cpa audit review final 3

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Joens1313
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cpa audit review final 3
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2014-11-15 19:40:26
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cpa audit review final 3
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  1. An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?

    A.Select and examine vouchers and ascertain that the related canceled checks are dated no earlier than the vouchers.

    B.Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks.

    C.Select and examine canceled checks and ascertain that the related vouchers are dated no earlier than the checks.

    D.Select and examine vouchers and ascertain that the related canceled checks are dated no later than the vouchers.
    B.Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks.

    Payment vouchers bearing the required approvals should be supported by a properly authorized purchase requisition, a purchase order executing the transaction, a receiving report indicating all goods ordered have been received in good condition, and a vendor invoice confirming the amount owed. To determine that check requests are valid, the appropriate audit procedure is therefore to compare checks and the related vouchers. The direction of testing should be from a sample of checks to the approved vouchers. If the date of a voucher is later than the date of the related check, the inference is that a check was issued without proper support.
  2. A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following items would least likely be included in legal counsel’s response to the auditor’s letter of inquiry?

    A.An evaluation of the probability of loss and a statement of the amount or range of loss if an unfavorable outcome is reasonably possible.

    B.An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.

    C.A description of potential litigation in other matters unrelated to the patent infringement lawsuit.

    D.A discussion of case progress and the strategy currently in place by client management to resolve the lawsuit.
    B.An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.

    An inquiry letter response from the client’s legal counsel will normally include information or comment about each pending or threatened litigation, claim, or assessment. Legal counsel should (1) address the progress of the case, (2) describe the action the company plans to take, (3) evaluate the likelihood of an unfavorable outcome, and (4) estimate (if possible) the range of any potential loss. Legal counsel does not have the expertise or appropriate information to make a judgment about the client’s ability to continue as a going concern. The auditor normally makes that judgment.
  3. If accounts receivable turned over 7.1 times in Year 1 as compared with only 5.6 times in Year 2, it is possible that there were

    A.Unrecorded credit sales in Year 2.

    B.Fictitious sales in Year 2.

    C.More thorough credit investigations made by the company late in Year 1.

    D.Unrecorded cash receipts in Year 1.
    B.Fictitious sales in Year 2.

    The accounts receivable turnover is the ratio of sales to average receivables. Fictitious sales would increase both the numerator and denominator. Adding an equal amount to both the numerator and denominator decreases a fraction greater than 1.0. For example, adding 1 to both parts of the fraction 3/2 decreases it to 4/3. The turnover ratio would decrease still more in the next period because the fictitious items would continue to increase receivables (which are cumulative) but not sales (which are closed periodically).
  4. Which of the following statements is true concerning statistical sampling in tests of controls?

    A.As the population size doubles, the sample size also should double.

    B.The population size has little or no effect on determining sample size except for very small populations.

    C.The expected population deviation rate has little or no effect on determining sample size except for very small populations.

    D.For a given tolerable rate, a larger sample size should be selected as the expected population deviation rate decreases.
    B.The population size has little or no effect on determining sample size except for very small populations.

    A change in the size of the population has a very small effect on the required sample size when the population is large. Tables are available for smaller population sizes providing appropriate smaller sample sizes.
  5. An auditor may decide to perform only substantive procedures for certain assertions because the auditor believes

    A.The entity’s control components are interrelated.

    B.Controls are not relevant to the assertions.

    C.Sufficient appropriate audit evidence to support the assertions is likely to be available.

    D.More emphasis on tests of controls than substantive tests is warranted.
    B.Controls are not relevant to the assertions.

    The auditor’s risk assessment procedures may not have identified any suitably designed and implemented controls that are relevant to the assertions. Another possibility is that testing of controls may be inefficient. But the auditor needs to be satisfied that performing only substantive procedures will be effective in reducing audit risk to an acceptable level.
  6. In auditing related party transactions, an auditor ordinarily places primary emphasis on

    A.The probability that related party transactions will recur.

    B.Confirming the existence of the related parties.

    C.Verifying the valuation of the related party transactions.

    D.The adequacy of the disclosure of the related party transactions.
    D.The adequacy of the disclosure of the related party transactions.

    Accounting principles ordinarily do not require transactions with related parties to be accounted for differently from those with unrelated parties. Primary emphasis should be on the adequacy of disclosure.

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