Audit Final Exam 2023--Practice

Student name:__________
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or
answers the question.
1) Scanning sales invoices for missing numbers in the sequence would be an activity intended to
satisfy what assertion?
1) ___A___
A) Completeness. B) Accuracy. C) Occurrence. D) Classification.

2) An auditor confirms a representative number of open accounts receivable as of December 31

and investigates respondents' exceptions and comments. By this procedure, the auditor would
be most likely to learn of which of the following?
2) __A____
A) One of the cashiers B) One of the sales C) One of the IT D) The credit manager has
has been covering a clerks has not been control clerks has been misappropriated remittances
personal preparing charge removing all sales from customers whose
embezzlement by slips for credit sales invoices applicable to accounts have been written
lapping. to family and his account from the off.
friends. data file.

3) Which of the following internal control activities most likely would ensure that all billed
sales are correctly posted to the accounts receivable ledger?
3) __A____
A) Daily sales B) Each sales invoice C) The accounts D) Each shipment on
summaries are is supported by a receivable ledger is credit is supported by a
compared to daily prenumbered shipping reconciled daily to the prenumbered sales
postings to the accounts document. control account in the invoice.
receivable ledger. general ledger.

4) Elm Tree Inc. has a December 31 year end. On October 15, the auditor evaluated and tested
Elm Tree's internal control procedures over the sales recording process and finds the controls
to be effective. At a minimum, the auditor's year-end procedures for testing internal control
procedures must include:
4) __B____
A) confirmations of B) tests the client's C) tests of compliance D) a comparison of the
year-end accounts internal control with internal control for responses to the auditor's
that were examined procedures from a random sample of internal control questionnaire
on October 15. October 15 through transactions throughout with a detailed flowchart of
the year end. the audit period. control procedures at year
end.

Version 1 1
Audit Final Exam 2023--Practice
5) Which of the following would be the best protection for a company that wishes to prevent the
"lapping" of trade accounts receivable?
5) ___C___
A) Separate duties so B) Separate duties so C) Have customers D) Request that
that the bookkeeper in that no employee has send payments customer's payment
charge of the general access to both checks directly to the checks be made payable
ledger has no access to from customers and company's to the company and
incoming mail. currency from daily cash depository bank. addressed to the
receipts. treasurer.

6) Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in

the ratio of gross profit to sales may suggest which of the following possibilities?
6) __B____
A) Unrecorded B) Unrecorded C) Merchandise purchases being charged D) Fictitious
purchases. sales. to selling and general expense. sales.

7) A client has a separate sales group for its largest "preferred" customers. This is a select group
of customers that normally make purchases in excess of $250,000 and often have accounts
receivable balances in excess of $1 million. Which of the following audit procedures would
the auditor most likely perform?
7) __D____
A) Prepare a B) Send out negative C) Inquire of the D) Send out positive
schedule of purchases confirmations on a large sales manager confirmations on a large
and payments for sample of these regarding the sample of these
these customers. customers. accounts receivable customers.
terms.

Version 1 2
Audit Final Exam 2023--Practice
8) The negative request form of accounts receivable confirmation is useful particularly when
the:

Assessed Level of Risk of Number of Small Proper Consideration

Material Balances Is by the Recipient Is
Misstatement Relating to
Receivables Is
A. Low Many Likely

B. Low Few Unlikely

C. High Few Likely

D. High Many Likely

8) __A____
A) Option A B) Option B C) Option C D) Option D

9) The financial records of the Movitz Company show that Mr. Dennis owes $4,100 on an
account receivable. An independent audit is being carried out and the auditors send a positive
confirmation to Mr. Dennis. What is the most likely reason as to why a positive confirmation
rather than a negative confirmation was used here?
9) __B____
A) Control risk was B) Inherent risk was C) Mr. Dennis's D) Mr. Dennis's
particularly low for particularly high for account was not account was not with
accounts receivable. accounts receivable. yet due. a related party.

10) Favorite Soda Company distributes beverages in the Portland, Oregon area. Which of the
following would be the test to determine that shipments made were actual sales?
10) ___D___
A) Trace bills of B) Vouch entries C) Trace entries in the sales D) Vouch bills of lading
lading to the sales made in the sales journal to accounts to the customer order
journal. journal to the bills of receivable subsidiary ledger. documents.
lading.

Version 1 3
Audit Final Exam 2023--Practice
11) An auditor traced a sample of purchase orders and the related receiving reports to the
purchases journal. The purpose of this substantive audit procedure most likely was to
11) __C____
A) identify usually large B) verify that cash C) determine that D) test whether
purchases that should be disbursements were for purchases were payments were for
investigated further. goods actually received. properly recorded. goods actually
ordered.

12) Purchase cutoff procedures should be designed to produce evidence of whether merchandise
is included in the inventory of the client company if the company
12) __C____
A) has paid for the B) has physical C) holds legal title D) holds the shipping
merchandise. possession of the to the merchandise. documents for the merchandise
merchandise. issued in the company's name.

13) An auditor wishes to perform tests of controls on a client's purchasing procedures. If the
control activities leave no audit trail of documentary evidence, the auditor most likely will
test the procedures by
13) ___B___
A) confirmation and B) observation and C) analytical procedures D) inquiry and
observation. inquiry. and confirmation. analytical procedures.

14) In performing a search for unrecorded retirements of fixed assets, an auditor most likely
would
14) __A____
A) inspect the property B) tour the client's C) analyze the repair D) tour the client's
ledger and the facilities, and then and maintenance facilities, and then
insurance and tax inspect the property account, and then tour analyze the repair and
records, and then tour ledger, and the the client's facilities. maintenance account.
the client's facilities. insurance and tax
records.

Version 1 4
Audit Final Exam 2023--Practice
15) A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only
48 tables, but the receiving department at the furniture company accepted the tables. The
invoice was eventually received but was for the 84 tables ordered. The furniture company
paid the entire amount. Which of the following controls would have been least likely to have
prevented this erroneous payment?
15) __D____
A) The copy of the B) Personnel in the C) Personnel in the D) Personnel in the
purchase order sent to furniture company's furniture company's cash furniture company's
the furniture accounts payable disbursements department purchasing
company's receiving department should should compare the check department should
department should compare the receiving that is prepared to all of the compare the
not have shown an report to the purchase backup documentation. purchase requisition
expected quantity. invoice before creation to the purchase order.
of the voucher.

16) An audit team would most likely examine the detail support for which of the following
charges?
16) __D____
A) Payroll expense B) Cost of goods sold C) Supplies expense D) Legal expense.

17) A CPA learns that his client has paid a vendor twice for the same shipment; once based upon
the original invoice and once based upon the monthly statement sent from the vendor. A
control procedure that should have prevented this duplicate payment is
17) __B____
A) prenumbering of B) attachment of the C) use of a limit or D) prenumbering of
disbursement receiving report to the reasonableness test. receiving reports.
vouchers. disbursement report.

18) When auditing liabilities account balances, auditors are most concerned with management'
assertion about
18) __C____
A) existence. B) rights and obligations. C) completeness. D) valuation and allocation.

19) Which of the following would not overstate current-period net income?
19) __C____
A) Capitalizing an B) Failing to record a C) Failing to record a D) All of these
expenditure that should liability for an check paying an item in would overstate net
be expensed expenditure vouchers payable. income

Version 1 5
Audit Final Exam 2023--Practice
20) Which of the following is an internal control activity that could prevent a paid disbursement
voucher from being presented for payment a second time?
20) __D____
A) Vouchers should B) Disbursement C) The date on a D) The official who
be prepared by vouchers should be disbursement voucher signs the check should
individuals who are approved by at least should be within a few compare the check with
responsible for signing two responsible days of the date the the voucher and should
disbursement checks. management officials. voucher is presented for stamp PAID on the
payment. voucher documents.

21) L. Martinez, CPA, was auditing a client, Marvelous Retail Company and selected a sample of
inventory items from the perpetual records and vouched additions to receiving reports. This
procedure was intended to satisfy which PCAOB assertion?
21) __C____
A) Rights and B) Completeness. C) Existence or D) Valuation or
obligations. occurrence. allocation.

22) Your client plans to count inventory at several locations on the same day. No location is
material in amount, but the total of inventory is quite material. How is an auditor likely to
plan to observe?
22) ___D___
A) Observe all counts at B) Insist the inventory be C) Work with the D) Observe a
all locations by using the counted on separate days so client to determine sample of
required number of the auditor can be present at which locations to locations on a
auditors. all locations. observe. surprise basis.

23) An auditor will usually trace the details of the test counts made during the observation of
physical inventory counts 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
23) __D____
A) owned by B) not C) physically present at the time of the D) included in the final
the client. obsolete. preparation of the final inventory schedule. inventory schedule.

24) An auditor selected items for test counts while observing a client's physical inventory. The
auditor then traced the test counts to the client's inventory listing. This procedure most likely
obtained evidence concerning management's balance assertion of
24) __B____
A) rights and obligations. B) completeness. C) existence. D) accuracy and valuation.

Version 1 6
Audit Final Exam 2023--Practice
25) When testing a company's cost accounting system, the auditor uses procedures that are
primarily designed to determine that
A) quantities on hand have
been computed based on
acceptable cost accounting
techniques that reasonably
approximate actual quantities
on hand.
25) ___D___
B) physical C) the system is in D) costs have been
inventories agree accordance with properly assigned to
substantially with generally accepted finished goods,
book inventories. accounting principles work-in-process,
and is functioning as and cost of goods
planned. sold.

26) An auditor is examining a nonpublic company's inventory procurement system and has
decided to perform tests of controls. Under which of the following conditions should the
auditor perform tests of controls?
26) __C____
A) Significant B) The auditor hopes C) The auditor believes D) Tests of controls are
weaknesses were to reduce the amount that testing the controls always performed when
found in the of work to be done in could lead to a reduction the auditor begins to
company's internal assessing inherent risk. in overall audit time and assess control risk.
control. cost.

27) An auditor most likely would make inquiries of production and sales personnel concerning
possible obsolete or slow-moving inventory to support management's financial statement
(PCAOB) assertion of
27) __A____
A) valuation or B) rights and C) existence or D) presentation and
allocation. obligations. occurrence. disclosure.

28) An auditor reviews job cost sheets to test which transaction assertion?
28) __C____
A) Occurrence. B) Completeness. C) Accuracy. D) Classification.

29) From the auditors' point of view, inventory counts are more acceptable prior to the year end
when
29) __B____
A) internal B) accurate perpetual C) inventory is D) significant amounts of
control is inventory records are slow moving. inventory are held on a
weak. maintained. consignment basis.

Version 1 7
Audit Final Exam 2023--Practice
30) An auditor most likely would analyze inventory turnover rates to obtain evidence concerning
management's balance assertions about
30) __D____
A) existence. B) rights and obligations. C) completeness. D) accuracy and valuation.

31) The decision of a company to have a transfer agent handle exchanges of shares is related
primarily to which of the functional responsibilities?
31) __B____
A) Rights and obligations B) Custody C) Record keeping D) Periodic reconciliation

32) The decision of a company to have a transfer agent handle exchanges of shares is related
primarily to which of the functional responsibilities?
32) __B____
A) Rights and obligations B) Custody C) Record keeping D) Periodic reconciliation

33) "Are interest payments and accruals monitored for due dates and financial statement dates?"
is an internal control questionnaire item that is related to the ASB transaction assertion of:
33) __C____
A) occurrence. B) completeness. C) cutoff. D) accuracy.

34) Which of the following controls would be most effective in ensuring that the proper custody
of assets in the investing cycle is maintained?
34) ___D___
A) Direct access B) Personnel who post C) The purchase and D) Independent personnel
to securities in the investment transactions sale of investments are periodically compare the
safety deposit box to the general ledger are executed on the specific recorded balances in the
is limited to only not permitted to update authorization of the investment subsidiary
one corporate the investment board of directors. ledger with the contents of
officer. subsidiary ledger. the safety deposit box.

35) In confirming with an outside agent, such as a financial institution, that the agent is holding
investment securities in the client's name, an auditor most likely gathers evidence in support
of ASB balance assertion of existence and:
35) __B____
A) valuation. B) rights and obligations. C) completeness. D) accuracy.

Version 1 8
Audit Final Exam 2023--Practice
36) Loan covenants are used for which of the following reasons?
36) __A____
A) To protect the lender B) To protect the C) To protect the D) To protect
from the borrower borrower from the auditors from false shareholders from
substantially weakening the lender calling the information by the management taking on
borrower's financial position. loan early. borrower. too much debt.

37) Jones was engaged to examine the financial statements of Gamma Corporation for the year
ended June 30. Having completed an examination of the investment securities, which of the
following is the best method of verifying the accuracy of recorded dividend income?
37) __D____
A) Tracing recorded B) Performing C) Comparing recorded D) Comparing recorded
dividend income to analytical dividends with amounts dividends with a standard
cash receipts records procedures and appearing on federal financial reporting
and validated deposit statistical sampling information Form 1099 service's record of
slips dividends

38) In connection with the audit of an issue of long-term bonds payable, the audit team should:
38) __D____
A) determine whether B) calculate the effective C) decide whether D) ascertain that the
bondholders are persons interest rate to see if it is the bond issue was client has obtained
other than owners, directors, substantially the same as made without the opinion of
or officers of the company the rates for similar violating state or counsel on the
issuing the bond. issues. local law. legality of the issue.

39) If the auditors discover that the carrying amount of a client's investments is overstated
because of a loss in value that is other than a temporary decline in market value, they should
insist that:
39) __C____
A) the approximate B) the investments be C) the loss in D) the equity section
market value of the classified as long term for value be of the balance sheet
investments be shown in balance-sheet purposes recognized in the separately show a
parentheses on the face of with full disclosure in the financial charge equal to the
the balance sheet. footnotes. statements. amount of the loss.

40) An audit plan for the examination of the retained earnings account should include a step that
requires verification of the:
40) __C____
A) market value used B) approval of the adjustment C) authorization for D) dividends
to charge retained to the beginning balance as a both cash and stock received from
earnings to account for result of a write-down of dividends. investments.
a 2-for-1 stock split. account receivables.

Version 1 9
Audit Final Exam 2023--Practice

41) Which of the following is the most effective method of identifying potential earnings
management attempts?
41) __D____
A) Analytical B) Detailed C) Inquiry of client D) Scanning accounts
procedures. substantive management and key financial for unusual items.
procedures. personnel.

42) Which of the following items would appear in written representations in the audit of a public
entity but not a nonpublic entity?
42) __D____
A) Statements related B) Statements related to C) An indication D) Management's
to management's management's that all subsequent opinion as to the
responsibility for the responsibility for events have been effectiveness of its
entity's financial designing internal control disclosed to the internal control over
statements. to prevent and detect auditors. financial reporting.
fraud.

43) If auditors are appointed on January 3, 2020, the date of the financial statements is December
31, 2020, the date of the auditors' report is February 7, 2021, and the audit report release date
is March 3, 2021, what is the appropriate date of the written representations?
43) __C____
A) January 3, 2020 B) December 31, 2020 C) February 7, 2021 D) March 3, 2021

44) Which of the following subsequent events would represent an event that provides
information about conditions that arose following the date of the financial statements?
44) __C____
A) Settlement of long B) Collection of a past C) Loss of inventory D) An additional tax
outstanding litigation. due accounts receivable. as a result of a flood. assessment on prior
income.

Version 1 10
Audit Final Exam 2023--Practice
45) On March 15, 2021, Kent, CPA, issued an unqualified opinion on a client's audited financial
statements for the year ended December 31, 2020. On May 4, 2021, Kent's internal
inspection program disclosed that engagement personnel failed to observe the client's
physical inventory. Omission of this procedure impairs Kent's present ability to support the
unqualified opinion. If the stockholders are currently relying on the opinion, Kent should first
45) __B____
A) advise management B) undertake to C) reissue the auditors' D) compensate for the
to disclose to the apply alternative reports and add an omitted procedure by
stockholders that Kent's procedures that explanatory paragraph performing tests of
unqualified opinion would provide a describing the departure controls to reduce audit
should not be relied on. satisfactory basis for from generally accepted risk to a sufficiently low
the opinion. auditing standards. level.

46) Which of the following best describes auditors' responsibilities with respect to evaluating the
going-concern status of the entity?
46) __D____
A) Auditors are B) Auditors are C) Auditors are required D) Auditors are required
required to required to to consider evidence to consider evidence
specifically gather specifically gather obtained during the audit obtained during the audit
evidence with respect evidence with respect that may provide that may provide
to going-concern to going-concern information with respect information with respect
status and separately status and modify to going-concern status to going-concern status
report on the entity's their report on the and separately report on and modify their report
ability to continue as financial statements if the entity's ability to on the financial
a going concern. substantial doubts continue as a going statements if substantial
exist. concern. doubts exist.

47) What course of action should auditors take if, after evaluating management's plan to mitigate
the effect of factors that suggest going-concern uncertainties, they believe that substantial
doubt about going concern does not exist?
47) __D____
A) Modify their report B) Prepare a separate C) Require financial D) Conclude that
on the financial report that describes statement disclosure of substantial doubt
statements to describe management's plan to management's plan to about going concern
management's plan to mitigate going-concern mitigate going-concern does not exist and
mitigate going-concern uncertainties, the uncertainties with no not require financial
uncertainties, the procedures performed modification to the statement disclosure
procedures performed by by the auditors, and auditors' report on the or modification of
the auditors, and indicate indicate that substantial financial statements or the auditors' report.
that substantial doubt doubt about going no separate report on
about going concern does concern does not exist. going concern.
not exist.

Version 1 11
Audit Final Exam 2023--Practice
48) Assume that Rory is auditing the financial statements of Augusta, Inc. Rory completes his
fieldwork on February 25 and his report (along with Augusta's financial statements) is issued
on March 1. On March 3, a hurricane destroys a warehouse that contains a significant amount
of uninsured inventory. Which of the following best describes Rory's responsibility with
respect to the effects of this hurricane on Augusta's financial statements?
48) __D____
A) Because the B) Because the C) Because the D) Because the
inventory was included hurricane occurred hurricane occurred hurricane occurred after
in the financial after the date of Rory's prior to the next fiscal the release of the
statements audited by report, he has no quarter, Rory is financial statements and
Rory, he is required to responsibility to required to perform Rory's report, he has no
perform additional perform additional additional procedures responsibility to perform
procedures and reissue procedures or reissue and reissue his report additional procedures or
his report on the revised his report. on the revised reissue his report.
financial statements. financial statements.

49) Which of the following auditing procedures most likely would assist auditors in identifying
conditions and events that may indicate substantial doubt about an entity's ability to continue
as a going concern?
49) __B____
A) Inspecting title B) Confirming with C) Reconciling the D) Comparing the
documents to verify third parties the details client's cash balance with entity's depreciation and
whether any assets of arrangements to the cut-off bank asset capitalization
are pledged as maintain financial statement and the bank policies to other entities
collateral. support. confirmation. in the industry.

50) Select the appropriate term to which it is most likely related. Each term is associated with
only one statement.

Includes statements regarding auditors' judgment of the quality of the client's accounting
principles.
50) ___E___
A) Written B) Engagement C) D) E) Communication F)
representations. quality review. Management Interim with individuals Attorney
letter. audit charged with letters.
work. governance.

Version 1 12
Audit Final Exam 2023--Practice
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
51) The following questions appeared on an internal control questionnaire for sales. Next to each
of the questions indicate the related assertion.

A Are sales invoice blanks prenumbered? A:Completeness

B Are all credit sales approved by the credit department B Accuracy

prior to shipment?

C Are invoice quantities compared to shipped quantities? C Accuracy

D Are summary journal entries approved before posting? D Accuracy

E Are sales prices and terms based on approved standards? E Accuracy

F Is access to sales invoice blanks restricted? F Occurrence

G Does the accounting manual contain instructions to date G Cutoff

sales invoices on the shipment date?

H Are returned sales credits supported by documentation? H Occurrence

I Are prenumbered bills of lading prepared in the shipping I Completeness

department?

J Are periodic sales data reported directly to general J Accuracy

ledger accounting independent of accounts receivable
accounting?

Version 1 13
Audit Final Exam 2023--Practice
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

52) When performing procedures in a search of unrecorded liabilities, auditors can utilize various
sources of evidence/information (e.g., documents, files, management and clerical personnel).

Required:
List at least five, but not more than seven, sources of evidence/information for the search for
unrecorded liabilities.
(Do not write procedures. Do not take time to write about particular evidence that can be
obtained or reasons for using the sources.)
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

1. Unmatched Vendor Invoices listing

2. Vendor statements
3. Contracts or agreements with third parties
4. Inquiry of client personnel
5. Cash disbursements from the accounting period following the balance sheet date.
6. Canceled checks
7. Unmatched receiving reports

Version 1 14
Audit Final Exam 2023--Practice
53) Audit planning requires that the auditor consider possible inventory errors or frauds that
might occur that could affect the financial statements. For each of the types of inventory
errors listed in the following table, indicate what would be the possible effect in the inventory
and cost of sales accounts: overstated, understated, or no effect.
Effect on Account

Inventory Error Inventory Cost of Sale

1. Unrecorded Receipt of Inventory 1. Understated 1. No effect

2. December sales recorded in January 2. No effect 2. No effect

3. December purchase recorded in January 3. Understated 3. No effect

4. Inventory omitted during physical count 4. Understated 4. Overstated

5. Consigned out inventory omitted during 5. Understated 5. Overstated

physical count
6. Unrecorded shipment of inventory 6. Overstated 6. Understated

______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

Version 1 15
Audit Final Exam 2023--Practice
54) For each of the internal control questions for notes payable, indicate by letter the related ASB
transaction assertion. Answers may be used more than once.
A. Valuation or allocation
B. Occurrence
C. Completeness
D. Rights

__B_____ 1. Are paid notes canceled, stamped PAID, and filed?

___A____ 2. Are bank due notices compared with records of unpaid liabilities?

___B____ 3. Are notes payable kept by someone who cannot sign notes or checks?

____C___ 4. Is all borrowing authorization by the directors checked to determine whether

all notes payable are recorded?

______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

Version 1 16
Audit Final Exam 2023--Practice
55) Indicate, using the letters C (client), A (auditors), and AT (attorney) which party is
responsible for each of the following duties relating to letters of inquiry of attorneys. Each
statement is associated with only one party.

_C__ 1. Respond directly to auditors' initial inquiries regarding litigation, claims, and
assessments.
_A__ 2. Initiate request for attorney letter.
_AT__ 3. Respond to attorney letter.
_C__ 4. Provide initial description and evaluation of litigation, claims, and
assessments.
_C__ 5. Request attorney letter.
_A__ 6. Perform various procedures relating to litigation, claims, and assessments.
_AT__ 7. Identify whether client's views expressed in the attorney letter are
appropriate.
_C__ 8. Party the attorney informs if an unasserted claim must be disclosed.

______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

Version 1 17