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    Year Four Study-guide for auditing final exam

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    Study guide for auditing class to use to study for final exam
    Multiple Choice - Choose the BEST answer for each question

    1. Which of the following accounts does not appear in the acquisition and expenditure cycle?
    a. Cash.
    b. Purchases Returns.
    c. Sales Returns.
    d. Prepaid Insurance.

    2. For which of the following accounts would the matching concept be the most appropriate?
    a. Cost of Goods Sold.
    b. Research and Development.
    c. Depreciation Expense.
    d. Sales.

    3. Which of the following would not overstate current period net income?
    a. Capitalizing an expenditure that should be expensed.
    b. Failing to record a liability for an expenditure.
    c. Failing to record a check paying an item in Vouchers Payable.
    d. All of the above would overstate net income.

    4. A client's purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes the auditor's primary concern with respect to liabilities resulting from the purchasing system?
    a. Accounts payable are not materially understated.
    b. Authority to incur liabilities is restricted to one designated person.
    c. Acquisition of materials is not made from one vendor or one group of vendors.
    d. Commitments for all purchases are made only after established competitive
    bidding procedures are followed.

    5. Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time?
    a. Vouchers should be prepared by individuals who are responsible for signing disbursement checks.
    b. Disbursement vouchers should be approved by at least two responsible management officials.
    c. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.
    d. The official who signs the check should compare the check with the voucher and should stamp 'PAID' on the voucher documents.

    6. Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a COD basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over
    a. Purchase requisitions.
    b. Cash receipts.
    c. Perpetual inventory records.
    d. Purchase orders.

    7. Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?
    a. Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable.
    b. Examine a sample of cash disbursements in the period subsequent to year-end.
    c. Examine a sample of invoices a few days prior to and subsequent to the year-end to ascertain whether they have been properly recorded.
    d. Examine unusual relationships between monthly accounts payable and recorded purchases.

    8. Which of the following procedures is least likely to be performed before the balance sheet date?
    a. Observation of inventory.
    b. Review of internal control over cash disbursements.
    c. Search for unrecorded liabilities.
    d. Confirmation of receivables.

    9. To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received has been recorded. The population for this test consists of all
    a. Vendors' invoices.
    b. Purchase orders.
    c. Receiving reports.
    d. Cancelled checks.

    10. When verifying debits to the perpetual inventory records of a nonmanufacturing company, an auditor would be most interested in examining a sample of purchase
    a. Approvals.
    b. Requisitions.
    c. Invoices.
    d. Orders.

    11. A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only 48 tables. The tables were accepted by the receiving department at the furniture company. The invoice was eventually received but was for the original 84 tables. The furniture company paid the entire amount. Which of the following controls would have been least likely to have prevented this erroneous payment?
    a. The copy of the purchase order sent to the furniture company's receiving
    department should not have shown an expected quantity.
    b. Personnel in the furniture company's accounts payable department should
    compare the receiving report to the purchase invoice before creation of the voucher.
    c. Personnel in the furniture company's cash disbursements department should
    compare the check that is prepared to all of the backup documentation.
    d. Personnel in the furniture company's purchasing department should compare the
    purchase requisition to the purchase order.

    12. Curtis, a maintenance supervisor, submitted maintenance invoices from a phony repair company and received the checks at a post office box. This should have been prevented by
    a. Recognition of the phony company a. by the check signer.
    b. Recognition of the excess maintenance costs by Curtis's supervisor.
    c. Refusal by the purchasing department to approve the vendor.
    d. All of the above.

    13. For which of the following accounts would an auditor most likely examine support for the detail charges?
    a. Payroll Expense.
    b. Cost of Goods Sold.
    c. Supplies Expense.
    d. Legal Expense.

    14. Which of the following accounts would most likely be audited in connection with a related balance sheet account?
    a. Property Tax Expense.
    b. Payroll Expense.
    c. Research and Development.
    d. Legal Expense.

    15. Which cycle is not linked to the production cycle?
    a. Acquisition and expenditure cycle.
    b. Payroll cycle.
    c. Revenue and collection cycle.
    d. Finance and investment cycle.

    16. To determine the client's planned amount and timing of production of a product, the auditor will review the
    a. Sales forecast.
    b. Inventory reports.
    c. Production plan.
    d. Purchases journal.

    17. An auditor reviews job cost sheets to test which assertion?
    a. Existence or occurrence.
    b. Completeness.
    c. Valuation or allocation.
    d. Presentation and disclosure.

    18. Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?
    a. Supplies of relatively little value are expensed when purchased.
    b. The cycle basis is used for physical counts.
    c. The warehouse manager is responsible for maintenance of perpetual inventory records.
    d. Perpetual inventory records are maintained only for items of significant value.

    19. To make a year-to-year comparison of inventory turnover meaningful, the auditor will perform the analysis
    a. For the company as a whole.
    b. By division.
    c. By product.
    d. All of the above.

    20. An auditor will usually trace the details of the test counts during the observation of the taking of physical inventory to a final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are
    a. Owned by the client.
    b. Not obsolete.
    c. Physically present at the time of the preparation of the final inventory schedule.
    d. Included in the final inventory schedule.

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    Solution Preview

    1. A/The other three items are either acquisitions or expenditures. Unidentified cash is neither.

    2. A/ The "matching concept" is one in which expenses are recognized in the income statement.

    3. B/Failing to record a liability, a decrease in income, could certainly lead to the overstatement of an income statement.

    4. B/Liabilities are always a negative to a business and as such should be controlled by the authorization limited to only one authority.

    5. D/These precautions will prevent any invoice from being re-submitted for payment.

    6. D/Internal control of purchase orders would prevent orders being prepared under illegal circumstances.

    7. D/Unusual relationships between accounts payable and recorded purchases should reveal any amounts attributable to unrecorded ...

    Solution Summary

    Twenty multiple choice questions are asked in preparing the year four student for a final exam in an auditing class.