Question 1

The authority to accept incoming goods in receiving should be based on a (an):

Accepted Answer

Choice "D" is correct. The authority to accept incoming goods in receiving should be based upon an approved purchase order. Choice "A" is incorrect. A vendor's invoice does not serve as an authority to accept incoming goods since it is generated by the vendor, not a responsible employee in the purchasing department. Choice "B" is incorrect. A materials requisition, which is prepared by the ultimate user of the goods, does not serve as an authority to accept incoming goods since it has not been approved by the purchasing department. Choice "C" is incorrect. A bill of lading does not serve as an authority to accept incoming goods since it is generated by the carrier, not a responsible employee in the purchasing department.

Question 2

When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the:

Accepted Answer

Choice "B" is correct. When nonconforming goods are returned to a vendor, the purchasing department should send a debit memo to the accounting department to ensure that the accounts payable balance is reduced appropriately. Choice "A" is incorrect. The unpaid voucher is sent from the accounts payable department to the treasurer's department for payment when conforming goods are received. Choice "C" is incorrect. The vendor invoice is sent to the accounting department when conforming goods are received. Choice "D" is incorrect. A credit memo is generally used to reduce accounts receivable, not accounts payable.

Question 3

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of:

Accepted Answer

Choice "D" is correct. An entity's periodic accounting for the numerical sequence of shipping documents and invoices supports management's financial statement assertion of completeness of sales. A gap in recorded sequence numbers might indicate an unrecorded sale. Choice "A" is incorrect. An auditor would trace from the sales invoices or sales journal (accounting records) to the shipping documents (source document) to support management's assertion of occurrence. Choice "B" is incorrect. An auditor would examine journal entries for a sample of shipping documents to determine whether the client has recorded the sales in the proper accounts. Choice "C" is incorrect. An auditor would review supporting documentation for shipping documents just before and just after year-end to determine whether appropriate cutoff has been achieved.

Question 4

Symbol B most likely represents:

Accepted Answer

Choice "D" is correct. The two documents most likely to be generated by the revenue cycle application are credit memos (already identified in the flowchart) and sales invoices. Choice "A" is incorrect. Customer orders are input at the beginning of the process, as noted in the flowchart. Customer orders are not generated by the company's revenue cycle. Choice "B" is incorrect. Receiving reports are part of the inventory/purchasing/cash disbursements cycle. Choice "C" is incorrect. Customer checks and remittances are entered into the application at the top of the flowchart. Customer checks are not an output of the revenue cycle.

Question 5

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. The company believes that all material expenditures that have been deferred to future periods will be recoverable.

Accepted Answer

Choice "N" is correct. Management's discussion of its belief that all material expenditures that have been deferred to future periods will be recoverable provides information regarding recognition, measurement, and disclosure, and would be included in the management representation letter.

Question 6

For effective internal accounting control, the accounts payable department should compare the information on each vendor's invoice with the:

Accepted Answer

Choice "A" is correct. For effective internal accounting control, the accounts payable department should compare the information on each vendor's invoice with the receiving report and the purchase order to assure that goods were received and that the purchase was properly authorized. Choices "B", "C", and "D" are incorrect. Vendor packing slips and internally generated vouchers do not provide assurance that goods were received and that the purchase was properly authorized.

Question 7

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. During our audit we discovered evidence of the company's failure to safeguard inventory from loss, damage, and misappropriation.

Accepted Answer

Choice "B" is correct. Failure to safeguard inventory from loss, damage, and misappropriation is a significant deficiency in the design or operation of internal control that could adversely affect the fairness of the financial statements.

Question 8

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. In connection with an audit of our financial statements, management has prepared, and furnished to our auditors, a description and evaluation of certain contingencies.

Accepted Answer

Choice "C" is correct. In an audit inquiry letter to legal counsel, management states that they have furnished to the auditors a description and evaluation of pending or threatened litigation and unasserted claims and assessments.

Question 9

In a well designed internal control, employees in the same department most likely would approve purchase orders, and also:

Accepted Answer

Choice "D" is correct. In a well-designed internal control, employees in the purchasing department most likely would approve purchase orders and also negotiate terms with vendors. Choice "A" is incorrect. Personnel in the accounts payable department reconcile the open invoice file while the purchasing agent approves purchase orders. Choice "B" is incorrect. Employees in the receiving department inspect goods upon receipt while the purchasing agent approves purchase orders. Choice "C" is incorrect. The stores department (personnel in the raw materials inventory area) authorize requisition of goods while the purchasing agent approves purchase orders.

Question 10

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. Several employees have disabled the anti-virus detection software on their PCs because the software slows the processing of data and occasionally rings false alarms. The company should obtain anti-virus software that runs continuously at all system entry points and that cannot be disabled by unauthorized personnel.

Accepted Answer

Choice "B" is correct. The ability for unauthorized personnel to disable anti-virus detection software is a significant deficiency in the design or operation of internal control that could adversely affect the fairness of the financial statements.

Question 11

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. The company has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.

Accepted Answer

Choice "N" is correct. Management's discussion of plans or intentions that may materially affect the carrying value or classification of assets and liabilities provides information regarding recognition, measurement, and disclosure, and would be included in the management representation letter.

Question 12

Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?

Accepted Answer

Choice "A" is correct. Observing the consistent use of cash registers and tapes by employees would provide evidence to the auditor regarding the controls over the completeness of cash receipts. Choices "B", "C", and "D" are incorrect. The completeness assertion relates to the recording of all transactions. Inquiries about access to recorded cash, tracing from the cash receipts journal, and testing the general ledger balance do not provide evidence regarding possible unrecorded transactions.

Question 13

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. Was the difference of opinion on the accrued pension liabilities that existed between the engagement personnel and the actuarial specialist resolved in accordance with firm policy and appropriately documented?

Accepted Answer

Choice "M" is correct. The engagement partner has ultimate responsibility for the performance of the audit and the preparation of the report. He or she would therefore want to ensure that any differences of opinion between engagement personnel and a specialist were resolved in accordance with firm policy and were appropriately documented.

Question 14

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. Nothing came to our attention that caused us to believe that at October 31, 20XX, there was any change in the capital stock, increase in long-term debt, or decrease in consolidated net current assets or stockholders' equity as compared with the amounts shown in the September 30, 20XX unaudited condensed consolidated balance sheet.

Accepted Answer

Choice "I" is correct. In a comfort letter, negative assurance is provided with respect to changes in selected financial statement items during a period subsequent to the date and period of the latest financial statements included in the registration statement.

Question 15

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. In planning the sampling application, was appropriate consideration given to the relationship of the sample to the audit objective and to preliminary judgments about materiality levels?

Accepted Answer

Choice "M" is correct. The engagement partner has ultimate responsibility for the performance of the audit and the preparation of the report. He or she would therefore want to ensure that, in planning a sampling application, appropriate consideration was given to the relationship of the sample to the audit objective and to preliminary judgments about materiality levels.

Question 16

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. Our audit cannot be relied upon to disclose significant deficiencies in the design or operation of internal control. Nevertheless, we will communicate to you all such significant deficiencies and potential areas for improvement that we become aware of during the course of our audit.

Accepted Answer

Choice "H" is correct. An understanding with the client should be established, and this understanding should be documented through an engagement letter. The understanding, and the letter, should include limitations of the engagement, including the fact that an audit is not designed to provide assurance on internal control or to identify significant deficiencies in internal control.

Question 17

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. Our audit is designed to provide reasonable assurance of detecting misstatements that, in our judgment, could have a material effect on the financial statements taken as a whole. Consequently, our audit will not necessarily detect all misstatements that exist due to error, fraudulent financial reporting, or misappropriation of assets.

Accepted Answer

Choice "H" is correct. An understanding with the client should be established, and this understanding should be documented through an engagement letter. The understanding, and the letter, should include the auditor's responsibilities, including the fact that an audit is designed to provide only reasonable assurance of detecting material misstatements, and therefore may not necessarily detect all misstatements that exist.

Question 18

This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment. Select, as the best answer for each item, the most likely source. Select only one source for each item. As discussed in Note 4 to the financial statements, the company experienced a net loss for the year ended July 31, 20XX, and is currently in default under substantially all of its debt agreements. In addition, on September 25, 20XX, the company filed a prenegotiated voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. These matters raise substantial doubt about the company's ability to continue as a going concern.

Accepted Answer

Choice "L" is correct. When there is substantial doubt about an entity's ability to continue as a going concern, the auditor would state his or her concerns in an explanatory paragraph of the auditor's report.

Question 19

Mailing disbursement checks and remittance advices should be controlled by the employee who:

Accepted Answer

Choice "D" is correct. Mailing disbursement checks and remittance advices should be controlled by the employee who signs the check last. This employee is generally in the treasury department. Choices "A" and "B" are incorrect. Approving the vouchers for payment and matching the receiving report, purchase orders, and vendor's invoices are functions of the vouchers payable department. Choice "C" is incorrect. When a mechanical check-signing device is used, there is generally dual control. One person maintains possession of the device itself, and the other controls the signature plates. The person with possession of the device would not mail disbursement checks, since mailing should be done by the last check signer.

Question 20

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?

Accepted Answer

Choice "D" is correct. A question related to whether purchase orders, receiving reports and vouchers are prenumbered and periodically accounted for would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases. A gap in recorded purchase order numbers might indicate an unrecorded purchase. Choice "A" is incorrect. Requiring an authorized purchase order before accepting a shipment would relate to whether the purchase was valid, not whether it was properly accounted for. Choice "B" is incorrect. Having prenumbered purchase requisitions independently matched with vendor invoices does not indicate whether all purchases are accounted for since these documents do not show that the purchase has been recorded. Choice "C" is incorrect. Reconciling the unpaid voucher file with inventory records does not indicate whether all purchases are accounted for since these documents do not show that all purchases have been recorded.

Exam 1: CPA Auditing and Attestation Exam

The authority to accept incoming goods in receiving should be based on a (an) :