Auditing

1. When auditing account payable, auditors are usually especially concerned about the
a. Existence and Completeness objectives
b. Completeness and Cut-Off objectives
c. Existence and Cut-Off objectives
d. Existence and Accuracy objectives

They are especially concerned about the completeness and cut-off balance-related
audit objectives because of the potential for understatements in the account balance.
(pg.616)

2. The Starting point for the verification of the balance in the general bank account is to
obtain
a. A Bank Reconciliation from the client
b. Client’s cash account from the general ledger
c. A Cut-Off bank statement directly from the bank
d. The client’s December bank statement and reconcile it

To audit cash in the bank, the auditor verifies whether the bank reconciliation
received from the client is correct. The most important objectives are existence,
completeness, and accuracy. (pg.743)

3. When auditing depreciation expense, the two major concerns related to the accuracy
audit objective are
a. Consistent application of depreciation method and useful life
b. Consistent application of depreciation method and classification of assets
c. Correctness of calculations and consistent application of depreciation method
d. None of the above

The most important balance-related audit objective for depreciation expense is

accuracy. Auditors focus on determining whether the client followed a consistent
depreciation policy from period to period and whether the client’s calculations are
correct. (pg.644)

4. Only Three Management assertions are associated with TRAO. Which one of the
following is not?
a. Existence or Occurrence
 b. Completeness
c. Valuation or Allocation
d. Presentation and Disclosure
5. Which of the following is not a document or record that should be examined early in
the engagement?
a. Management Letter
b. Corporate charter & by laws
c. Contracts (Engagement Letter)
d. Minutes of BOD & Stockholders Meeting

After the audit is completed, several potential communications from the auditor
may be sent to the audit committee or others charged with governance, including
communication of detected fraud and illegal acts, internal control deficiencies, other
communications with the audit committee, and a management letter. (pg. 785)
6. Which of the following is an example of Vouching?
a. Trace inventory purchases from the acquisitions journal to supporting invoices
b. Trace selected sales invoices to the sales journal
c. Trace details of employee paychecks to the payroll journal
d. All of the above are examples of vouching
7. When may auditors test the Physical Inventory?
a. At an Interim Date
b. At a Year-End
c. Both A and B
d. Neither A nor B
The physical count may be performed at or near the balance sheet date, at an
interim date, or on a cycle basis throughout the year. (pg. 696)

8. Which of the following statements about the payroll and personnel cycle is correct?
a. There are three classes of transactions within the payroll cycle – salaried
employees, hourly employees, and commissioned employees
b. Transactions are less significant than related balance sheet accounts
c. Internal controls over payroll are effective for almost all companies, even small
ones
d. All of the above are correct
9. Which of the following would not justify an auditor’s decision to spend very little
time performing tests of transactions in the payroll and personnel cycle?
a. The new payroll bookkeeper has a much better educational background than the
former one
b. Employees will detect any under payments
c. Payroll transactions are uniform and uncomplicated
d. Payroll transactions are extensively audited by government agencies
10. Which of the following is important supporting documentation to authorize the
transfer of funds to the payroll bank account?
a. Earnings statement
b. Time card
c. Payroll register
d. W-2 Form
11. Good Internal Control for the payroll function is usually:
a. Not difficult to establish
b. Difficult to establish
c. Absent
d. A result of prior audit

It is usually not difficult for companies to establish good control in the payroll and
personnel cycle. (pg.667)

12. Which of the following is not an objective of the auditor’s examination of notes
payable?
a. To determine whether the internal controls are adequate
b. To determine whether client’s financing arrangements are effective and efficient
c. To determine whether transactions regarding the principal and interest of notes are
properly authorized
d. To determine whether the liability for notes and related interest expense and
accrued liabilities are properly stated

The objectives of the audit of notes payable are to determine whether: (pg. 718)

a. Internal controls over notes payable are adequate.

 b. Transactions for principal and interest involving notes payable are properly
authorized and recorded in accordance with the six transaction-related audit
objectives.
c. The liability for notes payable and the related interest expense and accrued
liability are properly stated as defined by seven of the eight balance-related audit
objectives. (Realizable value is not applicable to liability accounts.)
d. Disclosures related to notes payable and the related interest expense satisfy the
four presentation and disclosure audit objectives.
13. Which of the following types of owner’s equity transactions would not require
authorization by the board of directors?
a. Restrictions on the payment of dividends
b. The number of shares issued and outstanding
c. Guarantees of preferred stock liquidation value
d. The number of share subject to agreements to repurchase

The following types of owners’ equity transactions usually require specific

authorization (pg. 722)

a. Issuance of Capital Stock. The authorization includes the type of equity to issue
(such as preferred or common stock), number of shares to issue, par value of the
stock, privileged condition for any stock other than common, and date of the issue.
b. Repurchase of Capital Stock. The repurchase of common or preferred shares, the
timing of the repurchase, and the amount to pay for the shares should all be
approved by the board of directors.
c. Declaration of Dividends. The board of directors must authorize the form of the
dividends (such as cash or stock), the amount of the dividend per share, and the
record and payment dates of the dividends.
14. Which of the following Balance-Related Audit Objectives (BRAO) typically is
assessed as having high inherent risk for cash?
a. Existence
b. Cut off
c. Detail Tie-In
d. Presentation and Disclosure
 The most important objectives are existence, completeness, and accuracy.
(pg.743)

15. Operational Auditing is primarily oriented toward

a. Future improvements to accomplish management’s goals
b. The accuracy of data reflected in managements financial records
c. Verifying that a company financial statements are fairly stated
d. Past protection provided by existing internal control

Operational auditing emphasizes effectiveness and efficiency on improving future

performance. (pg. 833)

16. The appropriate and sufficient evidence to obtained from TDB must be decided on an
a. Efficient Basis
b. Audit Objective Basis
c. Effectiveness Basis
d. None of the above

Auditors develop various types of decision aids to help link judgments affecting
audit evidence with the appropriate evidence to accumulate. The eight balance-related
audit objectives introduced in Chapter 6 are included in the columns at the top of the
worksheet to help ensure the auditor considers risks related to all the relevant balance-
related assertions. (pg.281)

17. Because many of the types of errors and irregularities that may be found in the
acquisition and payment cycle represent a misstatement of earnings and are of
significant concern to the auditor, the tolerable exception rate selected by the auditor
will be?
a. 15% or less
b. High
c. Average
d. Low
18. Which of the following groups has the responsibility for identifying and deciding the
appropriate accounting treatment for recording or disclosing contingent liabilities?
a. Auditors
b. Legal counsel
c. Management
 d. Management and the auditors

Current professional auditing standards make it clear that management, not the
auditor, is responsible for identifying and deciding the appropriate accounting
treatment for contingent liabilities.

19. The auditor’s primary concern relative to presentation and disclosure-related

objectives is:
a. Completeness
b. Occurrence
c. Existence
d. Accuracy

One of the auditor’s primary concerns related to presentation and disclosure

related objectives is determining whether management has disclosed all required
information (completeness objective for presentation and disclosure). (pg. 768)

20. Which of the following statement about the control environment is false?
a. A written policy and procedures manual is an important-tools for assigning
authority and responsibility
b. Supervision is especially important in organization that control afford elaborate
responsibility reporting are too small to have an adequate separation of duties
c. Management’s attitude towards internal control and ethical behavior have little
impact on employee beliefs or action
d. An overly complex or unclear organizational structure may be indicative of
problems that are more serious
21. In the HR and Payroll Cycle time card used to record:
a. Gross pay, net pay, and itemizes all deductions both for the current pay period and
for the year-to-date
b. List of each employee’s gross pay, payroll deductions, and net pay in a
multicolumn format
c. Time worked by an hourly-wage employee
d. The activities performed by a salaried professional for various clients

The time record is a document indicating the time the hourly employee started and
stopped working each day and the number of hours the employee worked. (pg. 665)
22. An auditor is vouching a sample of hourly employees from the payroll master file to
approved time clock or time sheet data in order to provide evidence that:
a. Segregation of duties is present between the payroll function and the payment
function for cash disbursements
b. Product cost information is accurate
c. Employees work the number of hours for which they are paid
d. Payments are made at the contractual rate
23. The highest level of assurance is provided for in which one of the following
engagements?
a. All answers are false
b. Review
c. Compilation
d. Audit
24. A weak internal control system allows a department supervisor to “clock in” for a
fictious employee and then approve the employee’s time card at the end of the pay
period. This fraud would be detected if other controls were in place, such as having an
independent party:
a. Compare the date of the recorded check in the payroll journal with the date on the
canceled checks and time cards
b. Recompute hours worked from time cards
c. Distribute paychecks
d. Foot the payroll journal and trace postings to the general ledger and the payroll
master file
25. What is the most appropriate procedure to avoid crediting customer payment to wrong
account?
a. Reconciliation of packing lists with sales orders
b. Mail monthly statements to customers
c. Periodic reconciliation of prenumbered sales orders with prenumbered shipping
documents
d. Segregation of duties of handling cash and maintaining accounts receivable
26. Narratives, flowcharts, and internal control questionnaires are three common methods
of:
a. testing the internal controls.
b. documenting the auditor's understanding of a client's organizational structure
 c. documenting the auditor's understanding of internal controls.
d. designing the audit manual and procedures.

Auditors commonly use three types of documents to obtain and document their
understanding of the design of internal control: narratives, flowcharts, and internal
control questionnaires. (pg.369)

27. An auditor is determining whether an issuance of notes payable for cash was correctly
recorded. Her best course of action would be to:
a. confirm with the bond trustee as to the amount of bonds issued.
b. confirm with the underwriter as to the appropriate market yield on the bonds.
c. trace the cash received from the proceeds to the accounting records.
d. verify that the amount was included in a footnote disclosure.
28. A document that specifies how much of a finished good is to the be produced during a
specific time period is called
a. Job time ticket
b. Production order
c. Lean manufacturing
d. Job order document

Master Production Schedule (MPS): A document that specifies how much of a

finished good is to be produced during a specific time period.

29. What is the purpose control procedures Encryption of payroll data both when it is
electronically sent to a payroll service bureaus and while at most in then HR payroll
database
a. To ensure complete processing of all payroll transactions
b. To check for inaccurate or incomplete payroll processing
c. To prevent overpaying employees
d. To protect the confidentiality of payroll information
30. The primary audit objectives to focus on when auditing debt are:
a. Accuracy and Valuation
b. Completeness and Valuation
c. Accuracy and Existence
d. Accuracy and Completeness
 The two most important balance-related audit objectives in notes payable are:
Existing notes payable are included (completeness) and Notes payable in the schedule
are accurately recorded (accuracy). (pg.719)