shortage may be concealed by transporting funds from one location to another or by converting negotiable assets to cash.  Because of this, which of the following is vital?

a)        Simultaneous confirmations.

b)        Simultaneous bank reconciliations.

c)        Simultaneous verification.

d)        Simultaneous surprise cash count.

Answer A is incorrect because a simultaneous confirmation will not, by itself, detect a cash shortage concealed by transporting funds from one location to another.

Answer B is incorrect because a simultaneous bank reconciliation will not, by itself, detect a cash shortage.  Only a limited amount of cash would be included in a bank reconciliation statement.  Other sources of cash would not be verified.

Answer C is correct because by simultaneously verifying cash, securities, and other related items, any concealment of cash shortages will be exposed.  If a transfer from another account is made to conceal a cash shortage, a shortage in the transferred item will result and this will be identified.

Answer D is incorrect because a simultaneous surprise cash count, by itself, would not detect a shortage of cash.  Only cash on hand would be verified by this method and the auditor would not be able to determine if negotiable assets had been converted to cash.

53.          Under which of the following circumstances would an auditor be most likely to intensify an examination of a Php500 imprest petty cash fund?

a)        Reimbursement vouchers are not prenumbered.

b)        Reimbursement occurs twice each week.

c)        The custodian occasionally uses the cash fund to cash employee checks.

d)        The custodian endorses reimbursement checks.

Answer A is incorrect because even though prenumbered vouchers are advisable, the limited amount in petty cash and the self-checking feature of the imprest system will mitigate for this deficiency.

Answer B is correct because a petty cash fund is most frequently used for small expenditures and one would not expect to find one in which the imprest amount of Php500 was being reimbursed twice weekly.  The auditor would be likely to intensify an examination of the petty cash fund if this situation occurred.

Answer C is incorrect because a petty cash fund could be used to cash employee checks.  This would be a normal use of the petty cash fund and would not cause the auditor to intensify the examination.

Answer D is incorrect because the custodian will normally endorse reimbursement checks to the petty cash fund.

54.          Which of the following areas would ordinarily be expected to require the most time when performing an audit of a continuing client?

a)        Accounts receivable.

b)        Common stock.

c)        Retained earnings.

d)        Revenues.

Answer A is correct.  Accounts receivable represents an account with many transactions and therefore would be expected to require significant audit time.

Answer B is incorrect.  Common stock ordinarily is confirmed through an independent stock registrar and contains relatively few transactions in comparison to other accounts.

Answer C is incorrect.  Retained earnings requires little audit time because few adjustments are expected into retained earnings.

Answer D is incorrect.  Income statement accounts such as revenues often receive less attention than many balance sheet accounts.

55.          During the process of confirming receivables as of December 31, 2005, a positive confirmation was returned indicating the “balance owed as of December 31 was paid on January 9, 2006.”  The auditor would most likely

a)        Determine whether there were any changes in the account between January 1 and January 9, 2006.

b)        Determine whether a customary trade discount was taken by the customer.

c)        Reconfirm the zero balance as of January 10, 2006.

d)        Verify that the amount was received.

Answer A is incorrect because there is not a general need to audit all transactions in the subsequent year's first 9 days.

Answer B is incorrect because an auditor's primary objective of forming an opinion on the financial statements is not directly related to whether the customer took an available discount.

Answer C is incorrect because there is no need to reconfirm the balance.

Answer D is correct because auditors trace such information to the accounting records to ensure the amount is recorded and to assist in testing the valuation assertion.

56.          The confirmation of the client’s trade accounts receivable is a means of obtaining evidential matter and is specifically considered to be a generally accepted auditing

a)        Principle.

b)        Standard.

c)        Procedure.

d)        Practice.

Answer A is incorrect because principles generally refer to accounting rather than auditing.

Answer B is incorrect because auditing standards deal with measures of the quality of performance and the objectives to be attained by audit procedures.

Answer C is correct because confirmation of accounts receivable is a generally accepted auditing procedure.

Answer D is incorrect because practices generally refer to accounting, rather than to auditing.

57.          An auditor confirms a representative number of open accounts receivable as of December 31, 2005, and investigates respondents’ exceptions and comments.  By this procedure the auditor would be most likely to learn of which of the following?

a)        One of the cashiers has been covering a personal embezzlement by lapping.

b)        One of the sales clerks has not been preparing charge slips for credit sales to family and friends.

c)        One of the computer control clerks has been removing all sales invoices applicable to his account from the data file.

d)        The credit manager has misappropriated remittances from customers whose accounts have been written off.

Answer A is correct because lapping slows down the recording of customers' payments.  Therefore, confirmations may detect lapping when an auditor receives replies in which customers state that they have paid the receivable well before year-end.

Answer B is incorrect because it is doubtful that such accounts will be confirmed since they will generally have low dollar or zero book balances.  Also, if confirmations are sent, one would not expect family and friends to disclose the fraud with which they are involved.

Answer C is incorrect because the computer control clerk would not be likely to self-report the fraud with which s/he is involved.

Answer D is incorrect because it relates to accounts which have been written off and not to open accounts.  Only open accounts were confirmed by the auditor.

58.          Which of the following is the best argument against the use of negative accounts receivable confirmations?

a)        The cost per response is excessively high.

b)        There is no way of knowing if the intended recipients received them.

c)        Recipients are likely to feel that in reality the confirmation is a subtle request for payment.

d)        The inference drawn from drawn from receiving no reply may not be correct.

Answer A is incorrect since the cost per response should be no higher than that for positive confirmations.

Answer B is incorrect because the auditor may control for nondelivered confirmations by inserting his/her firm's address in the return address portion of the envelope in which the confirmation is enclosed.

Answer C is incorrect since there is no reason to believe that recipients will consider this a subtle request for payment.

Answer D is correct because failure to reply would cause the auditor to assume that the recipient agrees with the confirmation request.  Should the recipient disregard the confirmation request despite the fact that the balances do not agree, the auditor would be incorrect in making this assumption.

59.          Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide evidence concerning the

a)        Collectively of the balances confirmed.

b)        Ownership of the balances confirmed.

c)        Existence of the balances confirmed.

d)        Internal control over balances confirmed.

Answer A is incorrect.  Refer to the correct answer explanation.

Answer B is incorrect.  Refer to the correct answer explanation.

Answer C is correct because confirmation does provide evidence as to the existence of the receivable.

Answer D is incorrect.  Refer to the correct answer explanation.

60.          If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the

a)        Cash receipts journal to the sales journal.

b)        Sales journal to the cash receipts journal.

c)        Source documents to the accounting records.

d)        Accounting records to the source documents.

Answer A is incorrect because tracing from the cash receipts journal to the sales journal will address whether a recorded sale exists for each cash receipt.

Answer B is incorrect because tracing from the sales journal to the cash receipts journal will only address whether cash has been received on recorded credit sales.  Note, however, that this procedure could detect overstatements of sales in that one would not expect a cash receipt for a recorded sale that is not proper.

Answer C is incorrect because tracing from source documents to the accounting records will primarily address understatements of sales, not overstatements (that is, it will test completeness).  See AU 326 for information on the financial statement assertions.

Answer D is correct.  The requirement is to determine an appropriate procedure to detect overstatements of sales.  Tracing from accounting records to source documents tests for overstatements (the existence assertion).  For example, an auditor might trace from the sales journal to support such as sales invoices, shipping documents and customers' orders.

61.          Which of the following procedures would an auditor most likely perform to verify management’s assertion of completeness?

a)        Compare a sample of shipping documents to related sales invoices.

b)        Observe the client’s distribution of payroll checks.

c)        Confirm a sample of recorded receivables by direct communication with the debtors.

d)        Review standard bank confirmation for indicators of kiting.

Answer A is correct because comparison of a sample of shipping documents to recorded sales invoices will provide evidence on whether all items shipped.

Answer B is incorrect because the observation of a client's distribution of payroll checks will provide evidence on the existence of the employees.

Answer C is incorrect because the confirmation of a sample of recorded receivables more directly addresses existence than it does completeness.

Answer D is incorrect because standard bank confirmations provide evidence on the existence of the accounts, but provide little evidence on completeness or on kiting.

62.          An auditor will be least likely to use a negative accounts receivable confirmation form when

a)        Internal control surrounding accounts receivable is effective.

b)        A large number of small balances are involved.

c)        The number of request mailed will be minimal.

d)        Customers are unlikely to confirm the information.

Answer A is incorrect.  Effective internal controls represent a circumstance in which negative confirmations are considered acceptable.

Answer B is incorrect.  A large number of small balances is a circumstance in which negative confirmations are considered acceptable.

Answer C is incorrect because in situations where the number of requests to be mailed would be minimal, the auditor may use either positive or negative confirmation.

Answer D is correct.  The requirement is to determine when an auditor will be least likely to use negative accounts receivable confirmations.  If the auditor believes that customers are not likely to confirm the information, positive confirmations should be used.

63.          The negative request form of accounts receivable confirmation is useful particularly when the

Answer A is correct because the negative form is useful when control risk is low, a large number of small balances are involved, and when the auditor has no reason to believe the persons receiving the requests are unlikely to give them consideration.

Answer B is incorrect.  Refer to the correct answer explanation.

Answer C is incorrect.  Refer to the correct answer explanation.

Answer D is incorrect.  Refer to the correct answer explanation.

64.          Auditors may use positive and/or negative forms of confirmation requests for accounts receivable.  An auditor most likely will use

a)        The positive form to confirm all balances regardless of size.

b)        A combination of the two forms, with the positive form used for large balances and the negative form for the small balances.

c)        A combination of the two forms, with the positive form used for trade receivables and the negative form for other receivables.

d)        The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are satisfactory.

Answer A is incorrect because it is unlikely the auditor would confirm all balances.

Answer B is correct because the professional standards suggest the use of the positive form for large balances and the negative form for small balances.

Answer C is incorrect because there is no requirement that the positive form be used for trade receivables or that the negative form be used for other receivables.

Answer D is incorrect because positive confirmations are suggested when internal control is unsatisfactory and the negative form is suggested when internal control is satisfactory.

65.          Customers having substantial year-end past due balances fail to reply after second request forms have been mailed directly to them.  Which of the following is the most appropriate audit procedure?

a)        Examine shipping documents.

b)        Review collections during the year being examined.

c)        Intensify the study of the client’s internal control structure with respect to receivables.

d)        Increase the balance in the accounts receivable allowance (contra) account.

Answer A is correct because the failure of customers to reply to request forms may indicate that these accounts may be in dispute.  The auditor would examine shipping documents to determine whether proper items and quantities have been shipped.

Answer B is incorrect because collections made during the year will provide only limited assurances as to the proper valuation of the account.

Answer C is incorrect because there is no reason at this point to believe that the internal control structure has broken down.

Answer D is incorrect because, although subsequent audit procedures may indicate the need for an increase in the allowance account, no reason to make the entry exists at this point.

66.          To conceal defalcations involving receivables, the auditor would expect an experienced bookkeeper to charge which of the following accounts?

a)        Miscellaneous income.

b)        Petty cash.

c)        Miscellaneous expense.

d)        Sales returns.

Answer A is incorrect because the write-off of the receivable would require a debit to miscellaneous income, an extremely unusual and noticeable entry.

Answer B is incorrect because petty cash will be limited to small entries and because the entry would appear unusual.

Answer C is incorrect because a debit to a miscellaneous expense and a credit to accounts receivable would be unusual and noticeable.

Answer D is correct because a debit to sales returns with a credit to accounts receivable is a normal entry for returns and is one which would not appear questionable.  Therefore, the auditor would expect an experienced bookkeeper to charge sales returns in a defalcation involving accounts receivable.

67.          Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable?

a)        Tracing amounts in the subsidiary ledger to details on shipping documents.

b)        Comparing receivable turnover rations to industry statistics for reasonableness.

c)        Inquiring about receivables pledged under loan agreements.

d)        Assessing the allowances for uncollected accounts for reasonableness.

Answer A is incorrect.  Tracing amounts in the subsidiary ledger to details on shipping documents may address the completeness and existence or occurrence assertions more directly than valuation.

Answer B is incorrect.  While turnover ratios will provide some evidence on the proper valuation of receivables, that evidence is much more limited than that obtained by directly assessing the allowance for uncollectible accounts.

Answer C is incorrect.  Inquiring about receivables pledged under loan agreements relates to presentation and disclosure.

Answer D is correct.  Assessing the allowance for uncollectible accounts for reasonableness addresses whether receivables are properly valued at their net realizable value.

68.          Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management’s assertion of

a)        Presentation.

b)        Completeness.

c)        Rights.

d)        Existence.

Answer A is incorrect.  The presentation or disclosure assertion deals with whether particular components of the financial statements are properly classified, described, and disclosed.

Answer B is correct.  The completeness assertion deals with whether all transactions have been included in the proper period.

Answer C is incorrect.  The rights and obligations assertion deals with whether assets are the rights of the entity and liabilities are the obligations of the entity at a given date.

Answer D is incorrect.  The existence or occurrence assertion deals with whether assets or liabilities of the entity exist at a given date and whether recorded transactions have occurred during a given period.  In this question, the existence assertion would be tested if the auditor sampled from sales recorded prior to year-end to determine whether the sale occurred before or after year-end.

69.          The auditor is most likely to verify accrued commissions payable in conjunction with the

a)        Sales cutoff review.

b)        Verification of contingent liabilities.

c)        Review of post balance sheet date disbursements.

d)        Examination of trade accounts payable.

Answer A is correct.  Commissions are directly related to sales in verifying accrued commission payable; the auditor seeks to determine that both are recorded in the proper period.

Answer B is incorrect because contingent liabilities generally have little to do with commissions; in most cases, the liability exists when the sale occurs.

Answer C is incorrect because the overall general nature of the post balance sheet review makes discovery difficult, although certainly possible.

Answer D is incorrect because the examination trade accounts payable will be of assistance in verifying accrued commissions only in those cases in which there are classification errors.

70.          A sales cutoff test of billings complements the verification of

a)        Sales returns.

b)        Cash.

c)        Account receivable.

d)        Sales allowance.

Answer A is incorrect because sales returns on cutoff sales will typically occur subsequent to the cutoff period.

Answer B is incorrect because the cash for cutoff sales will not be received until some time after billing.

Answer C is correct because the primary purpose of a sales cutoff test is to obtain reasonable assurance that sales and accounts receivable are recorded in the accounting period during which title has passed.

Answer D is incorrect because sales allowances on cutoff sales will occur subsequent to the cutoff period.

71.          The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date.  This aging is best used by the auditor to

a)        Evaluate internal control over credit sales.

b)        Test the accuracy of recorded charge sales.

c)        Estimate credit losses.

d)        Verify the validity of the recorded receivables.

Answer A is incorrect because aging accounts receivable does not aid the auditor in evaluating internal control over credit sales.  The aging is used for substantive testing which takes place after the study and evaluation of internal controls.

Answer B is incorrect because aging accounts receivable does not directly address the accuracy of recorded charge sales.  The auditor must examine the underlying documentation (bills of lading, sales invoices, etc.) to reach a conclusion as to the accuracy of recorded credit sales.

Answer C is correct because aging accounts receivable evaluates the adequacy of the allowance for doubtful accounts (i.e., to estimate credit losses).

Answer D is incorrect because aging accounts receivable does not verify the validity of recorded receivables.  To verify the validity of recorded receivables, the auditor would trace recorded amounts to valid shipping documents.

72.          Which of the following might be detected by an auditor’s cutoff review and examination of sales journal entries for several days prior to and subsequent to the balance sheet date?

a)        Lapping year-end accounts receivable.

b)        Inflating sales for the year.

c)        Kiting bank balances.

d)        Misappropriating merchandise.

Answer A is incorrect because lapping year-end accounts receivable involves misappropriating cash remittances received as payment on customers' accounts and generally would not be detected by the auditor's cutoff tests of the sales journal.

Answer B is correct because holding the sales journal open (i.e., recording sales of the next period in this period) inflates sales in the current period.  This should be detected by the auditor's cutoff work.

Answer C is incorrect because kiting involves the overstatement of cash through the improper recording of bank transfers and generally would not be detected by the auditor's cutoff tests of the sales journal.  Kiting occurs when an unrecorded check is drawn on one bank and deposited in another bank at year-end.  At the balance sheet date, the cash is counted as being in both banks.

Answer D is incorrect because the misappropriation of merchandise would not be apparent from examining the sales journals.

73.          An auditor is testing sales transactions.  One step is to trace a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices.  What would the auditor intend to establish by this step?

a)        Sales invoices represent bona fide sales.

b)        All sales have been recorded.

c)        All sales invoices have been properly posted to customer accounts.

d)        Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoices.

Answer A is incorrect because the auditor would trace sales invoices to supporting bills of lading in order to conclude that sales invoices represent bona fide sales.

Answer B is incorrect because the auditor would trace bills of lading to entries in the subsidiary ledger in order to conclude that all sales have been properly recorded.

Answer C is incorrect because the auditor will trace sales invoices to the subsidiary ledger in order to conclude that sales invoices have been properly posted to customer accounts.

Answer D is correct because the auditor would appropriately conclude that entries in the accounts receivable subsidiary ledger are properly supported by sales invoices.

74.          Once a CPA has determined that accounts receivable have increased due to slow collections in a “tight money” environment, the CPA would be likely to

a)        Increase the balance in the allowance for bad debts account.

b)        Review the going concern ramifications.

c)        Review the credit and collection policy.

d)        Expand tests of collectively.

Answer A is incorrect because the auditor does not increase (or decrease) balances, although collectibility tests may result in a proposed adjustment to the allowance for bad debts account.

Answer B is incorrect because any going concern ramifications would be considered subsequent to collectibility tests, if at all.

Answer C is incorrect because a review of the credit and collection policy would not allow the auditor to examine the primary problem of whether the accounts are properly valued.  It is not the collection policy which needs to be reviewed as much as the actual collectibility of the individual accounts.

Answer D is correct because during a period of slow collections caused by "tight money," the primary problem is to ascertain that the account is properly valued.  Expanding the tests of collectibility would allow the auditor to determine if the accounts are collectible.

75.          If accounts receivable turned over 7.1 times in 20X4 as compared to only 5.6 times in 20X5, it is possible that there were

a)        Unrecorded credit sales in 20x5.

b)        Unrecorded credit sales in 20x4.

c)        More thorough credit investigation made by the company late in 20X4.

d)        Fictitious cash sales in 20X5

Answer A is incorrect because in most cases unrecorded credit sales in 20X5 would have increased the ratio.

Answer B is incorrect because unrecorded cash receipts in 20X4 would overstate the year's accounts receivable, reducing the 20X4 ratio.

Answer C is correct because more thorough credit investigations in 20X4 would result in a higher 20X4 turnover (credit sales divided by average receivables).

Answer D is incorrect since fictitious 20X5 cash sales will not affect the numerator or the denominator of the turnover ratio (credit sales divided by average receivables).

76.          Auditors sometimes use comparison of ratios as audit evidence.  For example, an unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

a)        Unrecorded purchases.

b)        Unrecorded sales.

c)        Merchandise purchase being charged to selling and general expense.

d)        Fictitious sales.

Answer A is incorrect because unrecorded purchases would increase gross profit while sales are unaffected.  The result would be as an increase in the ratio.

Answer B is correct because unrecorded sales would decrease both sales and gross profit by equal amounts and thus decrease the ratio.  Note that the ratio is less than 1.0.

Answer C is incorrect because merchandise purchases being charged to general expense would increase gross profit while sales are unaffected.  The result would be an increase in the ratio.

Answer D is incorrect because fictitious sales would increase both sales and gross profit by equal amounts.  The result would be an increase in the ratio.  Note the ratio is less than 1.0.

77.          Some firms which dispose of only a small part of their total output by consignment shipments fail to make any distinction between consignment shipments and regular sales.  Which of the following would suggest that goods have been shipped on consignment?

a)        Numerous shipments of small quantities.

b)        Numerous shipments of large quantities and few returns.

c)        Large debits to accounts receivable and small periodic credits.

d)        Large debits to accounts receivable and large periodic credits.

Answer A is incorrect.  Refer to the correct answer explanation.

Answer B is incorrect.  Refer to the correct answer explanation.

Answer C is correct because when consignment sales are shipped as regular sales, accounts receivable would be debited for large amounts.  However, because the consignee is under no obligation to pay for the goods until they are sold, accounts receivable would be credited in small periodic amounts.

Answer D is incorrect.  Refer to the correct answer explanation.

78.          An auditor will usually trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule.  This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are

a)        Owned by the client.

b)        Not obsolete.

c)        Physical present at the time of the preparation of the final inventory schdule.

d)        Included in the final inventory schedule.

Answer A is incorrect because tracing the test count data to the final inventory schedule provides no evidence that the client owns the inventory.

Answer B is incorrect because tracing the test count data to the final inventory schedule provides no evidence of the obsolescence of the inventory.

Answer C is incorrect because, while the inventory was present for the auditor's observation and test count, it may have been shipped prior to the auditor's tracing the test count data to the final inventory schedule.

Answer D is correct because tracing the test counts from the observation of physical inventory to the final inventory schedule determines that items observed by the auditor are included in the final inventory schedule.

79.          From the auditor’s point of view, inventory counts are more acceptable prior to the year-end when

a)        Internal control is weak.

b)        Accurate perpetual inventory records are maintained.

c)        Inventory is slow-moving.

d)        Significant amounts of inventory are held on a consignment basis.

Answer A is incorrect because weak internal control will often necessitate a year-end count; the auditor does not have sufficient confidence that the internal control structure has properly handled transactions subsequent to the inventory count.

Answer B is correct because when well-kept perpetual records are maintained, the auditor's observation procedures usually can be performed either during or after the end of the period under audit.

Answer C is incorrect because there is no necessary relationship between inventory turnover and when a count is to be made.

Answer D is incorrect because the timing of the counting of consigned inventory is contingent upon the strength of internal control rather than on the amounts of inventory held on a consignment basis.

80.          The physical count of inventory of a retailer was higher than shown by perpetual records.  Which of the following could explain the difference?

a)        Inventory items had been counted but the tags placed on the items had not been taken off the items and added to the inventory accumulation sheets.

b)        Credit memos for several items returned by customers had not been prepared.

c)        Ni journal entry had been made on the retailer’s books for several items returned to its suppliers.

d)        An item purchased “FOB shipping point” had not arrived at the date of inventory count and had not been reflected in the perpetual records.

Answer A is incorrect because if the inventory count tags had not been pulled from the inventory, they would not be reflected on the physical inventory sheets and thus the physical inventory accumulation would be understated.

Answer B is correct because if credit memos for items returned by customers to the client are not prepared, the perpetual records will not be adjusted to reflect the returned items.  Thus, the physical inventory will be greater than indicated by the perpetual records.

Answer C is incorrect because if a general entry had not been made to reflect items returned to the client's suppliers, the perpetual records would be overstated.

Answer D is incorrect because when an item shipped FOB shipping point is not included in the inventory count and not included in the perpetual records, no difference between the two will result. Note that the items should be included in both the inventory count and the perpetual records.

81.          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 optimum automatic reorder points.

d)        The existence of obsolete merchandise.

Answer A is incorrect because the mispricing of inventory would need to be significantly material to affect the inventory turnover ratio.  Recall that the inventory turnover ratio is cost of goods sold divided by the average inventory.  Thus, the inventory would have to be substantially incorrect to affect the turnover ratio to a noticeable degree.

Answer B is incorrect because the external auditor's primary concern is fair presentation of the financial statements rather than control over inventory holding costs.

Answer C is incorrect because the auditor's primary concern is fair presentation of the financial statements rather than control over inventory reorder points.

Answer D is correct because inventory turnover analysis may be useful to the auditor in detecting the existence of obsolete merchandise.  As the proportion of obsolete merchandise to total inventory grows, the inventory turnover would decrease.

82.          When title to merchandise in transit has passed to the audit client, the auditor engaged in the performance of a purchase cutoff on December 31, the last day of the client’s year, will encounter the greatest difficulty in gaining assurance with respect to the

a)        Quantity.

b)        Quality.

c)        Price.

d)        Terms.

Answer A is incorrect because the vendor's invoice may be used by the auditor to determine the quantity of goods in transit.

Answer B is correct because the auditor will rely on the vendor's invoice for information about the merchandise in transit.  This invoice will not provide the auditor with much information on the quality of the goods.

Answer C is incorrect because the vendor's invoice may be used by the auditor to determine the price of the merchandise in transit.

Answer D is incorrect because the vendor's invoice may be used by the auditor to determine the terms of the goods in transit.

83.          The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with

a)        Purchase requisitions.

b)        Receiving reports.

c)        Purchase orders.

d)        Vendor payments.

Answer A is incorrect because purchase requisitions deal with the quantity of inventory ordered which differs from the quantity received.

Answer B is correct because the receiving report will indicate the quantity actually received.

Answer C is incorrect because the quantity of inventory ordered may be different from the quantity received.

Answer D is incorrect because the actual payment to the vendor will not be as helpful as the receiving report because it will be difficult to convert from the amount of the payment to the individual items received.  In addition to the payment, the vendor's invoice and/or the receiving report will be needed.

84.          Which of the following audit procedures would provide the least reliable evidence that the client has legal title to inventories?

a)        Confirmation of inventories at location outside the client’s facilities.

b)        Analytical procedures comparing inventory balances to purchasing and sales activities.

c)        Observation of physical inventory counts.

d)        Examination of paid vendors’ invoices.

Answer A is incorrect because the confirmation of the client's inventories with an independent outside warehouse provides evidence that the client has title to the goods.

Answer B is correct.  The requirement is to determine the audit procedure that provides the least reliable evidence that the client has legal title to inventories.  AU 326 illustrates audit procedures used to verify that the entity has legal title to inventories.  Analytical procedures applied to inventory balances alone will not provide information as to legal title to inventory, although subsequent tests of details of transactions and balances as a result of fluctuations identified may provide such evidence.

Answer C is incorrect because physical observation of an asset also provides evidence that the client has title to the inventory.

Answer D is incorrect because examination of paid vendors' invoices provides strong evidence of legal title, since the goods have been paid for.

85.          In verifying debits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the purchase

a)        Journal.

b)        Requisitions.

c)        Orders.

d)        Invoices.

Answer A is incorrect because the purchases journal is a client-prepared document which is a less valid form of audit evidence than a document prepared by independent third parties.

Answer B is incorrect because the purchase requisitions are internal requests within the client's firm to the client's purchasing department and would not be a basis for debiting perpetual inventory records.

Answer C is incorrect because purchase orders issued by the client's purchasing department would not be a basis for debiting perpetual inventory records, as the purchase orders may go unfilled by suppliers.

Answer D is correct because the purchase invoice prepared by the vendor is independent information which provides an excellent means of verifying debits to perpetual inventory records.

86.          During the first part of the current fiscal year, the client company began dealing with certain customers on a consignment basis.  Which of the following audit procedures is least likely to bring this new fact to the auditor’s attention?

a)        Tracing of shipping documents to the sales journal.

b)        Test of cash receipts transactions.

c)        Confirmation of accounts receivable.

d)        Observation of physical inventory.

Answer A is incorrect because tracing the shipping documents to the sales journal would disclose the consignment arrangement if the sales journal indicated sale terms.

Answer B is incorrect because testing cash receipts transactions and the related documentation would probably provide an indication of consignment sales.

Answer C is incorrect because no receivable is established by the client when goods are consigned.

Answer D is correct because observation of physical inventory would not indicate that shipments have been made on a consignment basis.  Irrespective of whether sales are on a regular basis or a consignment basis, the inventory would not be in the client's possession.

87.          When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably

a)        Want the client to schedule the physical inventory count at the end of the year.

b)        Insist that the client perform physical inventory count at the end of the year.

c)        Increase the extent of tests for unrecorded liabilities at the end of the year.

d)        Have to disclaim an opinion on the income statement for that year.

Answer A is correct.  The requirement is to determine the most likely effect of weak internal control over inventory.  Weak controls would indicate that the structure cannot be relied upon to accurately account for inventory; a year-end count would thus be necessary.

Answer B is incorrect because, for the auditor's purposes, an accurate count at the beginning and at the end of the year is essential.

Answer C is incorrect because controls over liabilities may or may not be weak in this situation; only the weak control over inventory is mentioned.

Answer D is incorrect because the existence of weak internal control does not necessarily lead to a disclaimer opinion.

88.          When an auditor tests a client’s cost accounting system, the auditor’s tests are primarily designed to determine that

a)        Quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate.

b)        Physical inventories are in substantial agreement with book inventories.

c)        The system is in accordance with generally accepted accounting principles and is functioning as planned.

d)        Costs have been properly assigned to finished goods, work in process and cost of goods sold.

Answer A is incorrect because the cost accounting system concerns valuation and not the quantity of physical inventory.

Answer B is incorrect because the cost accounting system concerns valuation and not the quantity of physical inventory.

Answer C is incorrect because generally accepted accounting principles do not apply to cost accounting systems.

Answer D is correct because the major objective of a manufacturing firm's cost accounting system is the valuation of the product(s) being produced.  The auditor would test the accuracy of this system by assuring that the product costs have been properly assigned to the accounts associated with the various stages of product completion (i.e., finished goods, work in process, and cost of goods sold).

89.          To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditor should review and test the

a)        Terms of the open purchase orders.

b)        Purchase cutoff procedures.

c)        Contractual commitments made by the purchasing department.

d)        Purchase invoices received on or around year-end.

Answer A is incorrect because reviewing the terms of open purchase orders is considered part of the auditor's cutoff procedures.  Therefore, this answer is only partially correct.

Answer B is correct because the objective of purchase cutoff procedures is to ascertain whether all merchandise owned by the client at year-end is properly included in year-end inventory.  For example, goods which are shipped to the client FOB shipping point before year-end but not received until after year-end are owned by the client and should be included in inventory (the related liability should also be recorded).

Answer C is incorrect because reviewing contractual commitments made by the purchasing department is considered part of the auditor's cutoff procedures.  Therefore, this answer is only partially correct.

Answer D is incorrect because reviewing purchase invoices received near year-end is considered part of the auditor's cutoff procedures.  Therefore, this answer is only partially correct.

90.          Which of the following is the best audit procedure for the discovery of damaged merchandise in a client’s ending inventory?

a)        Compare the physical quantities of slow-moving items with corresponding quantities of the prior year.

b)        Observe merchandise and raw materials during the client’s physical inventory taking.

c)        Review the management’s inventory representation letter for accuracy.

d)        Test overall fairness of inventory values by comparing the company’s turnover ratio with the industry average.

Answer A is incorrect because slow-moving items are not necessarily damaged items.  Also, items may be damaged near the end of the year and thus would not appear as slow-moving until some point in the future.

Answer B is correct because the observation of a client's physical inventory is the best procedure.

Answer C is incorrect because the accuracy of management's inventory representations with respect to damaged merchandise cannot be evaluated without observation of the inventory.

Answer D is incorrect because the auditor's concern with damaged merchandise is not overcome by the overall fairness of inventory values as determined by comparing the client's inventory turnover ratio with the industry average.

91.          Which of the following is not one of the independent auditor’s objectives regarding the examination of inventories?

a)        Verifying that inventory counted is owned by the client.

b)        Verifying that the client has used proper inventory pricing.

c)        Ascertaining the physical quantities of inventory on hand.

d)        Verifying that all inventory owned by the client is on hand at the time of the client.

Answer A is incorrect because ownership pertains to the rights assertion.

Answer B is incorrect because pricing pertains to the valuation assertion.

Answer C is incorrect because the physical quantities of inventory pertain to the existence assertion.

Answer D is correct.  The requirement is to identify the response which does not represent one of the independent auditor's objectives regarding the examination of inventory.  Verifying that all inventory owned by the client is on hand at the time of the count is not an objective.  For example, purchased items in transit at year-end, for which title has passed, should be included in inventory.  Similarly, inventory out on consignment should be included.

92.          Purchase cutoff procedures should be designed to test whether or not all inventory

a)        Purchased and received before the end of the year was paid for.

b)        Ordered before the end of the year was received.

c)        Purchased and received before the end of the year was recorded.

d)        Owned by the company is in the possession of the company at the end of the year.

Answer A is incorrect.  Refer to the correct answer explanation.

Answer B is incorrect.  Refer to the correct answer explanation.

Answer C is correct.  The purpose of purchase cutoff procedures is to ascertain whether inventory purchases have been recorded in the proper accounting periods.  Since title on purchases, in all cases, passes to the purchaser no later than the date of receipt, those purchases which were received before year-end should be recorded before year-end.

Answer D is incorrect.  Refer to the correct answer explanation.

93.          The auditor tests the quantity of materials charged to work in process by tracing these quantities to

a)        Cost ledgers.

b)        Perpetual inventory records.

c)        Receiving reports.

d)        Material requisitions.

Answer A is incorrect because cost ledgers include the work-in-process account, and therefore are not a source of supporting information to initiate transactions which would be recorded later in the cost ledger.

Answer B is incorrect because perpetual inventory records are maintained based upon supporting or initiating documentation such as material requisitions.

Answer C is incorrect because receiving reports are generally prepared by the receiving department when received from third parties at the plant itself.  Generally, receiving reports are not prepared in addition to the material requisitions for movement.

Answer D is correct.  The requirement is to determine supporting documentation for quantities of materials charged to work in process.  Material requisitions by production departments would be the basis for charging materials to work in process.

94.          To establish the existence and ownership of a long-term investment in the common stock of a publicly traded company, an auditor ordinarily performs a security count or

a)        Relies on the client’s internal controls if the auditor has reasonable assurance that the control procedures are being applied as prescribed.

b)        Confirms the number of shares owned that are held by an independent custodian.

c)        Determine the market price per share at the balance sheet date from published quotations.

d)        Confirms the number of shares owned with the issuing company.

Answer A is incorrect because the auditor will require corroborative evidential matter in addition to the reliance upon internal control.

Answer B is correct.  The requirement is to identify the correct statement with respect to establishing the existence and ownership of a long-term investment in a publicly traded company's stock.  The evidential matter should include inspection of the securities, and in appropriate circumstances, the written confirmation from an independent custodian.

Answer C is incorrect because information on market price relates more directly to the valuation of the common stock.

Answer D is incorrect because auditors will not in general confirm the number of shares owned with the issuing company.

95.          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.

c)        Confirming interest rate with the issuer of the bonds.

d)        Vouching the receipts and deposit of interest checks.

Answer A is incorrect because, in the case of interest earned, interest declarations will not be generally available.

Answer B is correct.  The requirement is to determine the most efficient audit procedure for verification of interest earned on bond investments.  An auditor may quickly and easily recompute the amount of interest which has been earned.

Answer C is incorrect because information on the interest rate is easily available from the bond agreement.

Answer D is incorrect because vouching the receipt and deposit of interest checks will test interest received and recorded as contrasted to interest earned.

96.          Which of the following is the most effective audit procedure for verification of dividends earned on the investments in equity securities?

a)        Tracing deposit of dividend checks to the cash receipts book.

b)        Reconciling amounts received with published dividend records.

c)        Comparing the amounts received with preceding year dividends received.

d)        Recomputing selected extensions and footing of dividend schedules and comparing totals to the general ledger.

Answer A is incorrect because tracing dividend checks to the cash receipts book provides evidence with respect to whether dividend checks received were included in the cash receipts but does not test the completeness with which dividends have been recorded, nor does it test whether the earnings were recorded during the proper period.

Answer B is correct because published dividend records represent strong externally generated evidence.

Answer C is incorrect because the dividends of many companies may vary greatly from year to year and so the evidence collected may not be the most reliable.

Answer D is incorrect because recomputing extensions and footings and comparing totals to the general ledger address the clerical and mathematical accuracy of the recordation of dividends but do not verify the amount of dividends earned.

97.          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 evidencing the investment.

b)        Examine the audited financial statements of the investee company.

c)        Review the broker’s advice or cancelled checks for the investment’s acquisition.

d)        Obtain market quotation from financial newspapers or periodicals.

Answer A is incorrect.  The stock certificates evidencing the investment will provide no information (other than par value) on valuation.

Answer B is correct.  Examination of the audited financial statements of the investee company will reveal the investee's operating and financing results and will allow the auditor to test whether changes in the account have been properly reflected.

Answer C is incorrect.  Information on the acquisition cost will not help the auditor to evaluate changes in the account's carrying value.

Answer D is incorrect.  The equity method uses a calculation based on the investor's proportionate share of the results of operations and financing by the investee, not market value.

98.          When negotiable securities are of considerable volume, planning by the auditor is necessary to guard against

a)        Unauthorized negotiation of the securities before they are counted.

b)        Unrecorded sales of securities after they are counted.

c)        Substitution of securities already counted for other securities which should be on hand but are not.

d)        Substitution of authentic securities with counterfeit securities.

Answer A is incorrect.  Refer to the correct answer explanation.

Answer B is incorrect.  Refer to the correct answer explanation.

Answer C is correct because the substitution of already counted securities for securities which should be on hand but are not may allow for concealment of material shortages through temporary transfers.  The auditor should plan to count securities in all accounts simultaneously in order to safeguard against concealment.

Answer D is incorrect.  Refer to the correct answer explanation.

99.          In violation of company policy, RAM Company erroneously capitalized the cost of painting its warehouse.  The auditor examining RAM’s financial statements would most likely detect this when

a)        Discussing capitalization policies with RAM’s controller.

b)        Examining maintenance expense accounts.

c)        Observing, during the physical inventory observation, that the warehouse had been painted.

d)        Examining the construction work orders supporting items capitalized during the year.

Answer A is incorrect because it is unlikely that a mere discussion of capitalization policies will cause the controller both to realize and to disclose the error.

Answer B is incorrect because information on the capitalized item will not be included in the maintenance expense accounts.

Answer C is incorrect because merely noting that the warehouse has been painted will not necessarily lead the auditor to the testing of whether the cost has been properly handled in the accounting records.

Answer D is correct.  The requirement is to determine how an auditor might find an item which has been erroneously capitalized in violation of company policy.  The cost which was erroneously capitalized will be included in the population of construction work orders which were capitalized during the year.

100.         The audit procedure of analyzing the repairs and maintenance accounts is primarily designed to provide evidence in support of the audit proposition that all

a)        Expenditures for fixed assets have been recorded in the proper period.

b)        Capital expenditure have been properly authorized.

c)        Noncapitalizable expenditures have been properly expensed.

d)        Expenditures for fixed assets have been capitalized.

Answer A is incorrect because examining the expense account only provides a limited test of whether fixed assets have been recorded in the proper period; it addresses only those expenditures which were incorrectly expensed.

Answer B is incorrect because support for authorization of capital expenditures is not being examined with this procedure.

Answer C is incorrect because the auditor must search elsewhere (e.g., fixed assets) to determine whether all noncapitalizable expenditures are included in the expense account.

Answer D is correct because an examination of the expense account may disclose expenditures for fixed assets which have been improperly expensed.

Which one of the following types of evidence is the most reliable?

Which of the following types of audit evidence is most reliable?

What is evidential matter?

Which of the following types of audit evidence is generally the most persuasive?