Question 1

When auditors verify accrued property taxes two audit objectives are especially significant. These are:
A) completeness and accuracy.
B) completeness and net realizable value.
C) detail tie-in and completeness.
D) accuracy and classification.

Accepted Answer

The two most significant audit objectives when verifying accrued property taxes are completeness and accuracy. Completeness ensures that all the property taxes that should have been recorded have been included in the financial statements, while accuracy ensures that the property taxes recorded are correct and reliable. These objectives are important because property taxes are a significant expense, and errors or omissions in the financial statements can have a material impact on the company's financial position and results of operations.

Question 2

The realizable value audit objective is not applicable when auditing prepaid insurance or insurance expense.

Accepted Answer

The realizable value audit objective pertains to assets that can be sold or converted into cash, such as accounts receivable or inventory. Prepaid insurance or insurance expense do not have a realizable value that can be audited.

Question 3

The balance in the property tax expense account is most similar to:
A) depreciation expense.
B) insurance expense.
C) compensation expense.
D) utilities expense.

Accepted Answer

The property tax expense account is an ongoing expense that is required by law and is similar to insurance expense, as both are non-operating expenses that are necessary for the proper functioning of a business or property. Depreciation expense, compensation expense, and utilities expense are considered operating expenses that are directly related to the day-to-day operations of a business.

Question 4

Which of the following is a customary audit procedure for the verification of the legal ownership of real property?
A) Examination of correspondence with the corporate counsel concerning acquisition matters.
B) Examination of ownership documents registered and on file at a public hall of records.
C) Examination of corporate minutes and resolutions concerning the approval to acquire property, plant, and equipment.
D) Examination of deeds and title guaranty policies on hand.

Accepted Answer

The answer of Which of the following is a customary...

Question 5

The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because:
A) accrued liability balances are less material than accounts payable balances.
B) accrued liabilities at year end will become accounts payable during the following year.
C) evidence supporting accrued liabilities is non-existent, whereas evidence supporting accounts payable is readily available.
D) accrued liabilities usually pertain to services of a continuing nature, whereas accounts payable are the result of completed transactions.

Accepted Answer

Accrued liabilities are typically for ongoing services or obligations that have been incurred but not yet paid for, while accounts payable are for completed transactions that have not yet been paid. Therefore, the audit procedures used to verify accrued liabilities will focus on the nature of the obligations and the appropriateness of the amounts recorded, rather than on the existence of invoices or other documentation as with accounts payable.

Question 6

The audit of insurance expense is normally limited to analytical procedures and a brief test of whether charges to insurance expense arose from credits to prepaid insurance.

Accepted Answer

The answer of The audit of insurance expense is normally...

Question 7

The most effective and efficient audit approach in the examination of the income statement would be which of the following?
A) Examination of income statement accounts concurrently with the related balance sheet accounts.
B) Compare company's components of net income to other businesses in the same industry.
C) Compare company's components of net income to the previous two years.
D) Examine changes in all balance sheet accounts.

Accepted Answer

Examining income statement accounts concurrently with the related balance sheet accounts is the most effective and efficient approach as it ensures accuracy, completeness, and consistency in the financial statements. This approach also enables auditors to identify any misstatements or irregularities in both the income statement and balance sheet accounts, providing a more comprehensive view of the financial health of the company. Comparing components of net income to other businesses and previous years can be useful but may not provide a complete picture without examining concurrent balance sheet accounts. Examining changes in all balance sheet accounts may be too broad and time-consuming.

Question 8

Discuss the key internal controls for prepaid insurance that affect the auditor's extent of testing of the prepaid insurance account.

Accepted Answer

The answer of Discuss the key internal controls for prepaid...

Question 9

Which of the following audit tests both have the effect of simultaneously verifying balance sheet and income statement accounts?
A) Analytical procedures and substantive tests of transactions
B) Tests of controls and substantive tests of transactions
C) Tests of details of balances and substantive tests of transactions
D) Tests of controls and analytical procedures

Accepted Answer

The answer of Which of the following audit tests both...

Question 10

In the audit of accrued property taxes, the two most important balance-related audit objectives are completeness and accuracy.

Accepted Answer

Completeness is important to ensure all property taxes that have been accrued are recorded, and accuracy is crucial to ensure the property taxes are recorded at the correct amount.

Question 11

The erroneous inclusion of transactions that should properly be recorded as assets into accounts such as repairs expense, lease expense, or supplies is a common client error. The auditor is most lkely to evaluate the likelihood of these types of misclassifications in conjunction with:
A) obtaining an understanding of internal control.
B) the tests of controls.
C) the tests of transactions.
D) the tests of details of balances.

Accepted Answer

In order to evaluate the likelihood of misclassifications of transactions, the auditor needs to understand how the client's internal control operates. This includes assessing the client's policies and procedures for recording transactions and ensuring they are properly classified. Therefore, obtaining an understanding of internal control is the most likely way for the auditor to evaluate the likelihood of misclassifications. The tests of controls, tests of transactions, and tests of details of balances are each designed to test specific aspects of the client's financial statements and are not directly related to evaluating the likelihood of misclassifications.

Question 12

Tests of the cutoff objective for prepaid insurance is normally not performed by auditors.

Accepted Answer

Auditors typically do not perform tests of the cutoff objective for prepaid insurance because the risk of material misstatement is low. Prepaid insurance is a short-term asset that is typically used up within a year, and the amount of prepaid insurance that is carried over from one year to the next is usually not material.

Question 13

When auditing insurance expense, auditors normally rely on analytical procedures and limited testing of the debits to ensure that they arose from credits to prepaid insurance.

Accepted Answer

This statement is true. Auditors typically use analytical procedures, such as comparing the current year's insurance expense to the prior year's and industry benchmarks, to assess the reasonableness of the insurance expense. They also typically perform limited testing of debits to the insurance expense account to ensure proper matching with credits to prepaid insurance.

Question 14

In performing expense account analysis the focus is on substantive tests of transactions. How do these tests of transactions differ from tests to assess control risk.

Accepted Answer

The answer of In performing expense account analysis the focus...

Question 15

Which of the following would offer the best evidence of owning real estate as of the balance sheet date?
A) Property insurance policies
B) Paid real estate tax bills
C) Acquisition documents
D) Cash disbursements register

Accepted Answer

Paid real estate tax bills would provide the best evidence of owning real estate as it confirms that the entity has paid the taxes on the property they own. Property insurance policies could also be an indication of ownership, but it does not necessarily confirm ownership. Acquisition documents and cash disbursements register do not directly provide evidence of ownership.

Question 16

Income statement accounts resulting from allocations are typically verified as a part of:
A) tests of controls.
B) substantive tests of transactions.
C) analytical procedures.
D) planning.

Accepted Answer

Analytical procedures are used to verify income statement accounts resulting from allocations by comparing recorded amounts to expected amounts based on historical data, budgets, or industry standards.

Question 17

Explain the audit objective allocation and why it is important to have accurate allocation within the financial statements, particularly for property, plant, and equipment

Accepted Answer

The answer of Explain the audit objective allocation and why...

Question 18

Explain the allocation audit objective and explain why it is important to have accurate allocation within the financial statements, in relationship to Property, Plant, and Equipment

Accepted Answer

The answer of Explain the allocation audit objective and explain...

Question 19

Tests of controls provide an indication of the likelihood of misstatements in both the income statement and the balance sheet, simultaneously.

Accepted Answer

Tests of controls evaluate the effectiveness of internal controls in preventing or detecting errors or fraud. A strong system of internal controls reduces the risk of misstatements in both financial statements. Therefore, tests of controls provide an indication of the likelihood of misstatements in both the income statement and the balance sheet.

Question 20

While analytical procedures are commonly used when auditing balance sheet accounts, they are normally not very useful when auditing income statement accounts.

Accepted Answer

Analytical procedures can also be useful when auditing income statement accounts. They can be used to identify unusual trends or fluctuations in account balances or ratios, which could indicate discrepancies or errors in the financial statements. However, the nature and extent of analytical procedures used for income statement accounts may differ from those used for balance sheet accounts.

Quiz 19: Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

When auditors verify accrued property taxes two audit objectives are especially significant. These are:

The realizable value audit objective is not applicable when auditing prepaid insurance or insurance expense.

The balance in the property tax expense account is most similar to:

Which of the following is a customary audit procedure for the verification of the legal ownership of real property?

The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because:

The audit of insurance expense is normally limited to analytical procedures and a brief test of whether charges to insurance expense arose from credits to prepaid insurance.

The most effective and efficient audit approach in the examination of the income statement would be which of the following?

Discuss the key internal controls for prepaid insurance that affect the auditor's extent of testing of the prepaid insurance account.

Which of the following audit tests both have the effect of simultaneously verifying balance sheet and income statement accounts?