Deck 13: Auditing Cash, Inventory, Investing and Financing Activities

Question 1

Inherent risk for property, plant and equipment is relatively straightforward.

Answer 1

False

Question 2

Financing activities include the purchase and sale of land, buildings, equipment, and other long-term assets not generally held for resale.

Answer 2

False

Question 3

When an auditor finds that a client has engaged in significant new debt or equity transactions, the auditor should be prepared to study a significant volume of legal documents related to the financing transaction and determine the impact of any legal requirements (such as debt covenants) on the entity.

Answer 3

True

Question 4

The nature of cash balances makes them susceptible to theft.

Question 5

An inventory risk occurs when inventory may not exist for which we can use SKU (Stock Keeping Unit) and UPC (Universal Product Numbers) bar codes for identification of each number.

Question 6

While authorizing bonds and capital stock issuance, the board of directors usually authorizes financing transactions based on the entity's strategic plans and investing activities.

Question 7

Cash receipts and disbursement transactions _______.

A)are subject to minimal inherent risk
B)are subject to increased inherent risk
C)should be recorded weekly by the client
D)should be approved by the bank before recording in the ledger

Question 8

Operating decisions are the only type of management operating decisions that significantly affect cash balances.

Question 9

Top performing companies within an industry generate significant free cash flow and_______.

A)are more likely to have significant balances of cash and cash equivalents
B)are more likely to have lower balances of cash and cash equivalents
C)typically incur higher rates of interest on greater debt balances
D)should consider returning the cash to the firm's stockholders and creditors in the form of stock dividends

Question 10

Investing activities include transactions and events whereby cash is obtained from or repaid to creditors (debt financing) or owners (equity financing).

Question 11

Prior experience in inventory turnover days, combined with knowledge of cost of sales, can be useful in estimating current inventory levels.

Question 12

An important aspect of developing a preliminary audit strategy involves _______.

A)understanding the entity and its environment
B)understanding the industry that the auditor operates in
C)determining what audit opinion management would like the auditor to issue
D)confirming certain account balances with the internal audit function

Question 13

Cash and cash equivalents typically include _______.

A)cash in the bank
B)imprest accounts, such as a payroll account
C)cash equivalents, such as money market funds
D)All of these answer choices are correct.

Question 14

The purpose of the auditor's test of repair and maintenance expenses is to determine the propriety and consistency of these charges.

Question 15

A shortening of inventory turnover days may indicate existence or valuation problems.

Question 16

Inventory in the manufacture of oil and gas field machinery and equipment is less subject to significant obsolescence risk.

Question 17

Some companies, such as Apple, Inc, _______.

A)have significant negative cash flow from operations, and positive free cash flow
B)have struggled to obtain financing, due to liquidity issues
C)have significant positive cash flow from operations, and positive free cash flow
D)have seen corporate credit ratings downgraded, due to defaults on debt payments

Question 18

Comparing financial statement presentation with Generally Accepted Accounting Principles (GAAP) requirements is part of presentation and disclosure verification.

Question 19

Cash equivalents include _______.

A)short-term time deposits
B)certificates of deposits
C)short-term government bonds
D)All of the answer choices are correct

Question 20

Management's operating, investing, and financing decisions and strategies _______.

A)have relatively little effect on cash balances
B)significantly affect cash balances
C)have no bearing on cash balances
D)should be approved by the client's vendors before implementation

Question 21

Tests of cash balances focus on the account balance assertions of _______.

A)completeness, right and obligations, and valuation
B)completeness, right and obligations, and disclosure
C)existence, cutoff, and valuation
D)cutoff, existence, going concern

Question 22

When an auditor is auditing a client's inventory accounts, the primary focus is on the assertions of _______.

A)cutoff, accuracy, and completeness
B)completeness, existence, valuation and allocation, and rights and obligations
C)completeness, verifiability, valuation and allocation, and rights and obligations
D)rights and obligations, existence and occurrence, disclosure

Question 23

In the case of a merchandiser, the company_______.

A)purchases inventory with the intention of reselling
B)manufactures its own inventory
C)is service-based, and retains no inventory
D)is not part of the value chain

Question 24

Many smaller businesses, not-for-profit organizations, and smaller governments _______.

A)may have inadequate segregation of duties, which results in strong internal controls over cash
B)may have adequate segregation of duties, which results in weak internal controls over cash
C)may have inadequate segregation of duties, which results in weak internal controls over cash
D)utilize their own internal audit function to attest to the accuracy and fairness of their financial statements

Question 25

Controls over cash receipts and cash disbursements _______.

A)are usually tested as part of testing controls in the revenue process and the purchasing process
B)are usually tested as part of testing controls in the financing process and the purchasing process
C)receive relatively little auditor attention due to their low inherent risk
D)should not be tested as part of the external audit

Question 26

If the financial statements show a trend of increased profit margin combined with an increase in the number of inventory turnover in days, _______.

A)inventory may be overstated
B)inventory may be understated
C)inventory may be becoming obsolete
D)inventory turnover to payables should increase also

Question 27

Inventory held by the client should be classified as _______.

A)revenue, on the income statement
B)cost of goods sold, on the income statement
C)an asset, on the balance sheet
D)a liability, on the balance sheet

Question 28

An example of a substantive test for cash balances would be to _______.

A)obtain written representations from management pertaining to cash balances
B)trace the beginning balance for cash on-hand and in bank to prior year's working papers
C)rely on the internal audit function for this part of the audit
D)send a confirmation to the client's legal counsel

Question 29

The most important control over the existence, completeness, and valuation of cash balances _______.

A)is immediate collection of cash by companies
B)is to defer cash collection for as long as possible
C)is an independent bank reconciliation
D)is written representation by senior management with respect to the accuracy of the cash balance

Question 30

Analytical procedures performed as part of risk assessment activities _______.

A)are typically cost effective and may alert the auditor to potential misstatements
B)are typically expensive to perform, but may alert the auditor to potential misstatements
C)should only be performed with the express approval of senior management
D)should be coordinated with the client's legal counsel beforehand

Question 31

In larger public companies where the internal auditor tests controls over cash and cash budgeting, the external auditor_______.

A)should ignore the results of the internal audit
B)will automatically rely on the work performed and results obtained
C)will determine if it is appropriate to use the work of a specialist to support the audit conclusion.
D)will determine if it is appropriate to use the work of the internal auditor to support the audit conclusion.

Question 32

An analytical procedure related to the substantive testing of cash balances would be to _______.

A)calculate cash as a percent of total assets and compare with auditor expectations
B)calculate cash as a percent of total assets and compare with internal auditor expectations
C)send notes payable confirmations to creditors
D)send confirmations to the client firm's stockholders

Question 33

Before proceeding with tests of details of cash balances, the auditor should _______.

A)attempt to confirm cash balances with the firms' creditors
B)ensure that an understanding has been obtained regarding the auditor and its environment and the importance of cash balances to the entity
C)ensure that an understanding has been obtained regarding the entity and its environment and the importance of cash balances to the entity
D)issue a tentative audit opinion related to cash

Question 34

Tests of inventory controls often involve _______.

A)observing the client's controls and reperforming the client's controls
B)observing the auditor's controls and reperforming the client's controls
C)observing the client's controls and reperforming the auditor's controls
D)determining that the inventory is correctly valued on the statement of cost of goods sold

Question 35

An audit of inventory _______.

A)will vary from client to client
B)is a systematic approach, and rarely varies between clients
C)is typically left to the internal auditors
D)is prescribed by GAAP standards, which must be adhered to closely

Question 36

Which of the following include cash in the bank, such as the primary bank account of the company?

A)Cash and cash equivalents
B)Transaction classes
C)Disclosures
D)Debt assets

Question 37

In which of the following assertions is inherent risk moderate and cash does not usually have significant disclosures?

A)Presentation and disclosure
B)Valuation and allocation
C)Rights and obligations
D)Completeness

Question 38

Which of the following is/are essential to the proper statement of cash at the balance sheet date?

A)Proper cutoff of cash receipts and cash disbursements at the end of the year
B)Proper cutoff of cash receipts, but not disbursements, at the end of the year
C)Cash disbursements at the end of the year
D)Cash assets at the end of the year

Question 39

An important rights and obligations issue _______.

A)deals with senior managements potential ownership of inventory
B)involves consignment inventory
C)deals with inventory that has been sold in the normal course of business
D)deals with the valuation of inventory on the income statement

Question 40

If control risk is high or maximum, and there are no compensating controls, the auditor should _______.

A)assume that fraud risk is high, and design appropriate substantive tests, particularly substantive tests of transactions
B)assume that fraud risk is low, and design appropriate substantive tests, particularly substantive tests of transactions
C)consider withdrawing from the engagement
D)request additional written representation from management

Question 41

With a manufacturer, wholesaler, or retailer, _______.

A)inventory is not typically a major part of a client's assets, and thus is not audited
B)inherent risk for inventory may be assessed at or near the minimum
C)inherent risk for inventory may be assessed at or near the maximum
D)inventory is typically a major part of a client's assets, and thus is not audited

Question 42

The auditor should be alert to _______.

A)incentives and pressures that may motivate management to misstate inventory
B)incentives and pressures that may motivate management to correctly state the value of inventory
C)sound policies relating to inventory management
D)a relatively stable inventory turnover ratio

Question 43

Many elements of valuing inventory _______.

A)should be handled by the internal auditors
B)involve professional judgment and accounting estimates
C)involve professional judgment and strict accounting rules
D)should be ignored by the auditor due to complicated valuation issues

Question 44

The audit strategy pertaining to inventory is highly dependent _______.

A)upon senior management
B)upon the internal audit function
C)on the client's system of internal controls
D)upon the client's legal counsel

Question 45

Consigned inventory held by the client, _______.

A)should be listed as an asset by the client
B)should appear on the client's balance sheet
C)should not be listed by the client because the client does not legally own the consigned goods
D)should be listed as part of cost of goods sold by the client

Question 46

In tracing beginning inventory balances to prior year working papers, _______.

A)the auditor should make certain that any audit adjustments agreed upon in the prior year did in fact get recorded
B)the auditor should make certain that any audit adjustments agreed upon in the subsequent years did in fact get recorded
C)the auditor should be mindful of the relationship between inventory sales and accounts payable
D)the auditor should be mindful of the relationship between inventory sales and notes payable

Question 47

The inherent risk of material misstatement arising from inventory transactions for a hotel chain or a university is relatively_______.

A)high, because inventory is not a material part of the entity's core process
B)low, because inventory is not a material part of the entity's core process
C)low, because inventory is a material part of the entity's core process
D)high, because inventory is a material part of the entity's core process

Question 48

An inventory markdown by a client _______.

A)could indicate obsolescence
B)is required every three years as part of GAAP
C)means the client has violated the accounting principle of conservatism
D)is not the responsibility of the auditor to check

Question 49

If ending inventory is overstated, _______.

A)cost of goods sold will be understated
B)cost of goods sold will be overstated
C)beginning inventory will be correctly valued
D)the value of purchases will be understated

Question 50

Weak internal control over inventory _______.

A)may lead to decreased theft of inventory by employees
B)may lead to increased theft of inventory by employees
C)will automatically mean the inventory balance is misstated
D)will serve to decrease inherent risk related to inventory

Question 51

Many of the controls over inventory _______.

A)overlap with other cycles
B)work in isolation
C)are typically redundant, and should not be tested by the auditor
D)are tested by the internal audit function, and can be ignored by the external auditor

Question 52

The value of goods available for sale consists of _______.

A)beginning inventory plus purchases
B)ending inventory minus purchases
C)calculating the inventory turnover ratio for the period
D)calculating days sales in inventory for the period

Question 53

The computer manufacturing industry _______.

A)is subject to high inherent risk, and should be avoided by the auditor
B)is subject to technological obsolescence
C)is not subject to technological obsolescence
D)is very profitable for the auditor due to high inherent risk and the greater extent of needed audit procedures

Question 54

With a manufacturer, wholesaler, or retailer, inherent risk for inventory may be assessed at or near the maximum due to _______.

A)a large volume of inventory purchases
B)a wide diversity of inventory items
C)inventories being stored at multiple sites
D)All of these answer choices are correct.

Question 55

The auditor needs to be attuned to _______.

A)changes in an audit client, and tailor the audit to the circumstances that the auditor finds
B)changes in an auditor, and tailor the audit to the circumstances that the auditor finds
C)the results of firms in other industries, and how they compare to the client
D)certain profitability ratios only

Question 56

If ending inventory is understated, _______.

A)cost of goods sold will also be understated
B)cost of goods sold will be overstated
C)accounts receivable balances will be overstated
D)accounts payable balance will be understated

Question 57

The assertions pertaining to inventory typically tested by the auditor are _______.

A)cutoff, existence, disclosure
B)rights and obligations, disclosure, going concern
C)completeness, valuation, cutoff
D)completeness, existence, valuation, and rights & obligations

Question 58

The auditor should be alert to cutoff problems _______.

A)that might have resulted in overstating inventory
B)that might have resulted in correct inventory balances
C)which relate to revenues being valued improperly
D)which relate to expenses being misclassified

Question 59

Cost of goods sold is determined by calculating _______.

A)beginning inventory plus purchases
B)beginning inventory minus ending inventory
C)value of goods available for sale minus ending inventory
D)value of goods available for sale plus ending inventory

Question 60

A perpetual inventory system _______.

A)involves counting inventory at period end because inventory is not tracked during the year
B)keeps track of the quantity of each item in inventory and where it is located.
C)is not allowed as part of US GAAP
D)should be used for overseas inventories only

Question 61

While conducting which type of inventory count will the client frequently identify a small portion of items in the perpetual inventory, count actual inventory, and investigate discrepancies?

A)Cycle
B)Perpetual
C)Virtual
D)Accuracy

Question 62

Most businesses will acquire new assets if _______.

A)the rate of return generated by those assets is lower than the after-tax marginal cost of debt financing associated with acquiring additional assets
B)the rate of return generated by those assets exceeds the after-tax marginal cost of debt financing associated with acquiring additional assets
C)they have surplus amounts of cash which they need to spend
D)their stockholders vote to do so

Question 63

Which of the following is sent by its owner to an agent who undertakes to sell the goods?

A)Consignment inventory
B)Testing Inventory
C)Disclosure inventory
D)Auditing inventory

Question 64

Substantive tests of property, plant and equipment often focus on _______.

A)Agreeing the beginning balance in property, plant and equipment to the prior year's audit
B)Auditing the acquisition of new property, plant and equipment
C)Auditing the disposal of property, plant and equipment
D)All of these answer choices are correct.

Question 65

Controls over fixed asset balances often include _______.

A)physical controls over fixed liabilities as well as the maintenance of a fixed asset inventory that is periodically checked against existing assets
B)physical controls over current assets as well as the maintenance of a fixed asset inventory that is periodically checked against existing assets
C)physical controls over fixed assets as well as the maintenance of a fixed asset inventory that is periodically checked against existing assets
D)ensuring all assets are recorded at fair value, and not historical cost

Question 66

The second step in auditing investing activities _______.

A)is to confirm the auditors issued opinion
B)involves determining what assets were disposed of during the period
C)involves determining what assets were acquired during the period
D)involves contacting the client's prior auditor to assist with geographically dispersed locations

Question 67

An entity acquires property, plant and equipment assets _______.

A)because they support its operations and core processes
B)to hold for resale at a higher price
C)because they support its ancillary operations and processes
D)as tax write-offs only

Question 68

Which of the following include(s) the purchase and sale of land, buildings, equipment, and other long-term assets not generally held for resale?

A)Investing activities
B)Property ownership
C)Real estate ownership
D)Ownership activities

Question 69

Investing activities include _______.

A)the sale of land, buildings, equipment, and other long-term assets not generally held for resale
B)the purchase and sale of land, buildings, equipment, and other long-term assets generally held for resale
C)the purchase and sale of land, buildings, equipment, and other long-term assets not generally held for resale
D)any issuance of bonds and proceeds from sales of stock

Question 70

Which of the following is usually determined by taking the book value of beginning inventory, adding purchases or production costs, and subtracting the book value of ending inventory?

A)Cost of goods sold
B)Cost of goods purchased
C)Cost of total assets
D)Cost of total deliverables

Question 71

Plant assets should be _______.

A)classified as current assets if the intention is to sell them
B)listed as a liability if the assets are financed
C)relatively stable and grow at approximately the rate of sales growth
D)relatively stable and grow at a higher rate than the rate of sales growth

Question 72

Which of the following is the purpose of the auditor's test of repair and maintenance expense to determine the propriety and consistency of these charges?

A)Review Entries to Repairs and Maintenance Expense.
B)Vouch Plant Asset Disposals.
C)Year-end statement
D)Auditing year transactions.

Question 73

When an auditor develops a business-based approach to auditing property, plant and equipment, _______.

A)it is not necessary to understand how the long-term assets support the operations of the entity
B)it is essential to understand how the long-term assets support the operations of the entity
C)the auditor recommends which assets to sell and keep
D)the auditor attempts to find competitors who are willing to buy certain of the client's assets

Question 74

Analytical procedures are required _______.

A)by management
B)by the internal auditors
C)as part of risk assessment
D)in order to eliminate risk

Question 75

Usually the growth in fixed assets should _______.

A)demonstrate a consistent relationship with the growth in revenues, accounting for some startup period
B)demonstrate an inconsistent relationship with the growth in revenues, accounting for some startup period
C)be unrelated to revenue
D)be unrelated to expenses such as cost of goods sold

Question 76

It is important to develop a good understanding of the audit client in order to _______.

A)develop expectations regarding the client's financial statements
B)develop expectations regarding payment for fees earned by the auditor
C)ensure the auditor will be employed in subsequent years by the client
D)help ensure inherent risk is high

Question 77

Fixed assets and key locations are important for which of the following categories?

A)Supermarkets and other grocery stores
B)Hotels and motels
C)College, Universities and other professional school.
D)Real estates

Question 78

The application of substantive analytical procedures to inventories _______.

A)should be conducted by the internal audit function, as this is an area of lower inherent risk
B)should be conducted by the internal audit function, as this is an area of higher inherent risk
C)uses management's knowledge of the entity and its environment to develop expectations about the financial statements
D)uses the auditor's knowledge of the entity and its environment to develop expectations about the financial statements

Question 79

The first step in auditing investing activities _______.

A)involves understanding the assets that are needed to support the entity's operations
B)involves understanding the assets that are needed to support the entity's sales
C)involves understanding the assets that are needed to support the entity's compliance with debt covenants
D)is to issue a preliminary audit opinion

Question 80

The auditor will often look at how the entity is growing in order to determine_______.

A)the likelihood of being paid for the audit
B)the assets needed to support that growth
C)which assets the client should keep
D)which assets the client should sell