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Quizzer On Test of Control & Substantive Test With Answers
Quizzer On Test of Control & Substantive Test With Answers
CMP
Test of Control and Substantive Test in the Conversion
1. To strengthen control procedures over the custody of heavy mobile equipment, the client would
most likely institute a policy requiring a periodic
a. Increase in insurance coverage.
b. Inspection of equipment and reconciliation with accounting records.
c. Verification of liens, pledges, and collateralizations.
d. Accounting for work orders.
2. To improve accountability for fixed asset retirements, management most likely would implement
an internal control structure that includes
a. Continuous analysis of the repairs and maintenance account.
b. Periodic inquiry of plant executives by internal auditors as to whether any plant assets
have been retired.
c. Continuous utilization of serially numbered retirement work orders.
d. Periodic inspection of insurance policies by internal auditors.
3. From the auditor's point of view, inventory counts are more acceptable prior to the year-end,
when
a. Internal control is deficient.
b. Accurate perpetual inventory records are maintained.
c. Inventory is slow moving.
d. Significant amounts of inventory are held on consignment.
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4. Apex Manufacturing Corporation mass produces eight different products. The controller who is
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interested in strengthening control procedures over the accounting for materials used in
production would be most likely to implement
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a. An economic order quantity (EOQ) system.
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b. A job order cost accounting system.
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c. A perpetual inventory system.
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d. A separation of duties among production personnel.
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5. For several years, a client's physical inventory count has been lower than what was shown on the
books at the time of the count so that downward adjustments to the inventory account were
required. Contributing to the inventory problem could be deficiencies in internal control that led
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6. When perpetual inventory records are maintained in quantities and in dollars, and internal control
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b. Insist that the client perform physical counts of inventory items several times during the
year.
c. Increase the extent of tests for unrecorded liabilities at the end of the year.
d. Have to disclaim an opinion on the income statement that year.
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7. Purchase cutoff procedures should be designed to test whether or not all inventory
a. Purchased and received before the year-end was recorded.
b. Was carried at the lower of cost or market on the year-end balance sheet.
c. Was paid for by the company on the year-end balance sheet.
d. Owned by the company is in the possession of the company.
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8. In tests of property, plant, and equipment, the auditor tries to determine all of the following
except the
a. Adequacy of the internal control.
b. Extent of property abandoned during the year.
c. Adequacy of replacement funds.
d. Reasonableness of depreciation.
9. An auditor has accounted for a sequence of inventory tags and is now going to trace information
on a representative number of tags to the physical inventory sheets. The purpose of this
procedure is to obtain assurance that
a. The final inventory is valued at cost.
b. All inventory represented by an inventory tag is listed on the inventory sheets.
c. All inventory represented by an inventory tag is bona fide.
d. Inventory sheets do not include untagged inventory items.
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AUDITING THEORY - 074: PROCESS 2
CMP
10. The physical count of inventory of a retailer was higher than shown by the perpetual records.
Which of the following could explain the difference?
a. Inventory items had been counted, but the tags placed on the items had not been taken
off the items and added to the inventory accumulation sheets.
b. Credit memos for several items returned by customers had not been recorded.
c. No journal entry had been made on the retailer's books for several items returned to its
suppliers.
d. An item purchased "FOB shipping point" had not arrived at the date of the inventory count
and had not been reflected in the perpetual records.
11. A client's physical count of inventories was higher than the inventory quantities per the perpetual
records. This situation could be the result of the failure to record
a. Sales.
b. Sales discounts.
c. Purchases.
d. Purchase returns.
12. The controller of Excello Manufacturing, Inc., wants to use ratio analysis to identify the possible
existence of idle equipment or the possibility that equipment has been disposed of without
having been written off. Which of the following ratios would best accomplish this objective?
a. Depreciation expense divided by book value of manufacturing equipment.
b. Accumulated depreciation divided by book value of manufacturing equipment.
c. Repairs and maintenance cost divided by direct labor costs.
d. Gross manufacturing equipment cost divided by units produced.
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13. The accuracy of perpetual inventory records may be established, in part, by comparing inventory
records with
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a. Purchase requisitions. eH w
b. Receiving reports.
c. Purchase orders.
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d. Vendor payments.
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14. The audit procedure of analyzing the repairs and maintenance accounts is primarily designed to
provide evidence in support of the audit proposition that all
a. Expenditures for plant assets have been recorded in the proper period.
b. Capital expenditures have been properly authorized.
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15. Which of the following explanations might satisfy an auditor who discovers significant debits to an
accumulated depreciation account?
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16. Which of the following activities is not common to the conversion cycle?
a. Maintaining perpetual inventory records.
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17. When an outside specialist has assumed full responsibility for taking the client's physical
inventory, reliance on the specialist's report is acceptable if
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18. An auditor's tests of a client's cost accounting system are designed primarily to determine that
a. Quantities on hand have been computed based on acceptable methods that reasonably
approximate actual quantities on hand.
b. Physical inventories substantially agree with book inventories.
c. The system complies with generally accepted accounting principles and functions as
planned.
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AUDITING THEORY - 074: PROCESS 2
CMP
d. Costs have been assigned properly to finished goods, work in process, and cost of goods
sold.
19. Sanbor Corporation's parts inventory consists of thousands of different items that are small in
value individually, but quite significant in total. Sanbor could establish effective control over the
parts by requiring
a. An officer's approval of requisitions for inventory parts.
b. Maintaining inventory records for all parts included in the inventory.
c. Physical counts on a cycle basis rather than at year-end.
d. Separation of the storekeeping function from the production and inventory record-keeping
functions.
20. When verifying debits to a manufacturing company's perpetual inventory records, an auditor
would be most interested in testing a sample of purchase
a. Approvals.
b. Requisitions.
c. Invoices.
d. Orders.
21. Assets may suffer an impairment in value for a variety of reasons, but not likely as a result of:
a. A corporate restructuring.
b. Slumping demand for uncompetitive products.
c. Significant increases in market share.
d. Obsolescence.
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22. Which of the following is not likely a motive for management to manipulate the timing and
amount of impaired asset writedowns?
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a. Steady increases in earnings per share over the past 5 years.
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b. Income smoothing.
c. A "big bath."
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d. An abnormally unprofitable year.
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23. The audit of year-end physical inventories should include steps to verify that the client's
purchases and sales cutoffs were adequate. The audit steps should be designed to detect
whether merchandise included in the physical count at year-end was not recorded as a
a. Sale in the subsequent period.
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25. Which of the following internal control efficiencies relates to factory equipment?
a. Checks issued in payment of purchases of equipment are not signed by the controller.
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b. All purchases of factory equipment are required to be made by the department that needs
the equipment.
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c. Factory equipment replacements are generally made when estimated useful lives have
expired.
d. Proceeds from sales of fully depreciated equipment are credited to other income.
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26. When auditing fixed assets, an auditor attempts to determine all of the following except
a. Control risk.
b. Property abandoned during the year.
c. Adequacy of replacement funds.
d. Reasonableness of depreciation.
27. Which of the following is the best evidence that an entity owns real estate at the balance sheet
date?
a. Title insurance policy.
b. Original deed.
c. Paid real estate tax bills.
d. Closing statement.
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AUDITING THEORY - 074: PROCESS 2
CMP
28. Which of the following procedures would least likely lead the auditor to detect unrecorded fixed
asset disposals?
a. Examine insurance policies.
b. Review repairs and maintenance expense.
c. Review property tax files.
d. Scan invoices for fixed asset additions.
29. The auditor may conclude that depreciation charges are insufficient by noting
a. Insured values greatly in excess of book values.
b. Large amounts of fully depreciated assets.
c. Continuous trade-ins of relatively new assets.
d. Excessive recurring losses on assets retired.
30. In violation of company policy, Lowell Company erroneously capitalized the cost of painting its
warehouse. An auditor would most likely detect this when
a. Discussing capitalization policies with Lowell's controller.
b. Examining maintenance expense accounts.
c. Observing that the warehouse had been painted.
d. Examining construction work orders that support items capitalized during the year.
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a. Chief accountant.
b. Internal auditor.
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c. Cashier. eH w
d. Treasurer.
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32. Of the following, which is the most efficient audit procedure for testing accrued interest earned on
bond investments?
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33. During the audit of a publicly held company, the auditor could obtain written confirmation
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c. Internal auditors.
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d. Trustee.
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34. The auditor's program for examining long-term debt should include
a. Verification of the existence of the bondholders.
b. Examination of any bond trust agreement.
c. Inspection of the accounts payable subsidiary ledger.
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35. Jones was engaged to audit the financial statements of Gamma Corporation, a June 30 year-end
client. Having completed testing of the investment securities, which of the following is the best
method of verifying the accuracy of recorded dividend income?
a. Tracing recorded dividend income to cash receipts records and validated deposit slips.
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36. A company has temporarily excess funds to invest. The board of directors decided to purchase
marketable securities and assigned the future purchase and sale decisions to a responsible
financial executive. The best person(s) to make periodic reviews of the investment activity would
be
a. The investment committee of the board of directors.
b. The treasurer.
c. The corporate controller.
d. The chief operating officer of the company.
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AUDITING THEORY - 074: PROCESS 2
CMP
37. Which of the following is a responsibility that should not be assigned to only one employee?
a. Access to securities in the company's safe deposit box.
b. Custodianship of the cash working fund.
c. Reconciliation of bank statements.
d. Custodianship of tools and small equipment.
38. When no independent stock transfer agents are employed and the corporation issues its own
stocks and maintains stock records, canceled stock certificates should
a. Be defaced to prevent reissuance and attached to their corresponding stubs.
b. Not be defaced but segregated from other stock certificates and retained in a canceled
certificates file.
c. Be destroyed to prevent fraudulent reissuance.
d. Be defaced and sent to the secretary of state.
39. Which of the following is not one of the auditor's concerns in an examination of marketable
securities?
a. To determine whether securities are authentic.
b. To determine whether securities are the property of the client.
c. To determine whether securities actually exist.
d. To determine whether securities are properly classified on the balance sheet.
40. When negotiable securities are of considerable volume, planning by the auditor is necessary to
guard against
a. Unauthorized negotiation of the securities before they are counted.
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b. Unrecorded sales of securities after they are counted.
c. Substitution of securities already counted for other securities which should be on hand but
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d. Substitution of authentic securities with counterfeit securities.
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41. During its fiscal year, a company issued, at a discount, a substantial amount of first-mortgage
bonds. When performing audit work, the independent auditor
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42. In the audit of a medium-sized manufacturing concern, which of the following areas would be
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c. Liabilities.
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d. Owner's equity.
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43. All corporate capital stock transactions should ultimately be traced to the
a. Minutes of the board of directors.
b. Cash receipts journal.
c. Cash disbursements journal.
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44. If a company employs a capital stock registrar and/or a transfer agent, the registrar or agent
should be requested to confirm directly to the auditor the number of shares of each class of stock
a. Surrendered and canceled during the year.
b. Authorized at the balance sheet date.
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45. The auditor's program for testing long-term debt should include steps that require
a. Verifying the existence of the bondholders.
b. Examining any bond trust indenture.
c. Inspecting the accounts payable subsidiary ledger.
d. Investigating credits to bond interest income.
46. During the year under audit, a company has completed a private placement of a substantial
amount of bonds. Which of the following steps is the most important in the auditor's tests of
existence?
a. Confirm the amount issued with the bond trustee.
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AUDITING THEORY - 074: PROCESS 2
CMP
b. Trace cash received from the issue to the accounting records.
c. Examine bond records maintained by the transfer agent.
d. Recompute annual interest cost and the effective yield.
47. During the course of an audit, an auditor observes that the recorded interest expense seems
excessive in relation to the balance in long-term debt. This observation could lead the auditor to
suspect that
a. Long-term debt is understated.
b. Discount on bonds payable is overstated.
c. Long-term debt is overstated.
d. Premium on bonds payable is understated.
48. Which of the following information is most important when auditing shareholders’ equity?
a. Changes in the capital stock account are verified by an independent stock transfer agent.
b. Stock dividends and/or stock splits during the year were approved by the shareholders.
c. Stock dividends are capitalized at par or stated value on the dividend declaration date.
d. Entries in the capital stock account can be traced to a resolution in the minutes of the
board of directors' meetings.
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