Question 1

In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of:

Accepted Answer

Choice "C" is correct. When testing liabilities, an auditor generally is concerned about understatement (as opposed to overstatement, for assets). Therefore, in auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of completeness (if accounts payable is not complete it would be understated). Choice "A" is incorrect. The assertion of existence is the primary focus of the auditor when auditing an asset account, not accounts payable. Choice "B" is incorrect. The understandability and classification assertion is not the primary focus in the audit of accounts payable. Choice "D" is incorrect. The assertion of valuation and allocation is not the main focus with respect to accounts payable. Good external evidence generally is available to support the amount, and allocation over more than one period generally is not required.

Question 2

Which of the following control activities is not usually performed in the vouchers payable department?

Accepted Answer

Choice "C" is correct. Internal control is enhanced if check mailing is performed by the treasury (cash disbursements) department. Choice "A" is incorrect. Mathematical accuracy of the vendor's invoice is usually verified in the vouchers payable department. Choice "B" is incorrect. Voucher approval by an authorized person is usually performed in the vouchers payable department. Choice "D" is incorrect. Matching the receiving report with the purchase order is usually performed in the vouchers payable department.

Question 3

The information below was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ended December 31, 20X1. Assume all checks are dated and issued on December 30, 20X1.  Which of the following checks might indicate kiting?

Accepted Answer

Choice "B" is correct. Kiting is concealing a cash shortage by depositing in one bank an unrecorded check of another disbursement bank, so that the deposit is recorded in both banks. An auditor would most likely detect kiting by reviewing the bank transfer schedule and following-up on all transfers for which the receipt date per bank is recorded in the accounting period before the disbursement date. Checks #202 and #404 both meet this criterion and therefore might indicate kiting. Choices "A", "C", and "D" are incorrect, based on the above Explanation.

Question 4

Which of the following internal control procedures most likely addresses the completeness assertion for inventory?

Accepted Answer

Choice "C" is correct. The internal control procedure of prenumbering receiving reports and periodically reconciling them to the inventory records most likely addresses the completeness assertion for inventory, because it allows the auditor to determine whether all goods received have been recorded as inventory. Choice "A" is incorrect. Reconciling the work in process account (per the general ledger) with subsidiary records (direct materials, direct labor, overhead) tests that those records are interfacing properly, but does not provide any information about the completeness assertion for inventory. Choice "B" is incorrect. Separation of employees responsible for custody of finished goods from the receiving function addresses the safeguarding of assets, not the completeness of the inventory records. Choice "D" is incorrect. The separation of duties between the payroll department and inventory accounting personnel is related to the valuation (pricing) of inventory, not its completeness.

Question 5

Which of the following is the most effective control activity to detect vouchers that were prepared for the payment of goods that were not received?

Accepted Answer

Choice "B" is correct. The most effective control activity to detect vouchers that were prepared for the payment of goods that were not received is to match the purchase order, receiving report, and vendor's invoice for each voucher in the accounts payable department. Choices "A" and "C" are incorrect. Controls that start with goods received would not be effective at detecting a situation where vouchers are prepared for goods that were not received. Choice "D" is incorrect. Verifying vouchers for accuracy and approval in the internal audit department might detect vouchers that were prepared for the payment of goods that were not received. However, this is not the most effective control, since it would likely occur subsequent to the processing of the transaction.

Question 6

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

Accepted Answer

Choice "D" is correct. If the objective of a test of details is to detect overstatements of sales (existence assertion), the auditor should trace transactions from the accounting records (i.e., sales journal) to the source documents (e.g., customer order, sales order, shipping documents, etc.). Choices "A" and "C" are incorrect. Tracing from the supporting documents to the accounting records gives assurance as to the completeness assertion (all sales are properly included). Choice "B" is incorrect. Tracing from the sales journal to the cash receipts journal only shows whether cash has been received for the sale. Failure to find a related cash receipt may indicate simply that the sale was made on account.

Question 7

Tracing bills of lading to sales invoices provides evidence that:

Accepted Answer

Choice "D" is correct. Tracing from a population of bills of lading (shipping documents) to sales invoices provides evidence that shipments to customers were invoiced. Choice "A" is incorrect. Tracing bills of lading to the sales invoice provides assurance that shipments to customers were invoiced, not that they were recorded as sales. Choice "B" is incorrect. Tracing from the sales journal to bills of lading provides evidence that recorded sales were shipped. Choice "C" is incorrect. Tracing from a population of sales invoices to the bills of lading provides evidence that invoiced sales were shipped.

Question 8

In auditing a client's retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate management's financial statement assertions with respect to:

Accepted Answer

Choice "C" is correct. Restrictions on retained earnings should be shown as appropriations in the financial statements. An auditor attempts to determine whether any such restrictions exist to verify that proper disclosures (i.e., retained earnings appropriations) have been made. Choices "A" and "B" are incorrect. Retained earnings appropriations restrict the company from paying dividends in excess of the unappropriated portion of retained earnings. This relates to presentation and disclosure, not to transactions, events, or balances. Choice "D" is incorrect. Audit risk and materiality are not financial statement assertions.

Question 9

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?

Accepted Answer

Choice "D" is correct. An internal control questionnaire for notes payable would likely ask if direct borrowings on notes payable are authorized by the board of directors. Choice "A" is incorrect. Whether collateralized assets are critically needed for the entity's continued existence is not a part of the control environment related to notes payable. Choice "B" is incorrect. The requirement for two authorized signatures is part of the disbursements internal control system, not the notes payable system. Choice "C" is incorrect. Whether the proceeds of notes payable are used for current or noncurrent assets is not a part of the notes payable internal control system.

Question 10

The information below was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ended December 31, 20X1. Assume all checks are dated and issued on December 30, 20X1. Which of the following checks illustrate deposits/transfers in transit at December 31, 20X1?

Accepted Answer

Choice "B" is correct. A deposit in transit is a disbursement recorded in one accounting period with the receipt occurring in the subsequent period. Assuming all checks were dated and issued on December 30 20X1, any deposits with a receipt date in 20X2 would indicate a deposit in transit at December 31, 20X1. Checks #101 and #303 both meet this criterion and therefore illustrate deposits/transfers in transit at December 31, 20X1. Choices "A", "C", and "D" are incorrect, based on the above Explanation.

Question 11

Which of the following most likely would be detected by an auditor's review of a client's sales cut-off?

Accepted Answer

Choice "C" is correct. A sales cut-off test is used to detect unrecorded sales (shipments where no invoice has been generated) or sales allocated to the wrong period (January sales included in December by "holding the books open"). Choice "A" is incorrect. A sales cut-off test relies on shipping documents to test the "cut-off" of sales invoices. Shipping documents are selected and the corresponding sale is examined to determine whether it was recorded in the proper period. A cut-off test is unlikely to detect the omission of shipping documents, since transactions without such documentation would have no chance of being selected for testing. Choices "B" and "D" are incorrect. Sales cut-off testing generally does not involve tests related to accounts receivable.

Question 12

Which of the following internal control procedures most likely would deter lapping of collections from customers?

Accepted Answer

Choice "C" is correct. Lapping is a defalcation in which a cash shortage is concealed by applying later customer remittances to a receivable account from which money was stolen. Lapping can be deterred by appropriate segregation of duties between receiving cash and posting to the accounts receivable ledger. This makes it more difficult for the employee who is stealing the cash to cover it up through inappropriate remittance credits. Choice "A" is incorrect. Even with a lapping scheme, the dates of cash receipts journal entries and the dates of daily cash summaries would still agree, since the stolen funds would be excluded from both places and subsequent receipts would be included in both places. Choice "B" is incorrect. The authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval would not deter lapping, since lapping schemes do not involve write-offs. Choice "D" is incorrect. Even with a lapping scheme, the daily cash summary would still agree with the sum of the cash receipts journal entries. Stolen funds would be excluded from both places and subsequent receipts would be included in both places.

Question 13

An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the:

Accepted Answer

Choice "C" is correct. An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the daily deposit slip. (That is his or her job). Choice "A" is incorrect. The prelist of individual checks is prepared by a clerk in the mailroom upon opening the mail. Choice "B" is incorrect. The monthly bank reconciliation is prepared by an internal auditor or someone else that is independent of the cash receipts and cash disbursements functions. Choice "D" is incorrect. The remittance advice is prepared by the customer and is mailed along with the check (remittance).

Question 14

Which of the following statements extracted from a client's lawyer's letters concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?

Accepted Answer

Choice "B," is correct. T,he auditor is concerned with preventing an understatement of contingent liabilities. T,he auditor would therefore request clarification before determining that a reduction in such liability (from damages claimed to some lesser amount) is reasonable. C,hoices "A,", "C,", and "D," are incorrect. W,hen a lawyer asserts that a contingent liability is immaterial ("nominal") or improbable ("without merit" and "successful defense likely"), it is unlikely that the auditor would require further clarification.

Question 15

An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all:

Accepted Answer

Choice "B" is correct. To determine whether checks are being issued for unauthorized expenditures, the auditor is most likely to select from the population of canceled checks. For each check, the auditor would then look for evidence supporting the payment, such as a purchase order, a receiving report, and an approved invoice. Choice "A" is incorrect. If the auditor selected from the population of purchase orders, he or she would never find those check requests that were missing the purchase orders. Without purchase orders, the expenditures would be considered unauthorized. Choice "C" is incorrect. If the auditor selected from the population of receiving reports, he or she would never find those check requests that were missing the receiving reports. Without receiving reports, the expenditures would be considered unauthorized. Choice "D" is incorrect. If the auditor selected from the population of approved vouchers, he or she would never find those check requests that were missing the approved vouchers. Without approved vouchers, the expenditures would be considered unauthorized.

Question 16

When a client company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning:

Accepted Answer

Choice "B" is correct. When a client company does not maintain its own stock records, the auditor should request the transfer agent and registrar to confirm the number of shares issued and outstanding. Choice "A" is incorrect. Restrictions on the payment of dividends should be in the board minutes, or possibly confirmed by the bank if the restrictions are due to outstanding loan(s). Choice "C" is incorrect. Guarantees of preferred stock liquidation value should be in the board minutes or the stock redemption agreement. Choice "D" is incorrect. The number of shares subject to agreements to repurchase should be in the board minutes and in any repurchase agreements.

Question 17

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

Accepted Answer

Choice "C" is correct. Unrecorded trade accounts payable are best identified by reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period. Choice "A" is incorrect. There is not usually a predictable relationship between accounts payable and cash payments, because management can pay cash or incur additional liabilities at its discretion. Choice "B" is incorrect. Reconciling vendors' statements to the file of receiving reports would not identify unrecorded payables, as the vendor statement would still agree with the receiving report even if the payable were not recorded. Choice "D" is incorrect. Investigating payables already recorded would not help identify unrecorded trade payables.

Question 18

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all:

Accepted Answer

Choice "C" is correct. The auditor is looking for situations where merchandise has been received but was not recorded. Such situations may be identified by selecting receiving reports and then determining whether the related payable was recorded. Choice "A" is incorrect. Selecting from vendor's invoices might allow a purchase to be selected for which the goods have not yet been received. Choice "B" is incorrect. Selecting from purchase orders might allow a purchase to be selected for which the goods have not yet been received. Choice "D" is incorrect. Selecting from canceled checks will not result in testing of accounts payable, since the payable is eliminated once payment is made.

Question 19

Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?

Accepted Answer

Choice "C" is correct. Sales personnel will have a tendency to maximize sales volume by selling to customers that may not be creditworthy, thereby resulting in high bad debt write-offs. To prevent sales to customers that may not be creditworthy, employees involved in the credit-granting function are separated from the sales function. Choice "A" is incorrect. Employees responsible for authorizing sales and bad debt write-offs should be denied access to cash to prevent the embezzlement of cash, not to prevent them from maximizing sales volume at the expense of high bad debt write-offs. Choice "B" is incorrect. This control does not affect the sales department or the tendency to maximize sales volume at the expense of high bad debt write-offs. Choice "D" is incorrect. This control does not affect the sales department or the tendency to maximize sales volume at the expense of high bad debt write-offs.

Question 20

For effective internal control purposes, the vouchers payable department generally should:

Accepted Answer

Choice "D" is correct. For effective internal control purposes, the vouchers payable department generally should establish the agreement of the vendor's invoice with the receiving report and purchase order. Choice "A" is incorrect. The treasury or cash disbursement department should stamp, perforate, or otherwise cancel supporting documentation after payment is mailed. Choice "B" is incorrect. The purchasing department should verify that each requisition has been properly approved. Choice "C" is incorrect. The purchasing department should obliterate the "quantity ordered" on the receiving department copy of the purchase order.

Exam 1: CPA Auditing and Attestation Exam