Question 1

An auditor's analytical procedures most likely would be facilitated if the entity:

Accepted Answer

Choice "B" is correct. An auditor's analytical procedures are facilitated when an entity uses a standard cost system with variance reports because the comparison of actual to budget will already have been performed. In addition, it is likely that management will already be aware of significant variations from budget and will be better able to address any questions the auditor may have. Choice "A" is incorrect. Segregation of obsolete inventory would not be an important factor in determining whether analytical procedures would be effective. Choice "C" is incorrect. Correction of internal control weaknesses prior to the beginning of the audit would not affect analytical procedures. Choice "D" is incorrect. Analytical procedures using data developed solely within the entity are not as reliable as analytical procedures using data developed externally.

Question 2

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that:

Accepted Answer

Choice "B" is correct. Unrealized gains on available-for-sale securities should properly be recorded in other comprehensive income. If such gains were erroneously recorded in the income account for trading securities, this might be discovered through comparison of the current year and prior year revenues and expenses (assuming the error occurred only in the current year, and not in the prior year). Choice "A" is incorrect. If payroll taxes were properly accrued and recorded, there is unlikely to be a significant change in revenues and expenses for the current year as compared to the prior year. Payables would not be part of the comparison of revenues and expenses. Choice "C" is incorrect. In times of worsening economic conditions, one would expect the annual provision for uncollectible accounts to increase. Since this answer option indicates that the provision was inadequate, it would appear that the client did not increase the provision appropriately. Investigating changes in revenues and expenses would not be likely to identify this error, since failing to increase the provision would likely result in there being little change between the two years. Choice "D" is incorrect. An increase in property tax rates should cause a corresponding increase in accrued property tax expense; however, the question indicates that the appropriate increase was not recorded in the current year. Investigating changes in revenues and expenses would not be likely to identify this error, since failing to increase the expense would likely result in there being little change between the two years.

Question 3

Selected data pertaining to Lore Co. for the calendar year 20X4 is as follows: Lore would use which of the following to determine the average days sales in inventory?

Accepted Answer

Choice "b" is correct. Average number of days sales in inventory is defined as 365 days per year divided by the inventory turnover. Choice "a" is incorrect. The denominator used to determine average days sales in inventory is inventory turnover. Inventory turnover is cost of goods sold divided by average inventory, not simply average inventory. Choice "c" is incorrect. The days sales in inventory calculation uses the cost of goods sold figure, not the sales figure. Choice "d" is incorrect. The days sales in inventory calculation uses 365 in the numerator, not sales divided by 365.

Question 4

The following data pertain to Cowl, Inc., for the year ended December 31, 20X4:  What was Cowl's rate of return on assets for 20X4?

Accepted Answer

Choice "b" is correct. Rate of return on assets is defined as the net income divided by the average total assets. In this case: $150,000 / [($2,000,000 + $3,000,000)/2] or [$150,000 / $2,500,000] = 6% rate of return. Choice "a" is incorrect. Average total assets ($2,500,000) should be used, not ending assets ($3,000,000). Choice "c" is incorrect. Net income ($150,000) and average total assets ($2,500,000) should be used, not net sales ($600,000) and ending assets ($3,000,000). Choice "d" is incorrect. Net income ($150,000) should be used, not net sales ($600,000).

Question 5

Selected data pertaining to Lore Co. for the calendar year 20X4 is as follows:  The accounts receivable turnover for 20X4 was 5.0 times. What were Lore's 20X4 net credit sales?

Accepted Answer

Choice "A" is correct. The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable. 5.0 = net credit sales / [($20,000 + $22,000)/2]. Net credit sales equal $105,000. Choice "B" is incorrect. The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable. Choice "C" is incorrect. The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable, not by year-end accounts receivable. Choice "D" is incorrect. The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable, not by the sum of beginning and ending accounts receivable.

Question 6

To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into:

Accepted Answer

Choice "B" is correct. The appropriate numerator for calculating inventory turnover is cost of goods sold. Cost of goods sold is the expense most clearly associated with the sale (turnover) of inventory, which is priced at acquisition cost, not selling price. Choice "A" is incorrect. Net sales is a measure of revenue that reflects the price at which inventory was sold, not its recorded inventoriable value. Choice "C" is incorrect. Operating income does not tie specifically to the recorded value of inventory sold because it reflects the sales price after all operating expenses. Choice "D" is incorrect. Gross sales is a measure of revenue that reflects the price at which inventory was sold, not its recorded inventoriable value.

Question 7

In performing a count of negotiable securities, an auditor records the details of the count on a security count worksheet. What other information is usually included on this worksheet?

Accepted Answer

Choice "A" is correct. After performing a count of negotiable securities, the auditor would generally obtain an acknowledgment from the client that the securities were returned intact. This helps maintain accountability for the securities, and reduces the likelihood of employee misappropriation (e.g., if a client employee were to steal a security and blame the auditor). Choice "B" is incorrect. The auditor generally would not include an analysis of realized gains and losses on a security count worksheet, although this information would be included elsewhere in the audit documentation. Choice "C" is incorrect. The auditor generally would not include an evaluation of the client's internal control on a security count worksheet, although this information would be included elsewhere in the audit documentation. Choice "D" is incorrect. The auditor generally would not include a description of the client's control procedures on a security count worksheet, although this information might be included elsewhere in the audit documentation.

Question 8

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of:

Accepted Answer

Choice "A" is correct. Assertions about valuation and allocation deal with whether assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts. Recalculation of the amortization and review of the amortization period would test the valuation and allocation assertion. Choice "B" is incorrect. Assertions about existence deal with whether assets, liabilities, and equity interests exist at a given date. Evaluating amortization does not relate to this assertion. Choice "C" is incorrect. Assertions about completeness deal with whether all assets, liabilities, and equity interests that should be presented in the financial statements are so included. Evaluating amortization does not relate to this assertion. Choice "D" is incorrect. Assertions about rights and obligations deal with whether assets are the rights of the entity and liabilities are the obligations of the entity at a given date. Evaluating amortization does not relate to this assertion.

Question 9

At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. Which of the following actions is the auditor most likely to take?

Accepted Answer

Choice "C" is correct. If an auditor has doubts about a material assertion (such as the valuation of inventory), he/she should gather sufficient evidence to eliminate the doubt. Choices "A" and "B" are incorrect. The auditor would not consult with the audit committee regarding the sufficiency of audit evidence obtained, as this is determined based on the auditor's own judgment. In addition, if the auditor is able to obtain additional evidence, it might be possible to issue an unqualified opinion. Finally, even if no additional evidence is available, the auditor will still need to decide whether a qualified opinion or a disclaimer of opinion is more appropriate, depending on materiality. Choice "D" is incorrect. Since management representations are in fact "statements from management," obtaining additional statements from management would not provide additional support.

Question 10

At December 30, 20X3, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of .5:1. On December 31, 20X3, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

Accepted Answer

Choice "a" is correct. The current ratio equals current assets divided by current liabilities. Since the current assets exceed the current liabilities (as evidenced by a current ratio of 1.5:1), when each is decreased by the same amount, there will be a greater percentage reduction of the current liabilities. Thus, the ratio will increase since the current assets are now proportionately larger than the current liabilities. The quick ratio equals quick assets (including cash) divided by current liabilities. Since the quick assets are less than the current liabilities (as evidenced by a quick ratio of .5:1), when each is decreased by the same amount, the percentage decrease of the quick assets will be greater than that of the current liabilities. Thus, the ratio will decrease since the quick assets are now proportionately smaller than the current liabilities. Choices "B", "C", and "D" are incorrect, per the above Explanation.

Question 11

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertions of:

Accepted Answer

Choice "B" is correct. Inspection of plant and equipment by the auditor provides evidence concerning the existence of the equipment; if the auditor can see it, it exists. However, physical inspection does not provide any evidence concerning whether the amounts paid for plant and equipment are properly presented, described, and disclosed. Only reviewing drafts of the financial statements will provide evidence regarding understandability and classification. Choice "A" is incorrect. Physical inspection does not provide any evidence concerning whether the amounts paid for plant and equipment are properly presented, described, and disclosed. Choice "C" is incorrect. Physical inspection of equipment does not provide any evidence concerning whether the amounts paid for the equipment are properly presented, described, and disclosed. Only reviewing drafts of the financial statements provides evidence regarding understandability and classification. However, inspection of plant and equipment by the auditor does provide evidence concerning the existence of the equipment; if the auditor can see it, it exists. Choice "D" is incorrect. Inspection of plant and equipment by the auditor does provide evidence concerning the existence of the equipment: if the auditor can see it, it exists.

Question 12

What effect would the sale of a company's trading securities at their carrying amounts for cash have on each of the following ratios?

Accepted Answer

Choice "A" is correct. Trading securities are both current assets and quick assets. If they are sold for their carrying value, then both total current assets and total quick assets remain constant since one type of current asset and quick asset is traded for another. Thus, both the current ratio and the quick ratio would be unaffected by the sale of trading securities. Choices "B", "C", and "D" are incorrect, per the above Explanation.

Question 13

At December 31, 20X2, Curry Co. had the following balances in selected asset accounts:  Curry also had current liabilities of $1,000 at December 31, 20X2, and net credit sales of $7,200 for the year then ended. What was the average number of days to collect Curry's accounts receivable during 20X2?

Accepted Answer

Choice "C" is correct. The average number of days to collect accounts receivable is calculated by dividing 365 days by the accounts receivable turnover. Accounts receivable turnover is net credit sales divided by the average accounts receivable: Choice "A" is incorrect. The denominator should be net credit sales ($7,200) divided by average receivables $1,000), or 7.2, not 12. 11ec2ce7_1b68_4b38_89bf_019c5af3b5b6_C1085_00 Choice "B" is incorrect. The average receivable balance is $1,000, not $800. The right-hand column shows the increase over 20X1, so the 20X1 receivable balance was $1,200 $400, or $800. Since the 20X2 receivable balance was given as $1,200, the average receivable balance is $1,000. Choice "D" is incorrect. Average inventory ($1,000), not ending inventory ($1,200), should be used.

Question 14

Selected data pertaining to Lore Co. for the calendar year 20X4 is as follows:  What was the inventory turnover for 20X4?

Accepted Answer

Choice "C" is correct. Inventory turnover equals cost of goods sold divided by average inventory. Beginning inventory ($6,000) plus purchases ($24,000) less ending inventory equals cost of goods sold ($18,000). Thus, ending inventory equals $12,000 and inventory turnover = $18,000 / [($6,000 + $12,000)/2] = 2.0. Choice "A" is incorrect. Inventory turnover equals cost of goods sold divided by average inventory. Choice "B" is incorrect. Cost of goods sold should be divided by average inventory, not by ending inventory. Choice "D" is incorrect. Cost of goods sold should be divided by average inventory, not by beginning inventory.

Question 15

At December 31, 20X2, Curry Co. had the following balances in selected asset accounts:  Curry also had current liabilities of $1,000 at December 31, 20X2, and net credit sales of $7,200 for the year then ended. What is Curry's acid-test ratio at December 31, 20X2?

Accepted Answer

Choice "A" is correct. The acid-test ratio is calculated by taking the current assets excluding inventory and prepaid expenses and dividing by current liabilities. In this case, cash and accounts receivable ($300 + $1,200 = $1,500) are divided by current liabilities ($1,000), resulting in a ratio of $1,500/$1,000, or 1.5. Choice "B" is incorrect. The numerator in the acid-test ratio formula includes only cash and accounts receivable. It would not include prepaid expenses. Choice "C" is incorrect. The numerator in the acid-test ratio formula includes only cash and accounts receivable. It would not include inventory. Choice "D" is incorrect. The numerator in the acid-test ratio formula includes only cash and accounts receivable. It would not include inventory and prepaid expenses.

Question 16

Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?

Accepted Answer

Choice "B" is correct. The most likely analytical review procedure involving costs and expenses would be to compare the current year's payroll expense (average amount per employee) to the prior year, taking into consideration an average increase in wage rates. This is a very effective technique in auditing payroll expense. Choice "A" is incorrect. Comparing the current year's accounts receivable balance with the prior year provides little evidence because accounts receivable may fluctuate based on timing of cash payments, which is unpredictable. Choice "C" is incorrect. Comparing the budgeted current year's sales with the prior year's sales provides evidence regarding the reasonableness of the current year sales budget, but does not provide evidence about costs and expenses. Choice "D" is incorrect. The current year's budgeted warranty expense would likely be compared to the current year's actual warranty expense, not to all of the contingent liabilities for the year.

Question 17

Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed?

Accepted Answer

Choice "B" is correct. Joint custody by two company officials over assets like cash and marketable securities helps safeguard the assets. Under joint custody, collusion is required for a defalcation to occur. Choice "A" is incorrect. Review of investment decisions made by the treasurer might reduce the probability of poor investment policies, but would not be likely to safeguard marketable securities after purchase. Choice "C" is incorrect. Tracing purchases and sales from the subsidiary ledger to the general ledger would help ensure that all existing securities are recorded in the financial statements, but would not help safeguard marketable securities. Choice "D" is incorrect. An annual count by the chairman of the board might provide a small safeguard, but the infrequent performance of the control makes it a fairly weak one.

Question 18

Analytical procedures used in the overall review stage of an audit generally include:

Accepted Answer

Choice "C" is correct. The objective of analytical procedures used in the overall review stage of the audit is to assist the auditor in assessing conclusions reached and in the evaluation of the overall financial statement presentation. Analytical procedures applied in the overall review stage are used to consider the adequacy of evidence gathered in response to unusual or unexpected balances identified in planning the audit, and to identify unusual or unexpected balances or relationships that were not previously identified. Choice "A" is incorrect. If analytical procedures are used to gather evidence about account balances that have not changed from last year, they are functioning as a substantive test rather than as a final review procedure. Choice "B" is incorrect. Analytical procedures are not used to test controls. Choice "D" is incorrect. If analytical procedures are used as a test of transactions, they are functioning as a substantive test rather than as a final review procedure.

Question 19

For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent:

Accepted Answer

Choice "C" is correct. Analytical procedures are required to be applied to some extent in planning and in the final review stage. In addition, although not required, analytical procedures may be used as a substantive test when they are more effective or efficient than tests of details. Choices "A", "B", and "D" are incorrect, per the above Explanation.

Question 20

An independent auditor asked a client's internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure?

Accepted Answer

Choice "B" is correct. The auditor should control the mailing of independent confirmations. Choice "A" is incorrect. It is appropriate for a member of management, such as the controller, to sign the confirmation request. Choice "C" is incorrect. It is acceptable for an internal auditor to provide direct assistance to the external auditor, such as by preparing confirmation forms. Choice "D" is incorrect. Confirmations may be sent to accounts that show a zero balance, to test for understatement errors or to obtain information about loans.

Exam 1: CPA Auditing and Attestation Exam