Deck 16: Audit of Transaction Cycles and Financial Statement Balances II

Question 1

The audit objective which requires the auditor to determine that loans payable on the loans payable schedule are properly classified can be tested with the following procedure:

A) Confirm loans payable.
B) Examine notes, minutes and bank confirmations for restrictions.
C) Review the notes to determine whether any are with related parties.
D) Examine corporate minutes for loan approval.

Answer 1

C

Question 2

Cash account is primarily affected by which transactions in the sales and collection cycle?

A) Sales
B) Collections
C) Both A and B
D) None of the above

Answer 2

B

Question 3

The record of the issuance and transfer of shares for the life of the corporation is maintained in the:

A) schedule of shareholders.
B) share register.
C) shareholders' master file.
D) corporate directory.

Answer 3

B

Question 4

The bank reconciliation should be prepared by:

A) someone independent of handling cash receipts and cash payments.
B) someone independent of handling or recording cash receipts.
C) someone independent of the finance manager.
D) the finance manager.

Question 5

The most important objective for depreciation expense is:

A) cutoff.
B) disclosure.
C) classification.
D) accuracy.

Question 6

Cash account is primarily affected by which transactions in the payroll and personnel cycle?

A) Sales
B) Collections
C) Both A and B
D) None of the above

Question 7

The auditor's starting point for verifying disposals of property, plant and equipment is the:

A) equipment subsidiary ledger.
B) equipment account in the general ledger.
C) client's schedule of recorded disposals.
D) file of shipping documents.

Question 8

The failure to capitalise a permanent asset, or the recording of an asset acquisition at the improper amount, affects the balance sheet:

A) for the current period.
B) forever.
C) for the depreciable life of the asset.
D) until the firm disposes of the asset.

Question 9

Typically, bank confirmations in the audit verify:

A) actual cash balance.
B) loan information.
C) both A and B
D) none of the above

Question 10

Which of the following objective/s is usually the focus in auditing cash balances?

A) Existence, completeness, accuracy and detail tie- in
B) Completeness, accuracy and detail tie- in
C) Existence and completeness
D) Existence, completeness and cutoff

Question 11

Property, plant and equipment are assets that:

A) have expected lives of more than one year.
B) are used in the business.
C) are not acquired for resale.
D) meet all of the requirements stated above.

Question 12

One typical difference between the asset prepaid expenses and other assets, such as accounts receivable and inventory, is the immateriality of the former in many audits. Because of this immateriality, frequently the only audit procedure necessary to perform is:

A) analytical procedures.
B) tests of transactions.
C) tests of control.
D) tests of details of balances.

Question 13

Information typically confirmed on liabilities to the bank would NOT include:

A) interest rate.
B) the existence of security included on the confirmation form.
C) loans beyond those included on the confirmation form.
D) all of the above

Question 14

The auditor recalculates approximate interest expense, using overall monthly installments payable and average interest rates, to test for:

A) omitted loans payable.
B) misstatement of interest expense.
C) both A and B
D) none of the above

Question 15

Which of the following misstatements will normally be discovered as part of the audit of the bank reconciliation?

A) Payment for raw materials that were not received
B) Payment to an employee for more hours than he or she worked
C) Payments on loans debited directly to the bank account but not entered in the client's records
D) All of the above

Question 16

Cash balance is important in the audit because of:

A) the potential for fraud.
B) the potential for error.
C) both A and B
D) none of the above

Question 17

The audit objective to determine that loans payable in the schedule exist is verified by the tests of balances procedure to:

A) foot the loans payable list.
B) examine the balance sheet for proper disclosure of noncurrent portions.
C) examine duplicate copy of loans for authorisation.
D) recalculate interest expense.

Question 18

The audit objective to determine that existing loans payable are included in the loans payable schedule (completeness) is accomplished by the following test of balances procedure:

A) Examine duplicate copies of loan agreements for principal and interest rates.
B) Trace the individual loans payable on the schedule to the master file.
C) Review the bank reconciliation for new loans credited directly to the bank account by the bank.
D) Review loans to determine whether any are related- party loans or accounts payable.

Question 19

Which of the following misstatements would result in the improper payment of cash or failure to receive cash not normally discovered as part of the audit of the bank reconciliation?

A) Duplicate payment of a vendor's invoice
B) Payment of raw materials that were not received
C) Payment to an employee for more hours than worked
D) All of the above

Question 20

Listing all bank transfers made a few days before and after the balance sheet date and tracing each to the accounting records for proper recording is a useful approach to test for:

A) kiting.
B) unintentional errors in recording bank transfers.
C) both A and B.
D) kiting and lapping.

Question 21

Which of the following concerns in auditing issued and paid- up capital involves tests of balances?

A) Issued and paid- up capital is properly disclosed.
B) Existing capital stock transactions are recorded.
C) Recorded capital stock transactions exist and are accurately recorded.
D) All of the above

Question 22

Which one of the general tests of details of balance objectives is NOT important in the audit of borrowings?

A) Realisable value
B) Completeness
C) Existence
D) Valuation

Question 23

Which of the following misstatements would normally be discovered as part of the audit of the bank reconciliation?

A) Cash received by the client subsequent to the balance sheet date but recorded as cash receipts in the current year
B) Deposits recorded as cash receipts near the end of the year, deposited in the bank in the same month and included in the bank reconciliation as a deposit in transit
C) Payments on loans debited directly to the bank account but not entered in the client's records
D) All of the above

Question 24

Which of the following procedures can test the audit objective of determining that cash in bank, as stated on the reconciliation, foots correctly and agrees with the general ledger?

A) Examining the minutes of the board of directors for restrictions on the use of cash
B) Performing tests for kiting
C) Adding the unpresented cheques list and the list of deposits in transit
D) Receiving and testing a cutoff bank statement

Question 25

The most important objective for depreciation is accuracy. One aspect of this objective is the consistency of depreciation policy. The four considerations in determining this do NOT include:

A) the estimated residual value.
B) the policy of depreciating assets in the year of acquisition and disposition.
C) what accounting standards must be used.
D) the method of depreciation.

Question 26

The amount of time spent verifying owners' equity is frequently minimal for private companies because:

A) the few owners all have access to the books so the auditor spends more time on accounts like liabilities, which affect outsiders.
B) there are few if any transactions during the year for the owners' equity accounts, except for earnings and dividends.
C) these companies are so small that it is not necessary to audit the capital section.
D) there is no public interest in these companies.

Question 27

In the audit of property, plant and equipment, it is helpful to separate the tests into all of the following categories EXCEPT:

A) verification of the beginning balance.
B) verification of the ending balance.
C) verification of current year disposals.
D) verification of current year acquisitions.

Question 28

The periodic payments of interest and principal are normally tested as a part of the:

A) capital acquisitions and repayments cycle.
B) interest and notes/bonds payable cycle.
C) acquisition and payment cycle.
D) sales and collection cycle.

Question 29

Estimated unpaid obligations for services or benefits that have been received prior to the balance sheet date are classified as:

A) miscellaneous assets.
B) accrued liabilities.
C) accounts payable.
D) deferred charges.

Question 30

Which one of the following is NOT a characteristic of the capital acquisition and repayment cycle?

A) Relatively few transactions affect the account balances, but each transaction is often highly material in amount.
B) There is a direct relationship between the interest and dividends accounts and debt and equity.
C) There is a legal relationship between the client and the holder of the equity securities.
D) The exclusion of a few transactions is rarely material by itself.

Question 31

To prevent the improper or incorrect issue of share certificates, it is common practice for publicly listed companies to engage:

A) a share register.
B) an imprest dividend account.
C) an independent share registrar.
D) an independent internal audit department.

Question 32

The test of details of balance procedure which requires the auditor to foot the loans payable list for loans payable and accrued interest satisfies the objective of:

A) accuracy.
B) existence.
C) completeness.
D) detail tie- in.

Question 33

Analytical procedures are essential for borrowings because:

A) there are few internal controls in this area which the auditor can rely upon to reduce substantive testing.
B) of the paucity of documentation in this area.
C) the large quantity of transactions would make this an expensive area to audit if some other means of reducing tests were not available.
D) tests of details for interest expense and accrued interest can frequently be eliminated when results are favourable.

Question 34

Which of the following cycles does NOT affect cash in bank?

A) Capital acquisitions cycle
B) Inventory and warehousing
C) Payroll and personnel cycle
D) Acquisitions and disbursements

Question 35

The balance- related audit objective to determine that cash in bank is properly presented and disclosed can be met through which of the following tests of details of balances?

A) Foot the outstanding cheque list and deposits in transit
B) Test for kiting
C) Examine minutes, loan agreements and the bank confirmation for restrictions on the use of cash and compensating balances
D) Trace outstanding cheques to subsequent period bank statement

Question 36

The two most important audit procedures for prepayments are:

A) tests of controls and substantive tests of transactions.
B) tests for reasonableness or plausible relationships using analytical procedures and recalculation.
C) consistency and accounting standards.
D) tests of controls and tests of details of balances.

Question 37

It should ordinarily be unnecessary to examine supporting documentation for each addition to property, plant and equipment, but it is normal to verify:

A) a representative sample of typical additions.
B) all large transactions.
C) all unusual transactions.
D) all of the above

Question 38

To prevent the payment of a larger amount of dividends than was authorised, the corporation should use:

A) an outside independent disbursing agency.
B) cheques which cannot be written for an amount in excess of a stated maximum amount.
C) a separate imprest dividend account.
D) all of the above

Question 39

In verifying accumulated depreciation, the credits to accumulated depreciation are verified as part of the audit of depreciation expense, whereas the debits are normally tested as a part of the audit of:

A) disposal of assets.
B) capital acquisitions.
C) accumulated depreciation.
D) asset acquisitions.

Question 40

Cash account is primarily affected by which transactions in the acquisitions and payment cycle?

A) Expenses
B) Accounts payable
C) Both A and B
D) None of the above

Question 41

The tests of details of balances procedure which requires the auditor to review transactions near the balance sheet date for the proper period satisfies the audit objective of:

A) existence.
B) cutoff.
C) classification.
D) completeness.

Question 42

In the audit of loans payable, it is common to include tests of principal and interest payments as a part of the audit of the acquisitions and payment cycle because the payments are in the cash payments journal that is being sampled. It is also normal to test these transactions as part of the capital acquisitions and repayment cycle because:

A) due to the infrequency of these transactions, in many cases no transactions involving loans payable are included in the sample tests of acquisitions and payments.
B) replicating the evidence will provide the auditor with a higher level of assurance.
C) it is not unusual for the auditor to duplicate a process, thereby, gathering a larger quantity of evidence.
D) the tests done in the acquisitions and payments cycle will look only at the cash credit side so the tests done in the capital acquisitions and repayment cycle will look at the debit side of the transaction.

Question 43

The audit procedure which requires the auditor to record the last cheque number used on the last day of the year and subsequently trace to the outstanding cheques and the cash payments journal is performed to satisfy the audit objective of:

A) detail tie- in.
B) completeness.
C) existence.
D) cutoff.

Question 44

Client business risk relating to cash may arise from:

A) handling of funds held in trust for others.
B) inappropriate cash management policies.
C) cash being more susceptible to theft than other types of investments.
D) all of the above

Question 45

A major consideration in the audit of the general cash balance is the possibility of fraud. The auditor must extend his or her procedures in the audit of year- end cash to determine the possibility of a material fraud when there are:

A) large cash balances at the end of the year.
B) large cash receipts and disbursements during the year.
C) inadequate internal controls.
D) no imprest accounts used for payroll.

Question 46

The starting point for the verification of the balance in the general bank account is to obtain:

A) client's cash account from the general ledger.
B) a bank reconciliation from the client.
C) the client's June bank statement and reconcile it.
D) a cutoff bank statement directly from the bank.

Question 47

If the client fails to record disposals of property, plant and equipment, both the original cost of the asset account and the net book value will be incorrect.

A) The original cost will be overstated indefinitely, and the net book value will be overstated until the asset is fully depreciated.
B) The original cost will be overstated indefinitely, and the net book value will be understated until the asset is fully depreciated.
C) Both will be overstated indefinitely.
D) The original cost will be overstated indefinitely, and the net book value will be understated indefinitely.

Question 48

Information typically confirmed on liabilities to the bank includes:

A) interest rate.
B) amount of loan.
C) the existence of security.
D) all of the above

Question 49

Which of the following transaction- related objectives is NOT important when auditing dividends?

A) Existence
B) Accuracy
C) Completeness
D) Posting and summarisation

Question 50

A major consideration in verifying the ending balance in permanent assets is the possibility of existing legal encumbrances. Tests to identify possible legal encumbrances would satisfy the audit objective for:

A) existence.
B) classification.
C) detail tie- in.
D) disclosure.

Question 51

Because cash is the most desirable asset for people to steal, it has a higher:

A) control risk.
B) detection risk.
C) inherent risk.
D) all of the above

Question 52

The general cash account is considered significant in almost all audits:

A) where either the beginning or ending balance is material.
B) even when the ending balance is immaterial.
C) except those of not- for- profit organisations.
D) where the ending balance is material.

Question 53

The test of details of balances procedure for PPE which requires 'examination of vendor's invoices and land titles and deeds' is done to satisfy the audit objective of:

A) rights.
B) classification.
C) accuracy.
D) existence.

Question 54

Usually dividends are audited:

A) on a 100% basis.
B) using block sampling.
C) using variables sampling.
D) using attributes sampling.

Question 55

When auditing the balance of the general cash account, which of the following is NOT one of the most important objectives?

A) Completeness
B) Accuracy
C) Classification
D) Existence

Question 56

The emphasis in auditing property, plant and equipment is on the verification of:

A) current period acquisitions and retirements.
B) the balance in the account after the current year's activities are considered (ending balance).
C) the balance carried forward in the account from the previous period.
D) all of the above

Question 57

Information typically confirmed on liabilities to the bank includes:

A) amount of loan.
B) the loan due date.
C) date of the loan.
D) all of the above

Question 58

Which of the following types of owners' equity transactions would NOT require authorisation by the board of directors?

A) Share issues
B) Share redemptions
C) Declaration of dividends
D) All of the above would require authorisation.

Question 59

Cash account is primarily affected by which transactions in the capital acquisition and repayment cycle?

A) Issue of shares
B) Payment of dividends
C) Both A and B
D) None of the above

Question 60

A set of records for each piece of equipment that includes descriptive information, date of acquisition, original cost, current year depreciation and accumulated depreciation is:

A) the depreciation schedule.
B) the acquisitions journal.
C) the fixed asset master file.
D) the file of purchase requisitions.

Question 61

In deciding on the reasonableness of the useful lives assigned to newly acquired assets, the auditor must consider which of the following factors?

A) Policies on trading in equipment
B) The expected life of the asset
C) The actual physical life of the asset
D) All of the above

Question 62

The failure to capitalise a permanent asset, or the recording of an asset acquisition at the improper amount, affects the income statement:

A) for the current period.
B) forever.
C) until the firm disposes of the asset.
D) for the depreciable life of the asset.

Question 63

The test that proves the bank reconciliation to additions and subtractions including all reconciling items is an attempt to satisfy the audit objective of:

A) detail tie- in.
B) accuracy.
C) completeness.
D) existence.

Question 64

Discuss two analytical procedures commonly performed during the audit of the cash account.

Question 65

The starting point for the verification of current year acquisitions of property, plant and equipment is normally:

A) the acquisitions journal.
B) the purchase requisitions file.
C) a schedule obtained from the client of all acquisitions recorded in the general ledger during the year.
D) the property, plant and equipment account in the general ledger.

Question 66

Cash account is primarily affected by which transactions in the acquisition and payment cycle?

A) Payment of dividends
B) Issue of shares
C) Both A and B
D) None of the above

Question 67

General ledger accounts commonly used in PPE are:

A) depreciation expense.
B) the asset at cost or valuation.
C) accumulated depreciation.
D) all of the above

Question 68

The auditor must know the client's capitalisation policies to determine whether acquisitions are:

A) treated in accordance with accounting standards.
B) treated consistently with those of the preceding year.
C) both A and B
D) none of the above

Question 69

Depreciation expense is one of the few expense accounts that is NOT verified as a part of:

A) substantive tests of transactions.
B) tests of controls.
C) A and B.
D) analytical procedures.

Question 70

The test of details of balances procedure to 'foot the acquisitions schedule' is done to satisfy the audit objective of:

A) detail tie- in.
B) existence.
C) classification.
D) cutoff.

Question 71

Which of the following is NOT a 'cash equivalent'?

A) Time deposits
B) Marketable securities
C) Money market funds
D) Cash management accounts

Question 72

Cash account is primarily affected by which transactions in the payroll and personnel cycle?

A) Payment of salaries
B) Payment of payroll tax
C) Both A and B
D) None of the above

Question 73

Which of the following is a balance- related audit objective for owners' equity?

A) Obligations
B) Realisable value
C) Rights
D) None of the above

Question 74

The tests of details of balances procedure which requires the auditor to examine duplicate copies of loans for authorisation is an attempt to satisfy the audit objective of:

A) existence.
B) classification.
C) completeness.
D) accuracy.

Question 75

Which one of the following ratio and trend analysis procedures might identify a possible misstatement of expensing amounts that should be capital items?

A) Compare 'monthly or annual repairs and maintenance, supplies expense, small tools expense and similar accounts' with previous years'.
B) Compare 'gross property, plant and cost divided by some method of production' with previous years'.
C) Compare 'depreciation expense divided by gross property, plant and equipment cost' with previous years'.
D) Compare 'accumulated depreciation divided by gross property, plant and equipment cost' with previous years'.

Question 76

The starting point for the verification of current- year acquisitions (that is, details of the balances) is normally a fixed asset schedule obtained from the client. Discuss the types of information that should be included in this schedule.

Question 77

Which of the following misstatements will NOT normally be discovered as part of the audit of the bank reconciliation?

A) Payment for raw materials that were not received
B) Improper payments of officers' personal expenditures
C) Payment to an employee for more hours than he or she worked
D) All of the above

Question 78

The process of transferring money from one bank account to another and improperly recording the transaction is referred to as:

A) embezzling.
B) scamming.
C) kiting.
D) lapping.

Question 79

Which one of the following errors would be LEAST likely to be discovered during the tests of the bank reconciliation?

A) The existence of payments on notes payable that were debited directly to the bank balance by the bank but were not entered in the client's records
B) Cash received by the client subsequent to the balance sheet date that was recorded as cash receipts in the current year
C) Failure to include a cheque that has not cleared the bank on the unpresented cheque list, even though it has been recorded in the cash payments journal
D) Payment to an employee for more hours than he or she worked

Question 80

Which of the following balance- related objectives is NOT a problem when auditing the general cash account?

A) Cutoff
B) Accuracy
C) Rights
D) Completion