Question 1

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client Explanation: s would satisfy the auditor?

Accepted Answer

Choice "C," is correct. I,f a second, similar retail outlet was opened, one would expect sales and accounts receivable to double. A,s long as the collection rates for the new outlet's receivables were expected to be similar to those of the original outlet, the allowance for doubtful accounts as a percentage of accounts receivable would remain the same. C,hoice "A," is incorrect. I,f more receivables are potentially uncollectible in the current year (as opposed to the prior year), the allowance for doubtful accounts as a percentage of receivables should increase to reflect the greater level of estimated bad debts. C,hoice "B," is incorrect. I,mproved control activities related to the recording of cash receipts might result in a decrease in accounts receivable in the current year as compared to the prior year, not an increase. I,n addition, improving such controls would not be likely to affect the allowance for doubtful accounts as a percentage of receivables. C,hoice "D," is incorrect. I,f the client sold less merchandise to customers with poor credit ratings, the allowance for doubtful accounts as a percentage of receivables should decrease to reflect the lower level of estimated bad debts.

Question 2

Which of the following would not be considered an analytical procedure?

Accepted Answer

Choice "B" is correct. Analytical procedures involve comparison of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. Projecting an error rate from a statistical sample does not involve such a comparison. Choice "A" is incorrect. An analytical procedure involves comparison of an independently developed expectation to a recorded amount. Comparing an estimate of payroll expense (developed by multiplying the number of employees by the average hourly rate and the total hours worked) to the recorded expense is an analytical procedure. Choice "C" is incorrect. An analytical procedure involves comparison of an independently developed expectation to a recorded amount. Ratio analysis is often performed in order to compare recorded results to industry norms or to past performance, and therefore calculation of accounts receivable turnover is likely to be an analytical procedure. Choice "D" is incorrect. An analytical procedure involves comparison of an independently developed expectation to a recorded amount. Comparing an estimate of sales (developed based on a trend analysis) to the recorded amount is an analytical procedure.

Question 3

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 4

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?

Accepted Answer

Choice "D" is correct. To audit the statement of cash flows, the auditor reconciles the amounts on the statement to amounts on other financial statements. Choice "A" is incorrect. Comparison of amounts on the cash flow statement with those of the previous period is an analytical procedure that is not commonly used to audit the statement of cash flows, since sources and uses of cash in the current year are not necessarily predictable based on sources and uses from the prior year. Choice "B" is incorrect. Reconciling the cutoff bank statement is a procedure used to audit the cash balance, rather than the statement of cash flows. Choice "C" is incorrect. Vouching all bank transfers is a procedure used to audit the cash balance, rather than the statement of cash flows.

Question 5

An auditor most likely would apply analytical procedures in the overall review stage of an audit to:

Accepted Answer

Choice "C" is correct. In performing analytical procedures as an overall review, the auditor determines whether adequate evidence has been gathered in response to unusual or unexpected balances identified during the audit, and may decide that additional audit procedures are warranted. In addition, the auditor may identify unusual or unexpected balances not already noted during the audit, which would also require the application of further auditing procedures. Choice "A" is incorrect. Analytical procedures applied during the overall review stage of the audit are meant to evaluate the overall financial statement presentation, and to assess the conclusions reached by the auditor. This is a high-level review, and one that focuses on the financial statements. As such, it would not be likely to enhance the auditor's understanding of subsequent events. Choice "B" is incorrect. Analytical procedures applied during the overall review stage of the audit are meant to evaluate the overall financial statement presentation, and to assess the conclusions reached by the auditor. This is a high-level review, and one that focuses on the financial statements. As such, it would not be likely to identify omitted auditing procedures. Choice "D" is incorrect. Analytical procedures applied during the overall review stage of the audit are meant to evaluate the overall financial statement presentation, and to assess the conclusions reached by the auditor. This is a high-level review, and one that focuses on the financial statements. As such, it would not be useful in evaluating the effectiveness of the client's internal control activities.

Question 6

Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit?

Accepted Answer

Choice "D" is correct. During the final review stage of an audit, the auditor focuses on the overall presentation of the financial statements. Total debt/total assets indicate the portion of assets financed by creditors, which is a meaningful ratio to calculate during the final audit review. Choice "A" is incorrect. Quick assets/current assets simply indicate the percentage of current assets that are also "quick" assets. It is not a particularly meaningful ratio. Choice "B" is incorrect. Accounts receivable/inventory is not a meaningful ratio because it compares a figure based on retail dollars with a cost-based figure. Choice "C" is incorrect. Interest payable/interest receivable is not a meaningful ratio because these two amounts are not related.

Question 7

Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that:

Accepted Answer

Choice "C" is correct. If analytical procedures suggest unexpected relationships, the auditor would perform additional tests of details of the accounts involved. Choice "A" is incorrect. The identification of unexpected relationships as a result of analytical procedures does not necessarily mean that irregularities exist in the relevant account balances, although this is a possible Explanation. Choice "B" is incorrect. The identification of unexpected relationships as a result of analytical procedures does not necessarily mean that internal control activities are not operating effectively, although this is a possible Explanation. Choice "D" is incorrect. The identification of unexpected relationships as a result of analytical procedures does not necessarily mean that communication with those charged with governance should be revised, although this is a possible consequence.

Question 8

An auditor may achieve audit objectives related to particular assertions by:

Accepted Answer

Choice "A" is correct. The auditor relies on substantive tests to achieve audit objectives related to particular assertions. Analytical procedures are one type of substantive procedure. Choice "B" is incorrect. CPA firms performing audits are required to adhere to a system of quality control, but adhering to such a system does not directly help the firm achieve specific audit objectives. Choice "C" is incorrect. Audit documentation is used to record the results of audit procedures that have been performed to achieve audit objectives. Mere preparation of audit documentation does not achieve audit objectives. Choice "D" is incorrect. Increasing the level of detection risk does not enable the auditor to achieve audit objectives related to a particular assertion.

Question 9

Analytical procedures performed in the final review stage of an audit generally would include:

Accepted Answer

Choice "B" is correct. Analytical procedures applied during the final review stage should be used to determine whether adequate evidence has been gathered in response to unusual or unexpected balances identified during the audit. Choice "A" is incorrect. Analytical procedures generally involve comparison of recorded amounts to auditor expectations. Reassessing the factors used to establish materiality levels and audit risk would not involve such comparisons. Choice "C" is incorrect. Analytical procedures generally involve comparison of recorded amounts to auditor expectations. Summarizing uncorrected misstatements would not involve such comparisons. Choice "D" is incorrect. Analytical procedures generally involve comparison of recorded amounts to auditor expectations. Calculating projected uncorrected misstatements would not involve such comparisons.

Question 10

To be effective, analytical procedures in the overall review stage of an audit engagement should be performed by:

Accepted Answer

Choice "C" is correct. The manager and partner on a specific job generally bear a great deal of responsibility for the audit and the report. Typically, they would perform analytical procedures during the final review stage, to evaluate overall financial statement presentation and to assess the conclusions reached. In order to evaluate the results of the analysis and to perform an effective review, the manager or partner should have a comprehensive knowledge of the client's business and the industry. Choice "A" is incorrect. It is more effective to have a manager or partner perform this review rather than a staff accountant, because the manager or partner is generally more experienced and knowledgeable, and because it provides a double check on the work of the staff accountant. Choices "B" and "D" are incorrect. The managing partner and the quality control manager or partner might not have a comprehensive knowledge of the client's business and industry.

Question 11

Tracing shipping documents to prenumbered sales invoices provides evidence that:

Accepted Answer

Choice "B" is correct. By tracing from the shipping documents to the invoices, the auditor confirms that goods that were shipped were properly billed. Choice "A" is incorrect. Tracing shipping documents to prenumbered invoices would not provide assurance that duplicate shipments or billings did not occur. Choice "C" is incorrect. In order to test whether all goods that were ordered were shipped, the auditor would trace customer purchase orders to shipping documents. Choice "D" is incorrect. Determining that all prenumbered sales invoices are accounted for does not require examining shipping documents.

Question 12

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

Accepted Answer

Choice "B" is correct. Confirmations are among the most reliable types of evidence, as they constitute external evidence sent directly to the auditor. Choice "A" is incorrect. Inquiries provide oral evidence, which is less reliable than confirmations. Choice "C" is incorrect. Analytical procedures provide the auditor with direct personal knowledge, but because these procedures often are based on internal accounting data, the evidence obtained is not as reliable as that obtained from confirmations. Choice "D" is incorrect. Review of audit procedures from the previous year does not provide appropriate audit evidence regarding the current year's financial statements.

Question 13

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 14

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 15

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 16

An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting:

Accepted Answer

Choice "B" is correct. Examination of accounts receivable and cash receipts provides the auditor with evidence with respect to both the completeness and the occurrence of sales transactions, thus limiting the need to test sales transactions. Choice "A" is incorrect. Examination of beginning and ending inventory balances may provide limited evidence of the occurrence of purchases and the cost of goods sold, but not of sales. Choice "C" is incorrect. Examination of shipping and receiving activities would not necessarily reduce the testing of sales transactions. Choice "D" is incorrect. Cutoffs of sales and purchases provides evidence regarding the sales occurring close to year-end, not necessarily all sales for the year.

Question 17

In analyzing a company's financial statements, which financial statement would a potential investor primarily use to assess the company's liquidity and financial flexibility?

Accepted Answer

Choice "A" is correct. Liquidity ratios and coverage ratios focus on balance sheet account balances. Choice "B" is incorrect. Income statement information is primarily used for profitability analysis. Choice "C" is incorrect. The statement of retained earnings is primarily a reconciliation of the retained earnings account. Choice "D" is incorrect. The statement of cash flows assesses cash inflows and cash outflows.

Question 18

Which of the following is a true statement regarding documentation requirements for analytical procedures?

Accepted Answer

Choice "D" is correct. When an analytical procedure is used as the principal substantive test of a significant financial statement assertion, the auditor is required to document both the auditor's expectation and the factors considered in developing that expectation. Choice "A" is incorrect. There is no requirement that the auditor document the reasons analytical procedures were performed instead of tests of details. Choice "B" is incorrect. There is no requirement that the auditor document management's concurrence with the expectation. Choice "C" is incorrect. When an analytical procedure is performed during the overall review stage, there are no specific documentation requirements. The requirement that the auditor document the expectation and any additional procedures performed to investigate significant unexplained differences relates to analytical procedures performed as principal substantive tests.

Question 19

Which of the following presumptions is correct about the reliability of audit evidence?

Accepted Answer

Choice "D" is correct. Reliability of audit evidence is enhanced by a satisfactory internal control structure. Choice "A" is incorrect. Information obtained directly from outside sources is more reliable than that obtained indirectly. Choice "B" is incorrect. In the great majority of cases, the auditor finds it necessary to rely on evidence that is persuasive rather than conclusive. Choice "C" is incorrect. The amount of corroborative evidence obtained refers to the sufficiency of the evidence, not its reliability.

Question 20

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.

Exam 1: CPA Auditing and Attestation Exam