Deck 16: Audit of transaction cycles and financial statement balances II

Question 1

Information typically confirmed on liabilities to the bank includes the:

A) interest rate.
B) existence of security.
C) amount of the loan.
D) all of the above

Answer 1

D

Question 2

Which of the following misstatements would result in the improper payment of cash or failure to receive cash not normally discovered as part of the audit of the bank reconciliation?

A) payment to an employee for more hours than worked
B) payment of raw materials that were not received
C) duplicate payment of a vendor's invoice
D) all of the above

Answer 2

D

Question 3

Cash balance is important in the audit because of:

A) the potential for fraud.
B) the potential for error.
C) both A and B
D) none of the above

Answer 3

C

Question 4

Which of the following misstatements will normally be discovered as part of the audit of the bank reconciliation?

A) payment for raw materials that were not received
B) payments on loans debited directly to the bank account but not entered in the client's records
C) payment to an employee for more hours than he or she worked
D) all of the above

Question 5

Who should prepare the bank reconciliation?

A) someone independent of handling or recording cash receipts
B) someone independent of handling cash receipts and cash payments
C) the finance manager
D) someone independent of the finance manager

Question 6

Which of the following misstatements would normally be discovered as part of the audit of the bank reconciliation?

A) cash received by the client subsequent to the balance sheet date but recorded as cash receipts in the current year
B) deposits recorded as cash receipts near the end of the year, deposited in the bank in the same month and included in the bank reconciliation as a deposit in transit
C) payments on loans debited directly to the bank account but not entered in the client's records
D) all of the above

Question 7

Which one of the following errors would be LEAST likely to be discovered during the tests of the bank reconciliation?

A) cash received by the client subsequent to the balance sheet date that was recorded as cash receipts in the current year
B) failure to include a cheque that has not cleared the bank on the unpresented cheque list, even though it has been recorded in the cash payments journal
C) the existence of payments on notes payable that were debited directly to the bank balance by the bank but were not entered in the client's records
D) payment to an employee for more hours than he or she worked

Question 8

Cash account is primarily affected by which transactions in the acquisitions and payment cycle?

A) expenses
B) accounts payable
C) both A and B
D) none of the above

Question 9

The general cash account is considered significant in almost all audits:

A) where the ending balance is material.
B) even when the ending balance is immaterial.
C) where either the beginning or ending balance is material.
D) except those of not-for-profit organisations.

Question 10

The test that proves the bank reconciliation to additions and subtractions, including all reconciling items, is an attempt to satisfy which audit objective?

A) completeness
B) detail tie-in
C) existence
D) accuracy

Question 11

Cash account is primarily affected by which transactions in the acquisition and payment cycle?

A) payment of dividends
B) issue of shares
C) both A and B
D) none of the above

Question 12

Information typically confirmed on liabilities to the bank includes the:

A) date of the loan.
B) amount of the loan.
C) loan due date.
D) all of the above

Question 13

Cash account is primarily affected by which transactions in the payroll and personnel cycle?

A) sales
B) collections
C) both A and B
D) none of the above

Question 14

Which of the following cycles does NOT affect cash in bank?

A) payroll and personnel cycle
B) inventory and warehousing
C) acquisitions and disbursements
D) capital acquisitions cycle

Question 15

Which of the following misstatements will NOT normally be discovered as part of the audit of the bank reconciliation?

A) payment for raw materials that were not received
B) improper payments of officers' personal expenditures
C) payment to an employee for more hours than he or she worked
D) all of the above

Question 16

Cash account is primarily affected by which transactions in the sales and collection cycle?

A) sales
B) collections
C) both A and B
D) none of the above

Question 17

Cash account is primarily affected by which transactions in the payroll and personnel cycle?

A) payment of salaries
B) payment of payroll tax
C) both A and B
D) none of the above

Question 18

Which of the following procedures can test the audit objective of determining that cash in bank, as stated on the reconciliation, foots correctly and agrees with the general ledger?

A) adding the unpresented cheques list and the list of deposits in transit
B) examining the minutes of the board of directors for restrictions on the use of cash
C) performing tests for kiting
D) receiving and testing a cutoff bank statement

Question 19

Cash account is primarily affected by which transactions in the capital acquisition and repayment cycle?

A) issue of shares
B) payment of dividends
C) both A and B
D) none of the above

Question 20

Which of the following is NOT a 'cash equivalent'?

A) time deposits
B) money market funds
C) cash management accounts
D) marketable securities

Question 21

The process of transferring money from one bank account to another and improperly recording the transaction is referred to as:

A) kiting.
B) embezzling.
C) scamming.
D) lapping.

Question 22

The emphasis in auditing property, plant, and equipment is on the verification of:

A) the balance carried forward in the account from the previous period.
B) the balance in the account after the current year's activities are considered (ending balance).
C) current period acquisitions and retirements.
D) all of the above

Question 23

In the audit of property, plant, and equipment, it is helpful to separate the tests into all of the following categories EXCEPT:

A) verification of current year disposals.
B) verification of the beginning balance.
C) verification of current year acquisitions.
D) verification of the ending balance.

Question 24

The test of details of balances procedure for PPE which requires 'examination of vendor's invoices and land titles and deeds' is done to satisfy which audit objective?

A) accuracy
B) classification
C) existence
D) rights

Question 25

The balance-related audit objective to determine that cash in bank is properly presented and disclosed can be met through which of the following tests of details of balances?

A) Trace outstanding cheques to subsequent period bank statement.
B) Examine minutes, loan agreements, and the bank confirmation for restrictions on the use of cash and compensating balances.
C) Foot the outstanding cheque list and deposits in transit.
D) Test for kiting.

Question 26

Which objective is not of vital importance when auditing the balance of the general cash account?

A) classification
B) accuracy
C) completeness
D) existence

Question 27

A set of records for each piece of equipment that includes descriptive information, date of acquisition, original cost, current year depreciation, and accumulated depreciation is the:

A) depreciation schedule.
B) file of purchase requisitions.
C) acquisitions journal.
D) fixed asset master file.

Question 28

The audit procedure which requires the auditor to record the last cheque number used on the last day of the year and subsequently trace to the outstanding cheques and the cash payments journal is performed to satisfy which audit objective?

A) cutoff
B) detail tie-in
C) existence
D) completeness

Question 29

Typically, bank confirmations in the audit verify:

A) actual cash balance.
B) loan information.
C) both A and B
D) none of the above

Question 30

General ledger accounts commonly used in PPE are:

A) accumulated depreciation.
B) depreciation expense.
C) the asset at cost or valuation.
D) all of the above

Question 31

Which of the following balance-related objectives is NOT a problem when auditing the general cash account?

A) accuracy
B) completion
C) rights
D) cutoff

Question 32

Client business risk relating to cash may arise from:

A) cash being more susceptible to theft than other types of investments.
B) inappropriate cash management policies.
C) handling of funds held in trust for others.
D) all of the above

Question 33

Which of the following objectives is usually the focus in auditing cash balances?

A) existence, completeness, and cutoff
B) completeness, accuracy, and detail tie-in
C) existence and completeness
D) existence, completeness, accuracy, and detail tie-in

Question 34

The starting point for the verification of the balance in the general bank account is to obtain:

A) a bank reconciliation from the client.
B) a cutoff bank statement directly from the bank.
C) the client's cash account from the general ledger.
D) the client's June bank statement and reconcile it.

Question 35

Listing all bank transfers made a few days before and after the balance sheet date and tracing each to the accounting records for proper recording is a useful approach to test for:

A) kiting.
B) unintentional errors in recording bank transfers.
C) both A and B.
D) kiting and lapping.

Question 36

Information typically confirmed on liabilities to the bank would NOT include:

A) the existence of security included on the confirmation form.
B) interest rate.
C) loans beyond those included on the confirmation form.
D) all of the above

Question 37

It should ordinarily be unnecessary to examine supporting documentation for each addition to property, plant, and equipment, but it is normal to verify:

A) all large transactions.
B) all unusual transactions.
C) a representative sample of typical additions.
D) all of the above

Question 38

Because cash is the most desirable asset for people to steal, it has a higher:

A) inherent risk.
B) detection risk.
C) control risk.
D) all of the above

Question 39

A major consideration in the audit of the general cash balance is the possibility of fraud.The auditor must extend his or her procedures in the audit of year-end cash to determine the possibility of a material fraud when there are:

A) large cash receipts and disbursements during the year.
B) no imprest accounts used for payroll.
C) inadequate internal controls.
D) large cash balances at the end of the year.

Question 40

Property, plant, and equipment are assets that:

A) have expected lives of more than one year.
B) are used in the business.
C) are not acquired for resale.
D) all of the above

Question 41

In verifying accumulated depreciation, the credits to accumulated depreciation are verified as part of the audit of depreciation expense, whereas the debits are normally tested as a part of the audit of:

A) asset acquisitions.
B) disposal of assets.
C) capital acquisitions.
D) accumulated depreciation.

Question 42

A major consideration in verifying the ending balance in permanent assets is the possibility of existing legal encumbrances.Tests to identify possible legal encumbrances would satisfy which audit objective?

A) detail tie-in
B) disclosure
C) classification
D) existence

Question 43

The starting point for the verification of current year acquisitions of property, plant, and equipment is normally:

A) a schedule obtained from the client of all acquisitions recorded in the general ledger during the year.
B) the acquisitions journal.
C) the purchase requisitions file.
D) the property, plant, and equipment account in the general ledger.

Question 44

The most important objective for depreciation is accuracy.One aspect of this objective is the consistency of depreciation policy.The four considerations in determining this do NOT include:

A) the method of depreciation.
B) the policy of depreciating assets in the year of acquisition and disposition.
C) the estimated residual value.
D) what accounting standards must be used.

Question 45

The two most important audit procedures for prepayments are:

A) tests of controls and tests of details of balances.
B) tests for reasonableness or plausible relationships using analytical procedures and recalculation.
C) consistency and accounting standards.
D) tests of controls and substantive tests of transactions.

Question 46

Which one of the following ratio and trend analysis procedures might identify a possible misstatement of expensing amounts that should be capital items?

A) Compare 'depreciation expense divided by gross property, plant, and equipment cost' with previous years.
B) Compare 'monthly or annual repairs and maintenance, supplies expense, small tools expense, and similar accounts' with previous years.
C) Compare 'accumulated depreciation divided by gross property, plant, and equipment cost' with previous years.
D) Compare 'gross property, plant, and cost divided by some method of production' with previous years.

Question 47

The failure to capitalise a permanent asset, or the recording of an asset acquisition at the improper amount, affects the balance sheet:

A) forever.
B) for the current period.
C) until the firm disposes of the asset.
D) for the depreciable life of the asset.

Question 48

The test of details of balances procedure to 'foot the acquisitions schedule' is done to satisfy which audit objective?

A) existence
B) detail tie-in
C) classification
D) cutoff

Question 49

The auditor must know the client's capitalisation policies to determine whether acquisitions are treated:

A) in accordance with accounting standards.
B) consistently with those of the preceding year.
C) both A and B
D) none of the above

Question 50

Which one of the following is NOT a characteristic of the capital acquisition and repayment cycle?

A) Relatively few transactions affect the account balances, but each transaction is often highly material in amount.
B) The exclusion of a few transactions is rarely material by itself.
C) There is a legal relationship between the client and the holder of the equity securities.
D) There is a direct relationship between the interest and dividends accounts and debt and equity.

Question 51

If the client fails to record disposals of property, plant, and equipment, both the original cost of the asset account and the net book value will be incorrect.

A) The original cost will be overstated indefinitely, and the net book value will be overstated until the asset is fully depreciated.
B) The original cost will be overstated indefinitely, and the net book value will be understated until the asset is fully depreciated.
C) Both will be overstated indefinitely.
D) The original cost will be overstated indefinitely, and the net book value will be understated indefinitely.

Question 52

The periodic payments of interest and principal are normally tested as a part of the:

A) acquisition and payment cycle.
B) capital acquisitions and repayments cycle.
C) sales and collection cycle.
D) interest and notes/bonds payable cycle.

Question 53

Depreciation expense is one of the few expense accounts that is NOT verified as a part of:

A) substantive tests of transactions.
B) tests of controls.
C) both A and B
D) analytical procedures.

Question 54

The auditor's starting point for verifying disposals of property, plant, and equipment is the:

A) client's schedule of recorded disposals.
B) file of shipping documents.
C) equipment account in the general ledger.
D) equipment subsidiary ledger.

Question 55

One typical difference between the asset prepaid expenses and other assets, such as accounts receivable and inventory, is the immateriality of the former in many audits.Because of this immateriality, frequently the only audit procedure necessary to perform is:

A) tests of transactions.
B) tests of control.
C) analytical procedures.
D) tests of details of balances.

Question 56

In deciding on the reasonableness of the useful lives assigned to newly acquired assets, the auditor must consider which of the following factors?

A) the expected life of the asset
B) policies on trading in equipment
C) the actual physical life of the asset
D) all of the above

Question 57

The tests of details of balances procedure which requires the auditor to review transactions near the balance sheet date for the proper period satisfies which audit objective?

A) classification
B) existence
C) completeness
D) cutoff

Question 58

The failure to capitalise a permanent asset, or the recording of an asset acquisition at the improper amount, affects the income statement:

A) forever.
B) until the firm disposes of the asset.
C) for the current period.
D) for the depreciable life of the asset.

Question 59

Estimated unpaid obligations for services or benefits that have been received prior to the balance sheet date are classified as:

A) accrued liabilities.
B) accounts payable.
C) miscellaneous assets.
D) deferred charges.

Question 60

The most important objective for depreciation expense is:

A) accuracy.
B) classification.
C) cutoff.
D) disclosure.

Question 61

The audit objective to determine that loans payable in the schedule exist is verified by the tests of balances procedure to:

A) recalculate interest expense.
B) foot the loans payable list.
C) examine duplicate copy of loans for authorisation.
D) examine the balance sheet for proper disclosure of noncurrent portions.

Question 62

The test of details of balance procedure which requires the auditor to foot the loans payable list for loans payable and accrued interest satisfies which audit objective?

A) detail tie-in
B) existence
C) completeness
D) accuracy

Question 63

The amount of time spent verifying owners' equity is frequently minimal for private companies because:

A) there are few if any transactions during the year for the owners' equity accounts, except for earnings and dividends.
B) the few owners all have access to the books, so the auditor spends more time on accounts like liabilities, which affect outsiders.
C) these companies are so small that it is not necessary to audit the capital section.
D) there is no public interest in these companies.

Question 64

Which of the following types of owners' equity transactions would NOT require authorisation by the board of directors?

A) declaration of dividends
B) share issues
C) share redemptions
D) all of the above

Question 65

The auditor recalculates approximate interest expense, using overall monthly instalments payable and average interest rates, to test for:

A) omitted loans payable.
B) misstatement of interest expense.
C) both A and B
D) none of the above

Question 66

Usually dividends are audited:

A) using variables sampling.
B) using block sampling.
C) using attributes sampling.
D) on a 100% basis.

Question 67

Analytical procedures are essential for borrowings because:

A) of the paucity of documentation in this area.
B) the large quantity of transactions would make this an expensive area to audit if some other means of reducing tests were not available.
C) there are few internal controls in this area which the auditor can rely upon to reduce substantive testing.
D) tests of details for interest expense and accrued interest can frequently be eliminated when results are favourable.

Question 68

The audit objective to determine that existing loans payable are included in the loans payable schedule (completeness)is accomplished by the following test of balances procedure:

A) Trace the individual loans payable on the schedule to the master file.
B) Examine duplicate copies of loan agreements for principal and interest rates.
C) Review loans to determine whether any are related-party loans or accounts payable.
D) Review the bank reconciliation for new loans credited directly to the bank account by the bank.

Question 69

To prevent the improper or incorrect issue of share certificates, it is common practice for publicly listed companies to engage:

A) a share register.
B) an independent share registrar.
C) an independent internal audit department.
D) an imprest dividend account.

Question 70

Which one of the general tests of details of balance objectives is NOT considered vital in the audit of borrowings?

A) existence
B) valuation
C) completeness
D) realisable value

Question 71

To prevent the payment of a larger amount of dividends than was authorised, the corporation should use:

A) an outside independent disbursing agency.
B) cheques which cannot be written for an amount in excess of a stated maximum amount.
C) a separate imprest dividend account.
D) all of the above

Question 72

Which of the following concerns in auditing issued and paid-up capital involves tests of balances?

A) Existing capital stock transactions are recorded.
B) Issued and paid-up capital is properly disclosed.
C) Recorded capital stock transactions exist and are accurately recorded.
D) all of the above

Question 73

The audit objective which requires the auditor to determine that loans payable on the loans payable schedule are properly classified can be tested with the following procedure:

A) Review the notes to determine whether any are with related parties.
B) Confirm loans payable.
C) Examine corporate minutes for loan approval.
D) Examine notes, minutes, and bank confirmations for restrictions.

Question 74

Examples of cash equivalents include time deposits, certificates of deposit, and marketable securities.

Question 75

Which of the following is a balance-related audit objective for owners' equity?

A) obligations
B) realisable value
C) rights
D) none of the above

Question 76

The general cash account is considered insignificant in the audit when the ending balance is immaterial.

Question 77

In the audit of loans payable, it is common to include tests of principal and interest payments as a part of the audit of the acquisitions and payment cycle, because the payments are in the cash payments journal that is being sampled.It is also normal to test these transactions as part of the capital acquisitions and repayment cycle, because:

A) due to the infrequency of these transactions, in many cases no transactions involving loans payable are included in the sample tests of acquisitions and payments.
B) it is not unusual for the auditor to duplicate a process, thereby gathering a larger quantity of evidence.
C) the tests done in the acquisitions and payments cycle will look only at the cash credit side, so the tests done in the capital acquisitions and repayment cycle will look at the debit side of the transaction.
D) replicating the evidence will provide the auditor with a higher level of assurance.

Question 78

The record of the issuance and transfer of shares for the life of the corporation is maintained in the:

A) shareholders' master file.
B) schedule of shareholders.
C) share register.
D) corporate directory.

Question 79

The tests of details of balances procedure which requires the auditor to examine duplicate copies of loans for authorisation is an attempt to satisfy which audit objective?

A) existence
B) accuracy
C) classification
D) completeness

Question 80

Which one of the following transaction-related objectives is NOT important when auditing dividends?

A) accuracy
B) completeness
C) existence
D) posting and summarisation