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MULTIPLE CHOICE:
1. The permanent file section of the working papers that is kept for each
audit client most likely contains
a. Review notes pertaining to questions and comments regarding
the audit work performed.
b. A schedule of time spent on the engagement by eachindividual
auditor.
c. Correspondence with the client's legal counsel concerning pending
litigation.
d. Narrative descriptions of the client's internal control policies and
procedures
ANSWER: D
2. Of the following procedures, which is not considered part of obtaining
an understanding of the clients environment?
a. Examining trade publications to gain a better understanding of
the client's industry.
b. Confirming customer accounts receivable for existence and
valuation.
c. Touring the client's manufacturing and warehousing
facilities to gain a clearer understanding of
operations.
ANSWER: A
22. Of the following procedures, which does not produce analytical
evidence?
a. Compare revenue, cost of sales, and gross profit with the prior
year and investigate significant variations.
b. Examine monthly performance reports and investigate significant
revenue and expense variances.
c. Confirm customers' accounts receivable and clear all material
exceptions.
d. Compare sales trends and profit margins with industry averages
and investigate significant differences.
ANSWER: C
23. Audit evidence can come in different forms with different degrees of
persuasiveness. Which of the following is the least persuasive type of
evidence?
a. Documents mailed by outsiders to the auditor. b. Correspondence
between the auditor and vendors. c. Sales invoices inspected by the
auditor.
d. Computations made by the auditor.
ANSWER: C
24. Analytical procedures are
a. Substantive tests designed to evaluate a system of internal
control.
29. Audit working papers are used to record the results of the auditor's
evidence-gathering procedures. When preparing working papers,
the auditor should remember that working papers should be
a. Kept on the client's premises so that the client can have access to
them for reference purposes.
b. The primary support for the financial statements being examined.
c. Considered as a part of the client's accounting records that are
retained by the auditor.
d. Designed to meet the circumstances and the auditor's needs on
each engagement.
ANSWER: D
30. The main advantage of properly indexed working papers is to
a. Reduce the size of the file.
b. Better organize the working papers.
c. Allow division of labor within the audit team. d. Facilitate the
efficient use of audit staff.
ANSWER: B
31. Which of the following is not a typical analytical procedure?
a. Study of relationships of financial information with relevant
nonfinancial information.
b. Comparison of financial information with similar information
regarding the industry in which the entity operates. c.Comparison of
ANSWER: A
45. Most of the independent auditor's work in formulating an opinion on
the financial statements consists of
a. Studying and evaluating internal control.
b. Obtaining and examining evidential matter.
c. Examining cash transactions.
d. Comparing recorded accountability with assets.
ANSWER: B
46. During an audit of the accounts receivable function, you found that
the accounts receivable turnover rate had fallen from 7.3 to 4.3 over the
last three years. What is the most likely cause of the decrease in the
turnover rate?
a. An increase in the discount offered for early payment. b. A more liberal
credit policy.
c. A change from net 30 to net 25.
d. Greater cash sales.
ANSWER: B
47. Which of the following is generally included or shown in the auditor's
working papers?
a. The procedures used by the auditor to verify the personal
financial status of members of the client's management team.
b. Analyses that are designed to be a part of, or a substitute for,
the client's accounting records. c. Excerpts from authoritative
61. The audit trail consists of that stream of evidence that enables the
auditor to trace a transaction or event forward from its inception to
the appropriate ledger account, or conversely, vouch a transaction
backward from the ledger
account to the inception of the transaction or event. For the audit trail to
exist, transactions must be .
ANSWER: DOCUMENTED
62. Analytical evidence may be the best form of evidence supporting
theobjective, in that auditors' suspicions concerning errors of
omission are often first aroused by the application of analytical
procedures.
ANSWER: COMPLETENESS
63. An auditor-prepared bank reconciliation is an example
of_______________ evidence.
ANSWER: MATHEMATICAL
64. A group of related transactions affecting essentially the same set of
general ledger accounts is referred to as a _________________.
ANSWER: TRANSACTION CYCLE
65. The focal point of the current file is the ____________
_______________ ______________ often referred to as a table of
contents.
ANSWER: WORKING TRIAL BALANCE
MATCHING:
66. For each of the listed auditing procedures, indicate, by letter, the type
of evidence it represents.
a. Physical evidence
b. Confirmation evidence
c. Documentary evidence
d. Analytical evidence
e. Mathematical evidence
f. Hearsay evidence
____ 1. Audited client-prepared bank reconciliation
____ 2. Vouched debits to repairs accounts by
examining vendorsinvoices
____ 3. Observed the clients year-end physical inventory
____ 4. Compared accounts receivable turnover with industry
average
____ 5. Prepared ten-year income summary expressing all
components as a percentage of sales
____ 6. Obtained letter from clients outside legal counsel
regarding pending litigation
____ 7. Inquired of corporate treasurer as to reason(s) for
acquiring marketable securities
11. d
67. For each of the listed procedures, indicate, by letter, the
assertion(s) being tested.
a. Existence or occurrence
b. Completeness
c. Rights and obligations
d. Valuation or allocation
e. Presentation and disclosure
____ 1. Confirmed customer accounts receivable
____ 2. Vouched property additions to underlying
documentation consisting of vendors invoices and
work orders
____ 3. Inquired of corporate treasurer as to reasons for
buying and holding securities
____ 4. Selected a sample of bills of lading representing
shipments to customers and traced to sales invoices
to determine that all shipments have been billed to
customers
____ 5. Examined vendors invoices recorded after year-end to
6. a,c,d
7. d
8. e
9. a
10. b
PROBLEM/ESSAY
68. For each of the following ledger accounts, give an example of
substance underlying the account balance:
1. Cash in bank
2. Sales revenue
3. Inventories
4. Accounts payable
5. Notes payable
6. Capital stock
7. Marketable securities
8. Operating expenses
9. Wages and salaries expense
10. Property, plant, and equipment
SOLUTION:
1. Bank statement, canceled checks, deposit tickets
the current ratio appears adequate when compared with the preceding
year and with the industry average, the quick ratio (current assets minus
inventory divided by current liabilities) has declined from 1.16 in 2002 to
.84 in 2003. This suggests a short-term liquidity problem, especially if
inventories are overstated and/or customer accounts receivable are
delinquent.
71. Identify the deficiencies in the following audit workpaper:
TRAMWAY ENTERPRISES
Bank Reconciliation
12/31/2003
Balance per bank $5,774 *
Add deposit in transit 1,223 &
6,997
Deduct outstanding checks:
4455 $67 &
4477 180 &
4478 1,023 &
4479 33 &
1,303
Adjusted balance $5,594
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