Third Auditing Multiple Choice Questions

20.  Sound internal control procedures dictate that defective merchandise  returned by customers should be presented initially to the
a.      Accounts receivable supervisor.
b.      Receiving clerk.
c.      Shipping department supervisor.
d.      Sales clerk.


  21.    If a control total were computed on each of the following data items, which would best be identified as a hash total for a payroll IS application?
            A)   Total debits and total credits.
            B)   Net pay.
            C) Department numbers.
            D) Hours worked.

    22.   When auditing financial statements and finding indications of a possible misappropriation of assets, independent auditors should
            A) Investigate fully to determine the total amount of the misappropriation.
            B) Determine which accounts are affected and the amount by which they are overstated or understated.
            C) Determine the methods by which the misappropriation was carried out.
            D) Identify a person(s) who are likely responsible for the misappropriation and obtain evidence about some other fraud indications in their work.
            E) All of the above.
                        
    23.   Confirmations of accounts receivable provide the most evidence for which of the following assertions?
            A) Existence.
            B) Valuation or Allocation.
            C) Rights and obligations.
            D) Completeness.

    24.   If the auditor obtains sufficient competent evidence on the client's accounts receivable balance by alternative procedures because it is impracticable to confirm accounts receivable, the auditor's opinion should be unqualified and could be expected to
            A) Disclose the fact that alternative procedures were used due to client imposed scope limitation.
            B) Disclose in the opinion paragraph that confirmation of accounts receivable was impracticable.
            C) Not mention the alternative procedures.
            D) Include an explanatory paragraph that discloses the performance of alternative procedures.
  
    25.   To determine whether sales transactions have been recorded in the proper accounting period the auditor performs cutoff tests. Which of the following best describes the overall approach used when performing cutoff tests?
            A) Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period.
            B) Analyze transactions occurring within a few days before and after yearend.
            C) Confirm yearend transactions with regular customers.
            D) Examine cash receipts in the subsequent period.

    26.   Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
            A) Reconcile receiving reports with related cash payments made just prior to year-end.
            B) Contrast the ratio of accounts payable to purchases with the prior year's ratio.
            C) Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.
            D) Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.

    27.   In determining the effectiveness of an entity's policies and procedures relating to the existence or occurrence assertion for payroll transactions, an auditor most likely would inquire about and
            A) observe the segregation of duties concerning personnel responsibilities and payroll disbursement.
            B) inspect evidence of accounting for pre-numbered payroll checks.
            C) re-compute the payroll deductions for employee fringe benefits.
            D) verify the preparation of the monthly payroll account bank reconciliation.
                        
    28.   Small and Tall, CPAs, completed the December 31, 2005 audit of Big Company on February 10, 2006. After the report was issued, it came to the attention of Small and Tall, CPAs, that an outstanding lawsuit against Big Company was settled for materially more than recorded in the December 31, 2005 financial statements. The amount recorded in the financial statements represented the best estimate of management and the company's attorneys at the time the audit was completed. Based on this new information, Small and Tall, CPAs should
            A) Determine whether persons are currently relying on the audit report.
            B) Advise the client to make appropriate changes in the financial statements and reissue them.
            C) Notify each member of the board of directors of Big Company.
            D) Take no action since the event took place after the audit report was issued.

    29.   The primary reason an auditor requests letters of inquiry be sent to a client's attorneys is to provide the auditor with
            A) The probable outcome of asserted claims and pending or threatened litigation.
            B) Corroboration of the information furnished by management about litigation, claims, and assessments.
            C) The attorneys' opinions of the client's historical experiences in recent similar litigation.
            D) A description and evaluation of litigation, claims, and assessments that existed at the balance sheet date.


    30.   Subsequent to the issuance of an auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next
            A) Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
            B) Request that management disclose the newly discovered information by issuing revised financial statements.
            C) Issue revised pro forma financial statements taking into consideration the newly discovered information.
            D) Give public notice that the auditor is no longer associated with financial statements.