Question 1

In a manufacturing company, which one of the following audit procedures would give the least assurance for the existence of the general ledger balance of investment in stocks and bonds at the audit date?

Accepted Answer

The answer of In a manufacturing company, which one of...

Question 2

Explain how cash plays a role in all business processes.

Accepted Answer

The answer of Explain how cash plays a role in...

Question 3

Auditors will need to perform more substantive tests than normal to obtain sufficient appropriate evidence that a financial instrument is fairly stated if which of the following conditions exist?

Accepted Answer

If management's key assumptions are subject to volatility, the auditor will need to perform more substantive tests to obtain sufficient appropriate evidence that a financial instrument is fairly stated. This is because volatile assumptions increase the risk of material misstatement in the financial statements. Choices A, C, and D do not necessarily impact the level of substantive testing required.

Question 4

The auditor should insist that a representative of the entity be present during the physical examination of securities in order to

Accepted Answer

Having a representative of the entity present during the physical examination of securities ensures that there is an acknowledgment of the receipt of securities returned, providing a record and reducing the risk of disputes about the handling and custody of the securities.

Question 5

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fund maintained on an imprest basis?

Accepted Answer

If the reimbursement of the fund from the general cash account occurs twice or more each week, it could indicate that the petty cash fund is being used for purposes other than small and incidental purchases, which violates the imprest system. This may lead to an intensification of the auditor's examination to ensure the fund is being properly maintained. The other options may also raise concerns, but they are not as significant as the frequency of reimbursement from the general cash account.

Question 6

Jones was engaged to examine the financial statements of Virginia Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?

Accepted Answer

The answer of Jones was engaged to examine the financial...

Question 7

Which of the following would provide the best form of evidential matter pertaining to the annual valuation of a long-term investment in which the entity owns a 45 percent voting interest?

Accepted Answer

Audited financial statements of the investee company would provide the best form of evidential matter as they provide reliable information about the financial performance and position of the investee company, which is necessary for determining the fair value of the long-term investment in which the entity owns a 45 percent voting interest. Market quotations of the investee company's stock would only provide information on the market price of the stock, which may not necessarily reflect the true value of the investment. The current fair value of the investee company's assets and historical costs of the investee company's assets are not sufficient to determine the fair value of the long-term investment.

Question 8

Which of the following procedures would be most important in the audit of an investment valued at fair value?

Accepted Answer

Developing an independent estimate of the fair value measurement is the most important procedure in the audit of an investment valued at fair value. This helps to ensure the accuracy and reliability of the reported value and confirms whether there is any bias in management’s estimation. Comparing the balance in the investment account to the prior year and reading the footnote disclosure related to the investment are important procedures, but they do not specifically address the accuracy of the fair value measurement. Inquiring of management regarding the accuracy and reliability of the underlying data is also important, but it is not as critical as independently estimating the fair value measurement.

Question 9

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

Accepted Answer

The internal auditor comparing the securities in the bank safe-deposit box with recorded investments would help ensure the completeness assertion is met by verifying that all investments are included and disclosed in the financial statements. Senior management verifying that securities are registered in the entity's name, the treasurer vouching the acquisition of securities, and the controller comparing market prices do not specifically address completeness and may only address other assertions such as ownership, existence, or valuation.

Question 10

Examining brokers' advices for a sample of securities purchased during the year is a test for the assertion of

Accepted Answer

Examining brokers' advices helps verify that the entity has the rights to the securities purchased, thus testing the rights and obligations assertion.

Question 11

For each assertion about cash listed below, give an example of a test of transactions for (1) cash receipts and (2) cash disbursements.
a. Classification.
b. Occurrence.
c. Authorization.
d. Completeness.

Accepted Answer

The answer of For each assertion about cash listed below,...

Question 12

When there is a large number of negotiable securities in multiple locations, careful planning of the physical inspection and count of the securities by the auditor is necessary to guard against

Accepted Answer

Careful planning is necessary to prevent the substitution of securities already counted at one location for those that should be at another location, ensuring all securities are accounted for accurately.

Question 13

An entity has a large and active investment portfolio that is kept in a bank safe-deposit box. If the auditor is unable to examine and count the securities at the balance sheet date but will examine and count the securities shortly thereafter, the auditor most likely will

Accepted Answer

The answer of An entity has a large and active...

Question 14

As one of the year-end audit procedures, the auditor instructed the entity's personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the entity's treasurer had signed the request, it was mailed to the bank by the assistant treasurer. What is the major flaw in this audit procedure?

Accepted Answer

The answer of As one of the year-end audit procedures,...

Question 15

Which of the following is not one of the auditor's primary objectives in an examination of marketable securities?

Accepted Answer

While determining whether securities are authentic may be a concern, it is not one of the primary objectives in an examination of marketable securities. The primary objectives are to determine ownership, existence, and proper classification on the balance sheet.

Question 16

When an auditor is unable to inspect and count an entity's investment securities until after the balance sheet date, the bank where the securities are held in a safe-deposit box should be notified on or before the balance sheet date that it will be asked to

Accepted Answer

By notifying the bank that the securities will be inspected after the balance sheet date, the auditor can ask the bank to confirm that the safe-deposit box has not been accessed during the intervening period. This confirmation can help to provide the auditor with evidence that the securities have not been tampered with or removed from the box, which is an important consideration when evaluating the completeness and valuation assertions related to investment securities. The other choices may also be useful, but they do not directly address the need to obtain evidence about the safekeeping and custody of the securities between the balance sheet date and the date of inspection.

Question 17

Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed?

Accepted Answer

Option B presents a physical safeguard for the marketable securities by requiring two company officials to be present in order to access them, and keeping them in a secure bank safe-deposit box. This control reduces the risk of unauthorized access or theft. Option A relates to oversight of investment decisions, but does not specifically address safeguarding of marketable securities. Option C relates to reconciliation of subsidiary ledgers to the general ledger but does not specifically address safeguarding of marketable securities. Option D relates to verification of marketable securities but does not specify any controls for safeguarding them.

Question 18

The primary purpose of sending a standard confirmation request to financial institutions with which the entity has done business during the year is to

Accepted Answer

The primary purpose of a standard confirmation request is to verify the accuracy of financial statement information, specifically deposit and loan balances. This helps to ensure that financial statements are presented fairly and accurately. While confirmation requests may indirectly help to detect kiting activities or provide information about contingent liabilities and secured transactions, these are not the primary purposes of the request. Additionally, a proof of cash may be prepared using bank statements and canceled checks rather than confirmation requests.

Question 19

In establishing the existence and ownership of a long-term investment in stock of a publicly traded company, an auditor should inspect the securities or

Accepted Answer

The auditor should confirm the number of shares owned that are held by an independent custodian to verify the existence and ownership of the investment.

Question 20

Explain the importance of the bank reconciliation to the audit and list some of the items found on the reconciliation.

Accepted Answer

The answer of Explain the importance of the bank reconciliation...

Quiz 16: Auditing the Financinginvesting Process: Cash and Investments