Question 1: What event initiates a transaction in the sales and collection cycle?
a) Receipt of cash.
b) Delivery of product to a customer.
c) Identification of a new customer.
d) Customer request for goods.
Question 2: The audit procedure referred to as proof of cash receipts is particularly useful to test:
a) time lags in making deposits.
b) whether all recorded cash receipts have been deposited in the bank.
c) whether there are cash receipts that have not been recorded in the journals.
d) the client's reconciliation between cash receipts and bank deposits
Question 3: The document that accompanies the customer's payment is the:
a) credit memo.
b) remittance advice.
c) vendor invoice.
d) monthly statement.
Question 4: What critical event must take place before goods can be shipped in order to assure payment can be reasonably expected?
a) Determination of correct delivery address
b) Credit approval
c) Matching of shipping document with sales invoice
d) Receipt of sales order from the customer
Question 5: A document that initiates shipment of goods and indicates the description of the merchandise, the quantity shipped, and customer name and address is the:
a) bill of lading.
b) sales invoice.
c) picking ticket.
d) vendor invoice.
Question 6: Auditors often use the ________ to determine the estimated population exception rate.
a) current year's audit results
b) tolerable exception rate
c) preceeding year's audit results
d) estimated computed by management
Question 7: The acceptable risk of overreliance:
a) is the risk that the auditor will erroneously conclude that the controls are less effective than they actually are
b) is less of a concern to the auditors than the risk of underlines
c) represents the auditor's measure of sampling risk
d) is determined by statistical formula, and not by professional judgment
Question 8: When the computed upper exception rate is greater than the tolerable exception rate, it is necessary for the auditor to take specific action. Which of the following courses of action would be most difficult to justify?
a) Reduce the tolerable exception rate so as to accept the sample results.
b) Expand the sample size and perform more tests.
c) Revise the assessed control risk.
d) Write a letter to management which outlines the control deficiencies.
Question 9: In systematic sample selection, the population size is divided by the number of sample items desired in order to determine the:
a) sampling interval.
b) tolerable exception rate.
c) computed upper exceptions rate.
d) mean.
Question 10: Attributes sampling would be an appropriate method to use on which one of the following procedures in an audit program?
a) Review sales transactions for large and unreasonable amounts.
b) Observe whether the duties of the accounts receivable clerk are separate from handling cash.
c) Examine a sample of duplicate sales invoices for credit approval by the credit manager.
d) Review the aged schedule of accounts receivable to determine if receivables from officers are included.
Question 11: Which of the following is likely to be determined first when performing tests of details for accounts receivable?
a) Recorded accounts receivable exist.
b) Accounts receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger.
c) Accounts receivable are owned.
d) Existing accounts receivable are included.
Question 12: The most effective audit evidence gathered for accounts receivable is the:
a) detail tie-in of the records.
b) analysis of the allowance for doubtful accounts.
c) confirmation of accounts receivable.
d) examination of sales invoices.
Question 13: When designing tests of details of balances, an important point to remember is:
a) auditors emphasize income statement accounts.
b) the audit procedures selected depends heavily on whether planned evidence for a given objective is low, medium, or high.
c) if accounts receivable are overstated, then sales will be understated.
d) sales cutoff is the most important test of details of accounts receivable
Question 14: Tests of which balance-related audit objective are normally performed first in an audit of the sales and collection?
a) Accuracy
b) Completeness
c) Rights
d) Detail tie-in
Question 15: A type of positive confirmation known as a blank confirmation:
a) requests the recipient to fill in the amount of the balance.
b) is considered less reliable than the regular positive confirmation.
c) generates as high a response rate as the regular positive confirmation form.
d) is used when the auditor is confirming several small balances.
Question 16: The final step in the evaluation of the audit results is the decision to:
a) accept the population as fairly stated or to require further action.
b) determine sampling error and calculate the estimated total population error.
c) project the point estimate.
d) determine the error in each sample
Question 17: If an auditor desires a greater level of assurance in auditing a balance, the acceptable risk of incorrect acceptance:
a) is reduced.
b) is increased.
c) is not changed.
d) may be reduced or increased depending upon other circumstances
Question 18: If acceptable audit risk is increased, acceptable risk of incorrect acceptance should be:
a) increased.
b) reduced.
c) unaffected.
d) modified.
Question 19: As the amount of misstatements expected in the population approaches tolerable misstatement, the planned sample size will:
a) decrease.
b) increase.
c) vary based on characteristics of the population.
d) be unaffected.
Question 20: In estimating the population misstatement, the first step in projecting from the sample to the population is to:
a) make a point estimate.
b) revise the upper error bound.
c) calculate the precision interval.
d) determine the population mean.
Question 21: A useful starting point for becoming familiar with the client's inventory is for the auditor to:
a) read the AICPA's Industry Audit Guide.
b) review accounting theory covering special inventory problems.
c) read the client's accounting manual.
d) tour the client's facility.
Question 22: A well-designed computerized system of perpetual inventory master files includes information about the:
a) units of inventory purchased, sold, and on hand.
b) unit costs of inventory purchased, sold, and on hand.
c) units of raw materials, work-in-process, and finished goods.
d) units and unit costs of inventory purchased, sold, and on hand.
Question 23: To assure proper segregation of duties, who should maintain the perpetual inventory master files?
a) Production personnel
b) Inventory storeroom personnel
c) Inventory receiving personnel
d) Accounting department personnel
Question 24: Handling the receipt of ordered goods is a part of the ________ cycle.
a) purchasing
b) acquisition and payment
c) inventory
d) inventory and warehousing
Question 25: Comparing the physical counts with the perpetual inventory master files satisfies the balance-related audit objective of:
a) classification.
b) observation.
c) completeness.
d) accuracy
Question 26: The auditor is responsible for communicating significant internal control deficiencies to the audit committee, or those charged with governance. This communication:
a) may be oral or written.
b) must be oral.
c) must be written.
d) must be oral via direct communication.
Question 27: With which of the following client personnel would it generally not be appropriate to inquire about commitments or contingent liabilities?
a) Controller.
b) President.
c) Accounts receivable clerk.
d) Vice president of sales.
Question 28: 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
Question 29: Which of the following subsequent events is most likely to result in an adjustment to a company's financial statements?
a) Merger or acquisition activities.
b) Bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance.
c) Issuance of common stock.
d) An uninsured loss of inventories due to a fire.
Question 30: The letter of representation obtained from an audit client should be:
a) dated as of the end of the period under audit.
b) dated as of the audit report date.
c) dated as of any date decided upon by the client and auditor.
d) dated as of the issuance of the financial statement.