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									                                         Auditing and Attestation 4
                                              Class Questions


1. CPA-02625
Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a remittance
listing that is forwarded to the cashier. A copy of the listing should be sent to the:
a.   Internal auditor to investigate the listing for unusual transactions.
b.   Treasurer to compare the listing with the monthly bank statement.
c.   Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
d.   Entity's bank to compare the listing with the cashier's deposit slip.

CPA-02625
Choice "c" is correct. A copy of the remittance listing is sent to the accounts receivable clerk and used to
update the subsidiary accounts receivable records.
Choice "a" is incorrect. A copy of each remittance listing would not be sent to the internal audit staff.
Choice "b" is incorrect. The bank statement is typically reconciled by an employee having no part in
authorizing or recording cash transactions, not by the treasurer.
Choice "d" is incorrect. The bank only receives a copy of the deposit slip, not the remittance listing.



2. CPA-02680
An auditor tests an entity's control of obtaining credit approval before shipping goods to customers in
support of management's financial statement assertion of:
a.   Valuation or allocation.
b.   Completeness.
c.   Existence or occurrence.
d.   Rights and obligations.

CPA-02680
Choice "a" is correct. By ensuring that credit approval is obtained before goods are shipped to
customers, the auditor is testing management's assertion that accounts receivable are collectible
(valuation or allocation).
Choice "b" is incorrect. Ensuring that credit approval is obtained before goods are shipped does not
support the completeness assertion.
Choice "c" is incorrect. Ensuring that credit approval is obtained before goods are shipped does not
support the existence or occurrence assertion.
Choice "d" is incorrect. Ensuring that credit approval is obtained before goods are shipped does not
support the rights and obligations assertion.




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3. CPA-02589
An auditor observed that a client mails monthly statements to customers. Subsequently, the auditor
reviewed evidence of follow-up on the errors reported by the customers. This test of controls most likely
was performed to support management's financial statement assertion(s) of:
     Presentation and       Rights and
        disclosure          obligations
a.         Yes                  Yes
b.         Yes                  No
c.          No                  Yes
d.          No                  No

CPA-02589
Choice "c" is correct. Assertions about rights and obligations deal with whether assets are the rights of
the entity and liabilities are the obligations of the entity. Errors reported by customers might indicate
receivables for which the company has no right of collection.
Choices "a" and "b" are incorrect. Assertions about presentation and disclosure deal with whether
particular components of the financial statements are properly classified, described, and disclosed.
Follow-up of errors reported by customers would not impact the proper classification, description and
disclosure of accounts receivable in the financial statements.
Choice "d" is incorrect. Assertions about rights and obligations deal with whether assets are the rights of
the entity and liabilities are the obligations of the entity. Errors reported by customers might indicate
receivables for which the company has no right of collection.



4. CPA-02595
Which of the following procedures concerning accounts receivable would an auditor most likely perform to
obtain evidential matter in support of an assessed level of control risk below the maximum level?
a. Observing an entity's employee prepare the schedule of past due accounts receivable.
b. Sending confirmation requests to an entity's principal customers to verify the existence of accounts
   receivable.
c. Inspecting an entity's analysis of accounts receivable for unusual balances.
d. Comparing an entity's uncollectible accounts expense to actual uncollectible accounts receivable.

CPA-02595
Choice "a" is correct. In order to support an assessed level of control risk below the maximum level, an
auditor must: (1) identify specific controls (relevant to financial statement assertions) that are likely to
prevent or detect material misstatements and (2) perform tests of those controls to evaluate their
effectiveness. Observing preparation of the schedule of past due accounts receivable is such a test of
controls.
Choice "b" is incorrect. Sending confirmation requests is a substantive test, not a test of controls.
Choice "c" is incorrect. Inspecting an entity's analysis of accounts receivable for unusual balances is a
substantive test, not a test of controls.
Choice "d" is incorrect. Comparing an entity's uncollectible accounts expense to actual uncollectible
accounts receivable is a substantive test, not a test of controls.




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5. CPA-02606
For effective internal control, the accounts payable department generally should:
a. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.
b. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized
   employee.
c. Obliterate the quantity ordered on the receiving department copy of the purchase order.
d. Establish the agreement of the vendor's invoice with the receiving report and purchase order.

CPA-02606
Choice "d" is correct. Under an effective system of internal control, the accounts payable clerk should
ensure that supporting documentation (invoice, receiving report, and purchase order) is in agreement
before the voucher is submitted for payment.
Choice "a" is incorrect. The supporting documentation should be canceled by the treasurer after the
check is mailed, not by the accounts payable department.
Choice "b" is incorrect. The purchasing department ascertains that the requisition is properly approved
for price, quantity, and quality before the purchase order is prepared. The accounts payable department
would not be involved until much later in the process, after the purchase has been made.
Choice "c" is incorrect. Sending the receiving department a copy of the purchase order that does not
display the amount expected is a good control. However, it is the purchasing department (and not the
accounts payable department) that would generally obliterate the quantity ordered before sending the
purchase order to receiving.



6. CPA-02601
An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping
customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor
most likely would compare the:
a.   Dates checks are deposited per bank statements with the dates remittance credits are recorded.
b.   Daily cash summaries with the sums of the cash receipts journal entries.
c.   Individual bank deposit slips with the details of the monthly bank statements.
d.   Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually
     recorded.

CPA-02601
Choice "a" is correct. When lapping occurs, an employee uses current remittances to conceal
remittances that have been stolen previously. Thus, a lag will exist from the time that this current
payment is deposited until the current customer's account is actually credited. (The current payment is
applied to the previous customer's account.)
Choice "b" is incorrect. The total of daily cash summaries will still agree with the total amount entered in
the cash receipts journal if lapping is occurring (because the employee does not record as received the
amount of cash stolen).
Choice "c" is incorrect. Individual deposit slips will still agree with the bank statements if lapping is
occurring.
Choice "d" is incorrect. The date that write-offs are approved and actually occur will not be affected by a
lapping scheme.




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7. CPA-02643
Audit documentation should:
a.   Not be permitted to serve as a reference source for the client.
b.   Not contain critical comments concerning management.
c.   Show that the accounting records agree or reconcile with the financial statements.
d.   Be considered the primary support for the financial statements being audited.

CPA-02643
Choice "c" is correct. Audit documentation should show that the accounting records agree or reconcile
with the financial statements.
Choice "a" is incorrect. Audit documentation may be permitted to serve as a reference source for the
client.
Choice "b" is incorrect. Audit documentation may contain critical comments concerning management
(e.g., documentation of disagreements with facts or opinions of management, such as accounts
receivable valuation).
Choice "d" is incorrect. Audit documentation is not the support for the FS. The client's books and
records are the support for the FS. Audit documentation should be the principal support for the work the
auditor has done to support his auditor's report.



8. CPA-02342
Which of the following types of audit evidence is the most persuasive?
a.   Prenumbered client purchase order forms.
b.   Client work sheets supporting cost allocations.
c.   Bank statements obtained from the client.
d.   Client representation letter.

CPA-02342
Choice "c" is correct. When evidential matter can be obtained from independent sources outside an
entity, it provides greater assurance of reliability for the purposes of an independent audit than does
evidence secured solely within the entity. While the bank statement was obtained from the client, it is still
more persuasive than any of the other three items because it is not prepared by the client.
Choice "a" is incorrect. Prenumbered client purchase orders are client-generated documents; as such,
they are not as persuasive as externally generated evidence received through a client.
Choice "b" is incorrect. Client work sheets supporting cost allocations are client-generated documents; as
such, they are not as persuasive as externally generated evidence received through a client.
Choice "d" is incorrect. The client representation letter is a client-generated document; as such, it is not
as persuasive as externally generated evidence received through a client.




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9. CPA-02334
The objective of tests of details of transactions performed as substantive tests is to:
a.   Comply with generally accepted auditing standards.
b.   Attain assurance about the reliability of the information system relevant to financial reporting.
c.   Detect material misstatements in the financial statements.
d.   Evaluate whether management's controls operated effectively.

CPA-02334
Choice "c" is correct. Substantive tests are concerned with dollar amounts and consist of tests of details
of transactions and balances and analytical procedures. The objective of tests of details of transactions
performed as substantive tests is to detect material (dollar) misstatements in the financial statements.
Choice "a" is incorrect. Tests of details of transactions (performed as substantive tests) are used to
evaluate management's assertions. While tests of details of transactions do help the auditor comply with
GAAS, such compliance is not the primary objective of the tests.
Choice "b" is incorrect. Attaining assurance about the reliability of the information system relevant to
financial reporting (assessing control risk) is an objective of tests of controls rather than of substantive
tests.
Choice "d" is incorrect. Evaluation of the operating effectiveness of management controls (assessing
control risk) is an objective of tests of controls rather than of substantive tests.



10. CPA-02373
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving
transactions from which of the following accounts most likely would yield the highest level of evidence?
a.   Accounts receivable.
b.   Interest expense.
c.   Accounts payable.
d.   Travel and entertainment expense.

CPA-02373
Choice "b" is correct. Relationships among income statement accounts tend to be more predictable than
balance sheet accounts (accounts receivable, accounts payable) because they represent transactions
over a period of time (rather than at one point in time). In addition, relationships involving transactions
subject to management discretion (travel and entertainment) are less predictable.
Choices "a", "c", and "d" are incorrect, per the above explanation.




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11. CPA-04622
An auditor's analytical procedures performed during the overall review stage indicated that the client's
accounts receivable had doubled since the end of the prior year. However, the allowance for doubtful
accounts as a percentage of accounts receivable remained about the same. Which of the following client
explanations most likely would satisfy the auditor?
a. The client liberalized its credit standards in the current year and sold much more merchandise to
   customers with poor credit ratings.
b. Twice as many accounts receivable were written off in the prior year than in the current year.
c. A greater percentage of accounts receivable were currently listed in the "more than 90 days overdue"
   category than in the prior year.
d. The client opened a second retail outlet in the current year and its credit sales approximately equaled
   the older, established outlet.

CPA-04622
Choice "d" is correct. If a second, similar retail outlet were opened, one would expect sales and accounts
receivable to double. As long as the collection rates for the new outlet's receivables were expected to be
similar to those of the original outlet, however, the allowance for doubtful accounts as a percentage of
accounts receivable would remain the same.
Choice "a" is incorrect. If the client sold more merchandise to customers with poor credit ratings, the
allowance for doubtful accounts as a percentage of receivables should increase to reflect the greater level
of estimated bad debts.
Choice "b" is incorrect. Write off of a specific account receivable reduces both the allowance and the
receivable by the amount written off. If there were twice as many write offs in the previous year than in
the current year (and this were the only difference), the allowance for doubtful accounts as a percentage
of receivables would not stay the same.
Choice "c" is incorrect. If more receivables are potentially uncollectible in the current year (as opposed to
the prior year), the allowance for doubtful accounts as a percentage of receivables should increase to
reflect the greater level of estimated bad debts.



12. CPA-02354
In determining whether transactions have been recorded, the direction of the audit testing should be from
the:
a.   General ledger balances.
b.   Adjusted trial balance.
c.   Original source documents.
d.   General journal entries.

CPA-02354
Choice "c" is correct. To determine whether transactions have been recorded (completeness assertion),
the auditor should test from the source documents to the accounting records (general ledger, trial
balances, etc.).
Choices "a", "b", and "d" are incorrect. Testing from the accounting records to the source documents
provides evidence of existence or occurrence, not completeness.




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13. CPA-02314
An auditor suspects that certain client employees are ordering merchandise for themselves over the
Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive,
one of the employees approves the invoices for payment. After the invoices are paid, the employee
destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor
most likely would select items for testing from the file of all:
a.   Cash disbursements.
b.   Approved vouchers.
c.   Receiving reports.
d.   Vendors' invoices.

CPA-02314
Choice "a" is correct. Since the employee is destroying the invoices and related vouchers, the most
obvious documentation remaining would be the file of all cash disbursements. The auditor would select
items from this file and then attempt to trace from specific cash disbursements to the related invoices and
approved vouchers. Missing documentation might be indicative of fraud.
Choices "b" and "d" are incorrect. Since the employee destroys the related invoices and vouchers,
selecting items from the file of remaining invoices and vouchers would never identify the fraud.
Choice "c" is incorrect. Selecting items from the file of receiving reports will not identify fraudulent
purchases that are shipped directly to the employees' home addresses.



14. CPA-02443
To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most
likely would trace:
a. Inventory tags noted during the auditor's observation to items listed in the inventory-listing schedule.
b. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors'
   invoices.
c. Items listed in the inventory-listing schedule to inventory tags and the auditor's recorded count sheets.
d. Items listed in receiving reports and vendors' invoices to the inventory-listing schedule.

CPA-02443
Choice "c" is correct. Tracing from the inventory schedule to the inventory tags and the auditor's record
count sheets verifies the validity (existence) of the items.
Choice "a" is incorrect. Tracing from inventory tags to the inventory listing schedule verifies the
completeness of the schedule, not the existence (or validity) of the items.
Choice "b" is incorrect. Tracing to receiving reports and to vendors' invoices from the inventory tags
might be used to verify completeness of purchases or payables.
Choice "d" is incorrect. Tracing from receiving reports and vendors' invoices to the inventory listing are
cut-off procedures used to verify completeness of the inventory listing.




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15. CPA-04627
An auditor decides to use the blank form of accounts receivable confirmation rather than the positive
form. The auditor should be aware that the blank form may be less efficient because:
a.   Subsequent cash receipts need to be verified.
b.   Statistical sampling may not be used.
c.   A higher assessed level of detection risk is required.
d.   More nonresponses are likely to occur.

CPA-04627
Choice "d" is correct. Blank forms may result in lower response rates because a greater effort is required
for response.
Choice "a" is incorrect. Use of the blank form does not necessarily imply that subsequent cash receipts
will need to be verified. This is an alternative procedure that might be used to follow up on
nonresponses.
Choice "b" is incorrect. The decision regarding whether or not to use statistical sampling is independent
of the decision regarding what form of accounts receivable confirmation to use.
Choice "c" is incorrect. Blank forms provide a greater degree of assurance, since the recipient cannot
simply sign off without checking the balance. A greater degree of assurance results in a lower assessed
level of detection risk.



16. CPA-02430
In confirming with an outside agent, such as a financial institution, that the agent is holding investment
securities in the client's name, an auditor most likely gathers evidence in support of management's
financial statement assertions of existence or occurrence and:
a.   Valuation or allocation.
b.   Rights and obligations.
c.   Completeness.
d.   Presentation and disclosure.

CPA-02430
Choice "b" is correct. A confirmation from an outside agent indicating that securities are being held in the
client's name provides evidence with respect to both the existence assertion and the rights and
obligations assertion.
Choice "a" is incorrect. The valuation or allocation assertion is generally tested for securities by reference
to an outside source of price information such as the Wall Street Journal.
Choice "c" is incorrect. In order to test the completeness assertion with confirmations, the auditor would
need to select from all possible agents rather than only agents that currently hold securities.
Choice "d" is incorrect. Confirmations do not provide evidence regarding the presentation and disclosure
assertion.




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17. CPA-02416
An auditor vouched data for a sample of employees in a payroll register to approved clock card data to
provide assurance that:
a.   Payments to employees are computed at authorized rates.
b.   Employees work the number of hours for which they are paid.
c.   Segregation of duties exist between the preparation and distribution of the payroll.
d.   Internal controls relating to unclaimed payroll checks are operating effectively.

CPA-02416
Choice "b" is correct. By vouching to time card data, the auditor is testing the existence assertion for
hours worked.
Choice "a" is incorrect. Vouching to approved time card data would provide evidence about hours
worked, not pay rates. Pay rates would be tested by comparing to personnel records.
Choice "c" is incorrect. Vouching to approved time cards does not provide evidence about segregation of
duties.
Choice "d" is incorrect. Vouching to the approved time cards does not provide evidence about internal
controls related to unclaimed paychecks. The auditor would need to observe a payroll distribution to
evaluate these controls.



18. CPA-02447
In performing a search for unrecorded retirements of fixed assets, an auditor most likely would:
a.   Inspect the property ledger and the insurance and tax records, and then tour the client's facilities.
b.   Tour the client's facilities, and then inspect the property ledger and the insurance and tax records.
c.   Analyze the repair and maintenance account, and then tour the client's facilities.
d.   Tour the client's facilities, and then analyze the repair and maintenance account.

CPA-02447
Choice "a" is correct. In a search for unrecorded disposals, the auditor would vouch a sample of assets
on the property ledger to those on hand in the client's facility.
Choice "b" is incorrect. By touring the facility first, and then comparing assets found to those recorded on
the property ledger, the auditor is testing the completeness of the property ledger, a procedure used to
search for unrecorded additions.
Choice "c" is incorrect. Analysis of the repair and maintenance account is useful in identifying
transactions that should have been capitalized versus expensed (i.e., unrecorded additions).
Choice "d" is incorrect. Analysis of the repair and maintenance account is useful in identifying
transactions that should have been capitalized versus expensed (i.e., unrecorded additions).




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19. CPA-02495
During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are
restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure
most likely is intended to verify management's assertion of:
a.   Existence or occurrence.
b.   Completeness.
c.   Valuation or allocation.
d.   Presentation and disclosure.

CPA-02495
Choice "d" is correct. Restrictions on retained earnings are for contractual or legal appropriation of
retained earnings. The purpose is to restrict dividends, and such restrictions should be disclosed in the
financial statements.
Choice "a" is incorrect. Restrictions on retained earnings have no effect on the existence or occurrence
of retained earnings.
Choice "b" is incorrect. Completeness refers to the inclusion of all transactions and balances.
Restrictions on retained earnings will not affect completeness.
Choice "c" is incorrect. Assertions about valuation or allocation deal with whether asset, liability, revenue,
and expense components have been included in the financial statements at appropriate amounts.
Restrictions on retained earnings do not affect valuation or allocation.



20. CPA-02536
Which of the following auditing procedures most likely would assist an auditor in identifying related party
transactions?
a.   Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.
b.   Vouching accounting records for recurring transactions recorded just after the balance sheet date.
c.   Reviewing confirmations of loans receivable and payable for indications of guarantees.
d.   Performing analytical procedures for indications of possible financial difficulties.

CPA-02536
Choice "c" is correct. Reviewing confirmations of loans receivable and payable is useful for determining
the existence of related party transactions because guarantees are commonly provided by or for related
parties.
Choice "a" is incorrect. Detection of unreported contingent liabilities is not a procedure that would assist
the auditor in identifying related party transactions.
Choice "b" is incorrect. Recurring transactions after year-end are a usual business occurrence. Related
party transactions would most likely be nonrecurring.
Choice "d" is incorrect. While financial difficulties may be associated with related party transactions, it is
unlikely that analytical procedures would assist the auditor in identifying such transactions.




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21. CPA-02529
Which of the following is an audit procedure that an auditor most likely would perform concerning
litigation, claims, and assessments?
a. Request the client's lawyer to evaluate whether the client's pending litigation, claims, and
   assessments indicate a going concern problem.
b. Examine the legal documents in the client's lawyer's possession concerning litigation, claims, and
   assessments to which the lawyer has devoted substantive attention.
c. Discuss with management the controls adopted for evaluating and accounting for litigation, claims,
   and assessments.
d. Confirm directly with the client's lawyer that all litigation, claims, and assessments have been
   recorded or disclosed in the financial statements.

CPA-02529
Choice "c" is correct. The independent auditor's procedures with respect to litigation, claims, and
assessments should include discussing with management the controls adopted for identifying, evaluating,
and accounting for litigation, claims, and assessments.
Choice "a" is incorrect. The evaluation of going concern issues is the auditor's responsibility.
Choice "b" is incorrect. The auditor should examine documents in the client's possession concerning
litigation, claims, and assessments, including correspondence and invoices from lawyers. The auditor
does not generally examine documents held by the client's lawyer.
Choice "d" is incorrect. The client's lawyer would only know about matters, which the attorney has been
engaged to handle, which might not include all litigation, claims, and assessments. In addition, it is the
auditor's responsibility (not the lawyer's) to determine whether litigation, claims, and assessments have
been adequately recorded or disclosed in the financial statements.




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