Question 1

Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control activity that provides for:

Accepted Answer

Choice "C" is correct. Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by internal control procedures that provide for investigation of variances within a formal budgeting system. Choice "A" is incorrect. Segregation of duties of employees in the accounts payable department would not prevent the misclassification of equipment acquisitions as maintenance expense. Choice "B" is incorrect. Verifying invoices for disbursements already recorded as equipment acquisitions would not include examining invoices for disbursements recorded as maintenance expense. Choice "D" is incorrect. Since the authorization by the board of directors occurs before the disbursement is recorded, this control would not prevent any misclassification.

Question 2

Which of the following controls is most likely to prevent the improper disposition of equipment?

Accepted Answer

Choice "A" is correct. Separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders is most likely to prevent the improper disposition of equipment. Choice "B" is incorrect. Serial number tracking is a good audit and control activity but it will not prevent improper dispositions of equipment. Choices "C" and "D" are incorrect. Periodic comparison of removal work orders to authorizing documentation and periodic analysis of scrap sales and the repairs and maintenance accounts may identify improper dispositions that have already occurred, but such procedures will not prevent improper dispositions.

Question 3

The primary evidence regarding year-end cash balances in the financial statements is documented in the:

Accepted Answer

Choice "B" is correct. The primary evidence regarding year-end cash balances in the financial statements is documented in the bank reconciliation, which reconciles the balance per the bank to that per the financial statements. Choice "A" is incorrect. The standard bank confirmation does not provide evidence about certain transactions that are necessary to compute the cash balance, such as deposits in transit and outstanding checks. Choice "C" is incorrect. The interbank transfer schedule provides evidence about bank transfers over a period of time. It is used to detect kiting, not to support the year-end cash balance. Choice "D" is incorrect. A "cash lead schedule" is a schedule that summarizes all the various balances that comprise cash. It is created by the auditor and is not, in and of itself, evidence supporting cash.

Question 4

An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using:

Accepted Answer

Choice "D" is correct. An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using a bank lockbox system. With this system the remittances are mailed directly to the bank where they are immediately deposited. The bank sends the remittances and deposit detail to the entity on a daily basis. Most larger companies use a lockbox system. Choice "A" is incorrect. Employee fidelity bonds may cover some of the losses suffered by misappropriation, but they do nothing to prevent the embezzlement in the first place. Choices "B" and "C" are incorrect. Independently prepared mailroom prelists and daily check summaries are good controls over cash receipts, but they are not as effective at reducing the risk of employee misappropriation as a lockbox system. With a lockbox system, employees have no access to cash receipts and therefore no opportunity to misappropriate cash.

Question 5

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 6

To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would:

Accepted Answer

Choice "B" is correct. To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would examine the audited financial statements of the investee company, performing recalculations of prorata share of income/loss and analytical procedures to determine if the investment is carried at the lower of cost or market. Choices "A" and "C" are incorrect. Inspecting the stock certificates evidencing the investment or reviewing the broker's advice or canceled check for the investment's acquisition are procedures that satisfy the existence assertion, not the valuation assertion. Choice "D" is incorrect. Obtaining market quotations from financial newspapers or periodicals would satisfy the valuation assertion for an investment accounted for by the cost method.

Question 7

The most likely result of ineffective internal control policies and procedures in the revenue cycle is that:

Accepted Answer

Choice "C" is correct. The most likely result of ineffective internal control policies and procedures in the revenue cycle is that final authorization of credit memos by personnel in the sales department could permit a salesman to sell, collect, and pocket the collection, then cover it up by issuing a credit memo. Final authorization of credit memos should be performed by an employee who is independent of the sales department such as the credit manager in the treasury department. Choice "A" is incorrect. The shipment of goods is an activity that takes place before the transaction is recorded. Irregularities in recording transactions in the subsidiary accounts therefore would have no impact on the timeliness of the goods being shipped. Choice "B" is incorrect. If shipping documents are omitted, then the inventory levels would be overstated since the reduction of inventory would not be recorded. Choice "D" is incorrect. If fictitious transactions in the revenue cycle are recorded, then the impact on revenues and receivables would be the same; either both would be overstated (the most likely case) or both would be understated.

Question 8

Which of the following internal controls would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?

Accepted Answer

Choice "B" is correct. Requiring the internal auditor to compare the securities in the bank safe deposit box with recorded investments is the procedure an entity most likely would use in satisfying the completeness assertion related to long-term investments. Choice "A" is incorrect. Verifying that securities in the bank safe deposit box are registered in the entity's name provides evidence regarding rights and obligations, not completeness. Choice "C" is incorrect. Vouching the acquisition of securities by comparing brokers' advices with canceled checks provides evidence regarding rights and obligations, not completeness. Choice "D" is incorrect. The controller comparing the current market prices of recorded investments with the broker advices on file provides assurance that the long-term investments are properly valued, and that unrealized gains and losses are properly recognized.

Question 9

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?

Accepted Answer

Choice "D" is correct. When performing a search for unrecorded payables, an auditor most likely would compare cash payments occurring after the balance sheet date with the accounts payable trial balance to determine that disbursements that pertain to the prior year's business (year under audit) have been properly accrued. This procedure is commonly known as an "out-of-period-search." Choice "A" is incorrect. If the cash payment is made just prior to year-end, then the related liability would have been paid/relieved as of the year-end balance sheet date. Choice "B" is incorrect. An analytical review procedure that contrasts the ratio of accounts payable to purchases with the prior year's ratio would not provide the best evidence, since payable balances are not predictable and may vary at management's discretion. Choice "C" is incorrect. Vouching a sample of creditor balances already recorded does not provide any evidence concerning unrecorded payables.

Question 10

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 "B" is correct. To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. This test consists of tracing from receiving reports for inventory received before year-end to the accounts payable trial balance to determine whether the purchase has been properly recorded. Choice "A" is incorrect. In testing for completeness of payables, the auditor tries to determine whether there are payables that have not been recorded. If the auditor selects from payment vouchers, he or she may be unlikely to select an unrecorded payable, since unrecorded payables that have not yet been paid would not have corresponding payment vouchers. Choice "C" is incorrect. Purchase requisitions do not indicate when the inventory was received, and therefore they are not useful for testing the completeness of accounts payable. Choice "D" is incorrect. Vendor's invoices do not generally indicate when the inventory was received, and therefore they are not useful for testing the completeness of accounts payable.

Question 11

The primary responsibility of a bank acting as registrar of capital stock is to:

Accepted Answer

Choice "D" is correct. Large companies often use a registrar to provide registration services and maintain the stockholder list. The primary responsibility of the registrar is to verify that stock is issued only with proper authorization. Choice "A" is incorrect. The company's board of directors bears responsibility for proper declaration of dividends, not the stock registrar. Choice "B" is incorrect. Since the company's management is responsible for maintaining accurate accounting records, a responsible company employee (not the registrar) would periodically compare the recorded number of shares outstanding (per company records) with the total in the shareholders' subsidiary ledger (per the registrar). Choice "C" is incorrect. A registrar does not have the described responsibility with respect to mergers, acquisitions, and the sale of treasury stock.

Question 12

An auditor should trace corporate stock issuances and treasury stock transactions to the:

Accepted Answer

Choice "D" is correct. The auditor should trace corporate stock issuances and treasury stock transactions to the minutes of the board of directors to make sure they were authorized. Choice "A" is incorrect. Numbered stock certificates for shares that are issued and outstanding would be in the hands of the stockholders. Choice "B" is incorrect. Information about stock issuances and treasury stock transactions would not be included in the articles of incorporation. Generally, only the shares authorized and their par value would be included therein. Choice "C" is incorrect. The transfer agent might confirm a transaction, but the auditor would not generally review the transfer agent's records.

Question 13

Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal accounting control system that provides for:

Accepted Answer

Choice "A" is correct. Investigation of variances in a formal budget might show maintenance costs over budget or acquisition costs under budget, either of which would trigger an investigation. Choice "B" is incorrect. Review of journal entries relating to depreciation would not disclose acquisitions misclassified as maintenance expense, since no depreciation would be recorded for the misclassified items. Choice "C" is incorrect. Segregation of duties in the accounts payable department would have no effect on the account classification of an approved invoice. Choice "D" is incorrect. Since the internal auditor would be looking at invoices and checks related to recorded property acquisitions, he or she would not be likely to identify payments that were erroneously excluded from the property account.

Question 14

An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period to detect whether:

Accepted Answer

Choice "C" is correct. An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period (bank transfer test) to detect whether cash balances were overstated because of kiting (concealing a cash shortage by depositing in one bank an unrecorded check of another disbursement bank, effectively recording the same funds in both bank accounts). Choice "A" is incorrect. If the cash receipts journal were held open for a few days after the year-end, cash receipts from the subsequent year would be erroneously included in the current year's accounting records. A bank transfer test is not typically used to detect this situation. Choice "B" is incorrect. If the last checks recorded before the year-end were actually mailed by the yearend, appropriate cut-off has occurred. Bank transfer tests would not be required to evaluate this situation. Choice "D" is incorrect. A bank transfer test is not generally used to detect unusual payments to or receipts from related parties.

Question 15

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

Accepted Answer

Choice "A" is correct. When performing a search for unrecorded payables, an auditor most likely would examine cash disbursements recorded after the balance sheet date to determine whether the payables related to the prior period have been included in the accounts payable trial balance. Choice "B" is incorrect. Investigating payables already recorded does not provide any evidence concerning unrecorded payables. Choice "C" is incorrect. While a high level of cash payments compared with a low level of payable balances may be indicative of unrecorded payables, comparing these amounts would not be the most effective method for identifying unrecorded payables. Choice "D" is incorrect. Comparing vendor statements to receiving reports is an audit step not involving the accounts payable balances; this step, therefore, provides no information about accounts payable.

Question 16

Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?

Accepted Answer

Choice "D" is correct. Selecting prenumbered shipping documents and matching them with entries in the sales journal is a control that would help ensure that all credit sales transactions are recorded. (Shipping documents without corresponding sales journal entries might indicate unrecorded sales). Choice "A" is incorrect. Sending copies of approved sales orders to the credit department for comparison to authorized credit limits and current account balances before the sale is made controls the risk of bad debts, not the proper recording of credit sales transactions. Choice "B" is incorrect. Reconciling the accounts receivable subsidiary ledger to the control account ensures that the accounts receivable balance in the general ledger is properly recorded, but would not necessarily identify unrecorded credit sales. (Unrecorded credit sales would be omitted from both places, and therefore the subsidiary ledger and control account would still agree). Choice "C" is incorrect. Controlling the mailing of monthly statements and investigating differences reported by the customers is not an effective control over the proper recording of credit sales transactions, since it is possible that customers would not complain if they were not billed.

Question 17

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 18

An auditor would most likely verify the interest earned on bond investments by:

Accepted Answer

Choice "C" is correct. Recomputing the interest earned is the most likely method of auditing interest earned on bond investments. Choice "A" is incorrect. Vouching cash receipts would only verify the recording of checks received. This may not be the same as interest earned, since interest is accrued between cash payment dates. Choice "B" is incorrect. Confirmation of the bond interest rate with the issuer is not sufficient, as the rate still needs to be applied based on face amount and period held. Choice "D" is incorrect. Internal control testing of cash receipts would not provide evidence that earned interest was properly recorded, since interest is accrued between cash payment dates.

Question 19

Which of the following procedures most likely would not be an internal control procedure designed to reduce the risk of errors in the billing process?

Accepted Answer

Choice "D" is correct. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger would probably not reduce the risk of errors in the billing process, since any errors in billing would likely be included in both the sales and accounts receivable balances. Choice "A" is incorrect. Comparing control totals for shipping documents with corresponding totals for sales invoices is a procedure designed to determine that all shipments have been billed. Choice "B" is incorrect. Using computer-programmed controls on sales invoices would reduce the risk of errors in the billing process. Choice "C" is incorrect. Matching shipping documents with approved sales orders before invoice preparation provides assurance that the quantity and terms of the invoice are correct.

Question 20

Which of the following internal controls most likely would justify a reduced assessed level of control risk concerning plant and equipment acquisitions?

Accepted Answer

Choice "A" is correct. Periodic physical inspection of plant and equipment by the internal audit staff is an internal control that would most likely justify a reduced assessed level of control risk concerning plant and equipment acquisitions. Such inspections would provide assurance that recorded acquisitions are real (existence assertion). Choice "B" is incorrect. The comparison of current-year plant and equipment account balances with prioryear actual balances might indicate that acquisitions occurred, but it would not justify a reduced assessed level of control risk, since the controls over the acquisition process are not tested. Choice "C" is incorrect. A review of prenumbered purchase orders is unlikely to provide evidence regarding plant and equipment acquisitions. (Generally a special requisition form is used for such acquisitions.) Choice "D" is incorrect. Approval of depreciation entries has little bearing on the control risk relating to plant and equipment acquisitions.

Exam 1: CPA Auditing and Attestation Exam