What makes an account significant or an assertion relevant?
> What evidence could the verbal inquiry audit procedure provide in “Printing (Copying) Money”?
> What is an audit plan? During which stage of the audit is an audit plan prepared?
> What key control concept was missing at Argus Productions?
> What methods are used to audit other expense accounts?
> What items in a client’s PP&E and depreciation schedule give auditors points of departure (assertions) for audit procedures?
> In substantive procedures, why is the emphasis on the completeness assertion for liabilities instead of on the existence assertion as in the audit of assets?
> Where could an auditor look to find evidence of (a) losses on purchase commitments or (b) unrecorded liabilities to vendors?
> Where would an auditor find the proper authorization that indicates it is okay to pay a vendor?
> How should an auditor test for proper authorization in the expenditure cycle?
> What feature of the acquisition and expenditure control would be expected to prevent an employee’s embezzling cash through creation of fictitious vouchers?
> If an account payable is left off the end of the period balance, what are the possible other accounts that may be misstated?
> Why is inherent risk for the existence of inventory an issue in the expenditure cycle audit?
> What controls should be implemented to safeguard accounts receivable files?
> Why do auditors focus on completeness of expenditures as a significant account and relevant assertion in the expenditure cycle?
> Which report would not be appropriate for a public accounting firm to provide on financial reporting controls? a. Unqualified—no material weaknesses found. b. Disclaimer of opinion—unable to perform all necessary procedures. c. Disclaimer of opinion—sign
> Which of the following would probably not be considered an indication of a material weakness? a. Evidence of a material misstatement. b. Ineffective oversight by the audit committee. c. Immaterial fraud committed by senior management. d. Overproduction b
> When completing the audit of internal controls for a public company, AS 2201 requires auditors to test a. Operating effectiveness only. b. Design effectiveness only. c. Both operating and design effectiveness. d. Neither operating nor design effectivenes
> Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily to a. Evaluate internal control over credit sales. b. Test the accuracy of recorded cha
> When completing the audit of internal controls for a public company, the PCAOB requires auditors to audit internal controls over a. Operations. b. Compliance with regulations. c. Financial reporting. d. All of the above.
> Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time? a. Vouchers should be prepared by individuals who are responsible for signing disbursement checks. b. Di
> Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern? a. “This amount was paid on December 30.” b. “We received this shipment on January 2.” c. “These goods were returned for cr
> With reference to the case of Thank Goodness It’s Friday, what contribution could an understanding of the business and the management reporting system have made to discovery of the open cash receipts journal cutoff error?
> The revenue cycle of a company generally includes which accounts? a. Inventory, accounts payable, and general expenses. b. Inventory, general expenses, and payroll. c. Cash, accounts receivable, and sales. d. Cash, notes payable, and capital stock.
> What are the five components of management’s internal control?
> An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that a. Sales invoices
> Tests of controls in a GAAS audit are required for a. Obtaining evidence about the financial statement assertions. b. Accomplishing control over the occurrence of recorded transactions. c. Applying analytical procedures to financial statement balances. d
> In the case of The Taxman Always Rings Twice, what information could have been obtained from confirmations directed to the real population of delinquent accounts?
> Which of the following accounts is not normally part of the revenue and collection cycle? a. Sales. b. Accounts Receivable. c. Cash. d. Purchases Returns and Allowances.
> Which of the following is a preventive control? a. Reconciliation of a bank account. b. Recalculation of a sample of payroll entries by internal auditors. c. Separation of duties between the payroll and personnel departments. d. Detailed fluctuation anal
> It is acceptable under generally accepted auditing standards for an audit team to a. Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive tests. b. Assess control risk at zero and perfo
> The primary purpose for obtaining an understanding of a nonpublic audit client’s internal control is to a. Provide a basis for making constructive suggestions in a management letter. b. Determine the nature, timing, and extent of further audit tests to b
> Effectiveness of audit procedures would be reduced by a. Selecting larger sample sizes for audit. b. Performing audit procedures at the fiscal year-end date as opposed to the interim period. c. Deciding to obtain external evidence instead of internal evi
> When a company that sells its products with a positive gross profit increases its sales by 15 percent and its cost of goods sold by 7 percent, the cost of goods sold ratio will a. Increase. b. Decrease. c. Remain unchanged. d. Not be able to be determine
> What types of audit procedures are typically performed in testing operating effectiveness of controls over the revenue and collection cycle?
> What is due care? To what standards are auditors held with respect to due care?
> What type of opinion would be issued by the audit team as the result of a scope limitation on the examination of internal control over financial reporting?
> What are the primary control procedures to ensure completeness of recorded revenues?
> Analytical procedures are generally used to produce evidence from a. Confirmations mailed directly to the auditors by client customers. b. Physical observation of inventories. c. Relationships among current financial balances and prior balances, forecast
> What feature(s) could SEI have installed in its cash receipts internal controls that would have been expected to prevent the cash receipts journal and recorded cash sales from reflecting more than the amount shown on the daily deposit slips?
> Why is the audit of revenue recognition riskier for a new company?
> What do we mean by revenue recognition? What does GAAP say about proper revenue recognition?
> The risk that the auditors’ own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is a. Audit risk. b. Inherent risk. c. Control risk. d. Detection r
> What special care should be taken with regard to examining the sources (e.g., faxed copy) of accounts receivable confirmation responses?
> What role does the PCAOB play in connection with monitoring and regulating public accounting firms?
> What are tests of control activities?
> What purpose is served by prenumbering sales orders, shipping documents, and sales invoices?
> If sales were overstated by recording a false credit sale at the end of the year, where could you find the false “dangling debit”? a. Inventory. b. Cost of goods sold. c. Bad debt expense. d. Accounts receivable.
> What are some audit procedures that can be performed using CAATs?
> What might two endorsements on a canceled check indicate?
> When are analytical procedures required during an audit engagement?
> How does the source of evidence affect its reliability?
> What are the three broad types of governmental audits described by the GAGAS issued by the GAO?
> Define audit evidence.
> What are some of the major areas of public accounting services?
> What kinds of functional responsibilities should be performed by different departments or persons in a control system with good separation of duties?
> What type of report should be issued when auditors are not independent with respect to the entity?
> Who is responsible for developing standards for the audits of public entities? Who is responsible for developing standards for the audits of nonpublic entities?
> Which duties should be separated in the payroll cycle?
> What functions are normally associated with the production cycle?
> What computer-based files might auditors examine to find evidence of unrecorded sales? Of inadequate credit checks? Of incorrect product unit prices?
> Lakeland Clothiers reported the following amounts in its 2013 financial statements. The 2012 amounts are given for comparison. Requirements 1. Compute Lakeland’s quick (acid-test) ratio at the end of 2013. Round to two decimal places.
> A business’s receipt of a $105,000 building, with a $90,000 mortgage payable, and issuanceof $15,000 of common stock will a. Increase stockholders’ equity by $15,000. b. Increase assets by $15,000. c. Increase stockholders’ equity by $105,000. d. Decreas
> Which statement is false? a. A trial balance lists all the accounts with their current balances. b. A trial balance can be taken at any time. c. A trial balance can verify the equality of debits and credits. d. A trial balance is the same as a balance sh
> If the credit to record the payment of an account payable is not posted, a. Expenses will be understated. b. Liabilities will be understated. c. Cash will be understated. d. Cash will be overstated.
> The journal entry to record a payment on account will a. Debit Accounts Payable and credit Retained Earnings. b. Debit Cash and credit Expenses. c. Debit Accounts Payable and credit Cash. d. Debit Expenses and credit Cash.
> If the credit to record the purchase of supplies on account is not posted, a. Stockholders’ equity will be understated. b. Assets will be understated. c. Liabilities will be understated. d. Expenses will be overstated.
> The journal entry to record the purchase of supplies on account a. Credits Supplies and debits Accounts Payable. b. Debits Supplies Expense and credits Supplies. c. Credits Supplies and debits Cash. d. Debits Supplies and credits Accounts Payable.
> The journal entry to record the receipt of land and a building and issuance of commonstock a. Debits Land and Building and credits Common Stock. b. Debits Land and credits Common Stock. c. Debits Land, Building, and Common Stock. d. Debits Common Stock a
> Which statement is false? a. Revenues are increased by credits. b. Assets are increased by debits. c. Liabilities are decreased by debits. d. Dividends are increased by credits.
> Which of the following is not an asset account? a. Salary Expense b. Service Revenue c. Common Stock d. None of the above accounts is an asset.
> All of the following are controls for cash received over the counter except a. The customer should be able to see the amounts entered into the cash register. b. The cash drawer should open only when the sales clerk enters an amount on the keys. c. The sa
> Where do we first record a transaction? a. Ledger b. Journal c. Trial balance d. Account
> Using your answers to Short Exercise 5-17, show how the First Interstate Bank will report the following: a. Whatever needs to be reported on its classified balance sheet at June 30, 2013. b. Whatever needs to be reported on its income statement for the y
> Sunnyvale Loan Company is in the consumer loan business. Sunnyvale borrows from banks and loans out the money at higher interest rates. Sunnyvale’s bank requires Sunnyvale to submit quarterly financial statements to keep its line of credit. Sunnyvale’s m
> Which of the following transactions will increase an asset and increase stockholders’equity? a. Collecting cash from a customer on an account receivable b. Borrowing money from a bank c. Performing a service on account for a customer d. Purchasing suppli
> Which of the following transactions will increase an asset and increase a liability? a. Purchasing office equipment for cash b. Issuing stock c. Buying equipment on account d. Payment of an account payable
> What is the effect on total assets and stockholders’ equity of paying the telephone bill assoon as it is received each month? Total assets _______Stockholders’ equity a. Decrease ………………………………… Decrease b. Decrease ………………………………… No effect c. No effect ………
> Purchasing a building for $95,000 by paying cash of $25,000 and signing a note payablefor $70,000 will a. Decrease total assets and increase total liabilities by $25,000. b. Decrease both total assets and total liabilities by $25,000. c. Increase both to
> Purchasing computer equipment for cash will a. Increase both total assets and total liabilities. b. Decrease both total assets and stockholders’ equity. c. Decrease both total liabilities and stockholders’ equity. d. Have no effect on total assets, total
> Receiving cash from a customer on account will a. Increase stockholders equity. b. Decrease liabilities. c. Increase total assets. d. Have no effect on total assets.
> Performing a service on account will a. Increase stockholders’ equity. b. Increase total assets. c. Increase total liabilities. d. Both a and b.
> Requiring that an employee with no access to cash do the accounting is an example of which characteristic of internal control? a. Monitoring of controls b. Competent and reliable personnel c. Assignment of responsibility d. Separation of duties
> Purchasing a laptop computer on account will a. Increase total assets. b. Have no effect on stockholders’ equity. c. Increase total liabilities. d. All of the above.
> An investment of cash into the business will a. Decrease total liabilities. b. Decrease total assets. c. Have no effect on total assets. d. Increase stockholders’ equity.
> Refer to Exercise 2-34B. In Exercise 2-34B Set upthe following T-accounts: Cash, Accounts Receivable, Office Supplies, Office Furniture, AccountsPayable, Common Stock, Dividends, Service Revenue, Salary Expense, and Rent Expense. Recordthe following tra
> On August 31, 2012, Nancy Totten borrowed $5,000 from First Interstate Bank. Totten signed a note payable, promising to pay the bank principal plus interest on August 31, 2013. The interest rate on the note is 7%. The accounting year of First Interstate
> Set upthe following T-accounts: Cash, Accounts Receivable, Office Supplies, Office Furniture, AccountsPayable, Common Stock, Dividends, Service Revenue, Salary Expense, and Rent Expense. Recordthe following transactions directly in the T-accounts without
> The trial balance of Doyle, Inc.,at September 30, 2012, does not balance. The accounting records hold the following errors: a. Recorded a $600 cash revenue transaction by debiting Accounts Receivable. The creditentry was correct. b. Posted a $3,000 cre
> The accounts of Custom PoolService, Inc., follow with their normal balances at June 30, 2012. The accounts are listed in noparticular order. Requirements 1. Prepare the company’s trial balance at June 30, 2012, listing accounts in pro
> The first seven transactionsof Gallagher Advertising, Inc., have been posted to the company’s accounts as follows: Requirement Prepare the journal entries that served as the sources for the seven transactions. Include anexplanation fo
> Refer to Exercise 2-29B. In Exercise 2-29B Double TreeCellular, Inc., completed the following transactions during September 2012, its first month ofoperations: Sep 1 Received $19,900 and issued common stock. 2 Purchased $400 of office supplies on accoun
> Double TreeCellular, Inc., completed the following transactions during September 2012, its first month ofoperations: Sep 1 Received $19,900 and issued common stock. 2 Purchased $400 of office supplies on account. 4 Paid $14,000 cash for land to use as a
> All of the following are internal control procedures except a. Electronic devices b. Assignment of responsibilities c. Internal and external audits d. Sarbanes-Oxley reforms
> Refer toExercise 2-27B. In Exercise 2-27B Gary Smith opened a medical practice specializing in surgery. During the first month of operation (July), the business, titled Gary Smith, Professional Corporation (P.C.), experienced thefollowing events: Jul 6
> Gary Smith opened a medical practice specializing in surgery. During the first month ofoperation (July), the business, titled Gary Smith, Professional Corporation (P.C.), experienced thefollowing events: Jul 6 Smith invested $41,000 in the business, whic
> Thefollowing selected events were experienced by either Simply Sensible, Inc., a corporation, or BillGriggs, the major stockholder. State whether each event (1) Increased, (2) Decreased, or (3) Had noeffect on the total assets of the business. Identify a
> Assume M. Crue opened a store in San Francisco, starting with cash and commonstock of $104,000. Sharon Saboda, the store manager, then signed a note payable to purchase landfor $95,000 and a building for $125,000. Saboda also paid $55,000 for equipment a
> 1. Compute the amount of interest during 2012, 2013, and 2014 for the following note receivable: On May 31, 2012, TMRN Bank lent $220,000 to Bob Morrison on a two-year, 8% note. 2. Which party has a (an) a. Note receivable? b. Note payable? c. Interest r
> Refer to Exercise 2-23A. 1. After recording the transactions in Exercise 2-23A, and assuming they all occurred in themonth of May 2012, prepare the trial balance of Lynn Dover, Attorney, at May 31, 2012. Usethe T-accounts that have been prepared for the
> Set upthe following T-accounts: Cash, Accounts Receivable, Office Supplies, Office Furniture, AccountsPayable, Common Stock, Dividends, Service Revenue, Salary Expense, and Rent Expense. Recordthe following transactions directly in the T-accounts without
