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Question
The field work for the December 31, 2011 audit of Pumpkin Corporation ended on March 13, 2012. The financial statements and auditor's report were issued and mailed to stockholders on March 23, 2012. In each of the situations below, select from the list at the end of the problem the appropriate action to be taken by the auditor. Assume all situations are material.
Situations:
Answer
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Related questions
Q:
When evaluating internal control of an entity that processes revenue transactions on the Internet, an auditor would be most concerned about the
A. Potential for computer disruptions in recording sales.
B. Lack of sales invoice documents as an audit trail.
C. Frequency of archiving and data retention.
D. Inability to establish test data.
Q:
Tracing bills of lading to sales invoices provides evidence that
A. Shipments to customers were properly authorized.
B. Recorded sales were shipped.
C. Billed sales were shipped.
D. Shipments to customers were billed.
Q:
According to the SEC's SAB No. 101, which of the following is not necessary for revenue recognition?
A. The seller's price to the buyer is fixed.
B. Collectibility is reasonably assured.
C. The seller has determined that the buyer will take the discount.
D. Persuasive evidence of an arrangement exists.
Q:
A positive confirmation requests that customers respond whether they agree or not with the amount due to the client stated in the confirmation.
Q:
1. Observe the endorsement of checks Accuracy 2. Review of cash receipts journal for unusual items Classification 3. Test a sample of cash receipts transactions for proper cash discounts Completeness 4. Test a sample of sales invoices for the presence of authorized customer order and shipping document Occurrence 5. Compare the dates on the sales invoices with the dates of the relevant shipping documents Cutoff 6. Recompute financial information on a sample of sales invoices Authorization
Q:
When tracing a sample of shipping documents from throughout the year to the details of the sales invoices and to the sales journal and customers' accounts receivable subsidiary ledger, the auditor is testing the _____________ assertion.
A. Classification.
B. Cutoff.
C. Existence.
D. Completeness.
Q:
In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely would be included with the client's confirmation letter?
A. An auditor-prepared letter explaining that a nonresponse may cause an inference that the account balance is correct.
B. A client-prepared letter reminding the customer that a nonresponse will cause a second request to be sent.
C. An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to the auditor.
D. A client-prepared statement of account showing the details of the customer's account balance.
Q:
Customers having substantial year-end past due balances fail to reply after second request forms have been mailed directly to them. Which of the following is the most appropriate audit procedure?
A. Examine shipping documents.
B. Review collections during the year being examined.
C. Intensify the study of the client's system of internal control with respect to receivables.
D. Increase the balance in the allowance for uncollectible accounts.
Q:
Mill Company uses a batch processing method to process its sales transactions. Data on Mill's sales transaction tapes are electronically sorted by customer number and are subjected to programmed edit checks in preparing its invoices, sales journals, and updated customer account balances. One of the direct outputs of the creation of these tapes most likely would be a
A. Report showing exceptions and control totals.
B. Printout of the updated inventory records.
C. Report showing overdue accounts receivable.
D. Printout of the sales price master file.
Q:
Which of the following statements would an auditor most likely add to the negative form of confirmations of accounts receivable to encourage timely consideration by the recipient?
A. "This is not a request for payment; remittances should not be sent to our auditors in the enclosed envelope."
B. "Report any differences on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your records."
C. "If you do not report any differences within 15 days, it will be assumed that this statement is correct."
D. "The following invoices have been selected for confirmation and represent amounts that are overdue."
Q:
The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because
A. Many customers merely sign and return the confirmation without verifying its details.
B. Recipients usually respond only if they disagree with the information on the request.
C. Customers may not be inclined to report understatement errors in their accounts.
D. Auditors typically select many accounts with low recorded balances to be confirmed.
Q:
Once a CPA has determined that accounts receivable has increased because of slow collection in a "tight money" environment, the CPA would be likely to
A. Increase the balance in the allowance for bad debts account.
B. Review the going concern ramifications.
C. Require the client to tighten their credit policy.
D. Expand tests regarding the collectability of receivables.
Q:
Matching 1. Mus logical unit an individual dollar 2. MUS Sampling unit the total of the projected misstatement plus the allowance for sampling risk 3. MUS Upper misstatement limit the account or transaction that contains the selected dollar 4. MUS misstatement the difference between monetary amounts in the client's records and amounts supported by audit evidence
Q:
You are auditing accounts receivable for a small company and have found the following results:
Q:
Which one of the following statements is true regarding two random samples, drawn in the same way, from the same population, one of size 30 and one of size 300?
A. The two samples are expected to have the same sample mean.
B. The larger sample is more likely to produce a large sample mean.
C. The smaller sample will have a smaller 95% confidence interval for the mean.
D. The smaller sample will, on average, produce a lower estimate of the variance of the population.
Q:
The assurance factor for nonstatistical sampling is based on
A. The number of items in the account.
B. Auditor judgment.
C. The risk of misstatement in the account and the level of desired assurance.
D. Variability in the population and the risk of misstatement in the account.
Q:
In a monetary-unit sample with a sampling interval of $5,000, an auditor discovers that a selected account receivable with a recorded amount of $10,000 has an audit amount of $8,000. If this were the only error discovered by the auditor, the projected misstatement for this sample would be
A. $5,000.
B. $4,000.
C. $2,000.
D. $1,000.
Q:
Which of the following sampling methods would be used to estimate a numerical measurement of population, such as the dollar value of an account?
A. Attributes sampling.
B. Stop-or-go sampling.
C. Classical variables sampling.
D. Random-number sampling.
Q:
Which of the following statements best describes an inherent limitation of the monetary-unit sampling method?
A. It can only be used for substantive testing of asset accounts.
B. It requires the use of a computer system to perform the required calculations.
C. Misstatement rates must be large and the misstatements must be overstatements.
D. Misstatement rates must be small and the misstatements must be overstatements.
Q:
Which audit procedure is most closely related to management's assertions about the presentation and disclosure of stockholders' equity?
A. Determining whether restrictions have been imposed on retained earnings.
B. Counting treasury stock certificates.
C. Inspecting minutes of the board of directors to verify that cash dividends were declared.
D. Establishing that treasury stock is valued at cost.
Q:
An audit of stockholders' equity ordinarily should include
A. Tracing individual dividend payments to the capital stock records.
B. Reviewing minutes of board meetings to determine the number of shares outstanding.
C. Confirming shares outstanding with state officials.
D. Determining that dividend declarations comply with debt agreements.
Q:
Reviewing interest expense to examine payments to debt holders not listed on the debt analysis schedule is a procedure that can be used to test the audit assertion of
A. Occurrence.
B. Completeness.
C. Cutoff.
D. Accuracy.
Q:
In auditing long-term bonds payable, an auditor most likely would
A. Perform analytical procedures on the bond premium and discount accounts.
B. Examine documentation of assets purchased with bond proceeds for liens.
C. Compare interest expense with the bonds payable amount for reasonableness.
D. Confirm the existence of individual bond holders at year-end.
Q:
During an examination of a public company, the auditor should obtain written confirmation regarding bond transactions from the
A. Bond broker.
B. Client's attorney.
C. Internal auditors.
D. Trustee.
Q:
During its fiscal year, a company issued, at a discount, a substantial amount of bonds. When performing audit work in connection with the bond issue, the independent auditor should
A. Confirm the existence of the bond holders.
B. Review the board of directors' minutes for authorization.
C. Trace the net cash received from the issuance to the bond payable account.
D. Inspect the records maintained by the bond trustee.
Q:
The auditor is concerned with establishing that dividends are paid to stockholders of the client corporation owning stock as of the
A. Issue date.
B. Declaration date.
C. Record date.
D. Payment date.
Q:
An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's
A. Minutes of the board of directors' meetings.
B. Transfer agent's records.
C. Canceled stock certificates.
D. Treasury stock certificate book.
Q:
What tests do auditors typically perform on a lead schedule for property, plant, and equipment and what assertion are they testing?
Q:
Auditors can usually gather sufficient, competent evidence on prepaid insurance by performing substantive analytical procedures. Why is this?
Q:
If the ratio of repairs and maintenance expense to property, plant, and equipment is higher than expected, which of the following is a plausible explanation?
A. Routine maintenance on an important piece of machinery was charged to repairs and maintenance expense.
B. An addition to a building was charged to repairs and maintenance expense.
C. The company forgot to depreciate all of its equipment.
D. The company purchased an unusual amount of new equipment.