Salem State College

Auditing ACC407

Final Exam

Chapters 6, 7, 8, 9 & 12


December 2002




Please indicate the best/correct answer by circling the appropriate letter.


1.      The primary purpose for obtaining an understanding of an 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 tests to be performed in the audit.

c.       Obtain sufficient competent evidential matter to afford a reasonable basis for an opinion on the financial statements under examination.

d.      Provide information for a communication of internal control-related matters to management.


2.      Controls intended to ensure that transactions are recorded in the right accounts are designed to achieve the objective of


a.       validity

b.      accuracy

c.       classification

d.      accounting


3.      In the consideration of internal control, the effectiveness of the design of controls is tested by:


a.       flowcharts

b.      test of controls

c.       substantive tests

d.      decision tables


4.      The use of fidelity bonds protects a company from embezzlement loses and also:


a.       Minimizes the possibility of employing persons with dubious records in positions of trust.

b.      Reduces the company’s need to obtain expensive business interruption insurance.

c.       Allows the company to substitute the fidelity bonds for various parts of internal control

d.      Protects employees who made unintentional errors from possible monetary damages resulting from such error.


5.      A well-designed system of internal control that is functioning effectively is most likely to detect an irregularity arising from:


a.       the fraudulent action of several employees

b.      the fraudulent action of an individual employee

c.       informal deviations from the official organization chart

d.      management fraud


6.      Internal controls are not designed to provide reasonable assurance that:


a.       transactions are executed in accordance with management’s authorization

b.      irregularities will be eliminated

c.       access to assets is permitted only in accordance with management’s authorization

d.      the recorded accountability for assets is compared with the existing assets at reasonable intervals


7.      Which of the following would be least likely to be included in an auditor’s test of controls?


a.       inspection

b.      observation

c.       inquiry

d.      confirmation


8.      Which of the following is not considered an accounting estimate?


a.       allowance for loan losses

b.      credit sales

c.       net realizable value of inventory

d.      percentage-of-completion revenue


9.      Peter Payroll was including fictitious employees on the payroll each month and taking the checks for himself.  An audit procedure that would most likely lead to discovering this would be


a.       recalculating the payroll accounts

b.      comparing the total payroll amount to the journal entry

c.       a surprise payroll distribution

d.      making sure all checks clear the bank


10.  If sales and income were overstated by recording a false credit sale at the end of the year, where could you find the false “dangling debit”.  In the


a.       Inventory?

b.      cost of goods sold?

c.       bad debt expense?

d.      accounts receivable?


11.  Which of the following is an invalid social security number?


a.       029-34-1234

b.      034-00-1289

c.       123-45-6789

d.      987-12-0004


12.  Which of the following types of auditor is least interest in materiality?


a.       external auditors

b.      internal auditors

c.       GAO auditors

d.      Fraud examiners


13.  If the amount of a check is altered by an employee after it has cleared the bank, the change can be detected by


a.       comparing the amount written on the check face to the amount written in the cash disbursement journal

b.      comparing the magnetic imprint of the amount paid to the amount written on the check face

c.       examining the endorsement on the back of the check

d.      comparing the check number on the face of the check to the check number in the cash disbursement journal.


14.  Alpha Brewery Corporation recorded sales through January 4, 2002, dating them December 31, 2001.  This situation is an example of a violation of which of the following control objectives?


a.       validity

b.      completeness

c.       classification

d.      proper period accounting


15.  Confirmations of accounting receivable provide the most evidence for which of the following assertions?


a.       existence

b.      net valuation

c.       ownership

d.      completeness


16.  To conceal defalcations involving receivables, the auditor would expect an experienced bookkeeper to change which of the following accounts?


a.       miscellaneous income

b.      petty cash

c.       miscellaneous expense

d.      sales returns


17.  In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one-year bank loan with a debit to cash and an credit to miscellaneous revenue.  The most effective method for detecting this type of error is to:


a.       foot the cash receipts journal for October

b.      send a bank confirmation as of year-end

c.       prepare a bank reconciliation as of year-end

d.      prepare a bank transfer schedule as of year-end


18.  Jones embezzled $10,000 from his company’s account in bvank A.  At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B.  He has not recorded the transaction on the books.  This is an example of:


a.       lapping

b.      kiting

c.       effective cash management

d.      related party transactions


19.  Which of the following is not confirmed on the standard form used for cash balances at financial institutions?


a.       cash checking account balances

b.      cash saving account balances

c.       loans payable

d.      securities held for the client by the financial institution


20.  After the CPAs have selected particular accounts receivable for confirmation:


a.       as a control measure, the CPAs should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail.

b.      It is important that every account selected that has a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow-up through alternative procedures.

c.       all requests for confirmation should be mailed in envelopes bearing the CPA firm’s return address and should include a return envelope addressed to the CPA firm.

d.      All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client.


21.  When verifying debts to the perpetual inventory records of a nonmanufacturing company, an auditor would be most interested in examining a sample of purchase


a.       approvals

b.      requisitions

c.       invoices

d.      orders


22.  “All purchase orders are supported by requisitions form proper persons” is a specific example of which general objective?


a.       validity

b.      completeness

c.       authorization

d.      classification


23.  When confirming accounts payable, emphasis should be put on what kind of accounts? 


a.       accounts with small or zero balances

b.      all accounts should be equally emphasized

c.       accounts with large balances

d.      accounts listed in the accounts payable subsidiary


23.  A client’s physical count of inventories was higher than the inventory quantities shown in the perpetual records.  This situation could be the result of the failure to record


a.       sales

b.      sales discounts

c.       purchases

d.      purchase discounts


24.  When the auditors select a sample of items from the vouchers payable register for the last month of the period under audit and trace these items to underlying documents, the auditors are gathering evidence primarily in support of the assertion that:


a.       recorded obligations were paid

b.      incurred obligations were recorded in the correct period

c.       recorded obligations occurred prior to year-end

d.      cash disbursements were recorded as incurred obligation


25.  In a properly designed internal control structure, the same employee should not be permitted to:


a.       sign checks and cancel supporting documents

b.      receive merchandise and prepare a receiving report

c.       prepare disbursement vouchers and sign checks

d.      initiate a request to order merchandise and approve merchandise received


26.  The audit of which of the following balance sheet accounts does not normally result in verification of an income statement account?


a.       cash

b.      accounts receivable

c.       property, plant and equipment

d.      intangible assets


27.  Which of the following is not a procedure normally performed while completing the audit?


a.       obtain a lawyer’s letter

b.      obtain a representations letter

c.       perform an overall review using analytical procedures

d.      obtain confirmation of capital stockholdings from shareholders


28.  An second-partner review of the working papers and financial statements is performed to ensure that the


a.       “to-do lists” are reviewed and cleared

b.      audit program procedures are “signed off”

c.       tick-mark notations are cleared

d.      audit work meets the quality standards of the firm


29.  A type II subsequent event (requiring disclosure) would be illustrated by which of the following?


a.       settlement of long outstanding litigation

b.      collection of a past due accounts receivable

c.       loss of inventory as a result of a flood

d.      an additional tax assessment on prior income


30.  An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all


a.       noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period.

b.      Expenditures for property and equipment have been recorded in the proper period.

c.       noncapitalizable expenditures for repairs and maintenance have been properly charged to expense

d.      expenditures for property and equipment have not been charged to expense