1. Which of the following expected relationships is reasonable in terms of performing preliminary analytical procedures in the acquisition and payment cycle?
a. Assume that the company's production and pricing strategies have remained the same during the past year. Gross margin is expected to improve because of the stability.
b. Assume that the company has introduced a new product with a low price point and significant customer demand. Inventory turnover is expected to increase, and days sales in inventory is expected to decrease.
c. Assume that the company has invested in a new manufacturing process that results in significantly less waste and overall increases in efficiency during the production process. Cost of goods sold is expected to increase, and gross margin is expected to decrease.
d. All of the above are reasonable expected relationships.
2. Which of the following analytical relationships is most suggestive of a heightened risk of fraud in the acquisition and payment cycle?
a. Unexpected increases in gross margin.
b. Unexpected decreases in gross margin.
c. Inventory that is growing at a rate slower than sales.
d. Expense accounts that have significant debit entries.
3. Which mix of evidence would be most appropriate for the following scenario? This is a client where the auditor has assessed the risk of material misstatement related to the existence of inventory at the maximum level. This client has incentives to overstate income to achieve profit targets that affect management bonuses.
Oversight of the vice president of finance is relatively weak because of a lack of supervision by top management. Other controls are designed effectively.
a. 100% tests of details.
b. 50% tests of details, 30% analytics, 20% tests of controls.
c. 30% tests of details, 40% analytics, 30% tests of controls.
d. 20% tests of details, 40% analytics, 40% tests of controls.
4. Which mix of evidence would be most appropriate for the following scenario? This is a client where the auditor has assessed the risk of material misstatement related to the existence of inventory at a relatively low level. Top management appears to possess integrity. Management has spent the resources necessary to ensure effective design, implementation, and operation of controls.
a. 100% tests of details.
b. 70% tests of details, 10% substantive analytics, 20% tests of controls.
c. 50% tests of details, 10% substantive analytics, 40% tests of controls.
d. 20% tests of details, 40% substantive analytics, 40% tests of controls.
5. Which of the following statements is false regarding obtaining evidence about internal control operating effectiveness in the acquisition and payment cycle?
a. For integrated audits, the auditor will test the operating effectiveness of important controls as of the client's year end.
b. The auditor will select controls that are important to the auditor's conclusion about whether the organization's controls adequately address the assessed risk of material misstatement in the acquisition and payment cycle.
c. Evidence of proper payment is not necessary for each purchase and payment, but is necessary for those that are material.
d. The auditor will take a sample of receiving reports and trace through the system to test controls related to the completeness assertion for accounts payable.
6. Refer to the Auditing in Practice feature "Inventory Controls at CSK Auto Corporation." Which of the following represents an implication of weaknesses in the company's controls over inventory?
a. The company could not adequately process and account for the disposition of inventory returns from customers.
b. The board of directors fired the CEO of CSK Auto as a result of the internal control deficiencies.
c. The company had to make adjustments to year-end inventory balances.
d. a. & c.
e. a. & b.
7. Which of the following auditing procedures would be used to test the existence or occurrence assertion for inventory?
a. Perform year-end cutoff tests by noting the last shipping and receiving document numbers used before physical inventory is taken.
b. Make inquiries of the client regarding the segregation of duties between the purchasing department and the receiving department.
c. Review the client's proposed physical inventory procedures to determine whether they are likely to result in a complete and correct physical inventory.
d. Make inquiries of the client regarding allowances made for expected returns.
e. All of the above.
8. Which of the following auditing procedures would be used to test the valuation or allocation assertion for inventory?
a. Inquire of production and warehouse personnel about the existence of obsolete inventory.
b. Test inventory cost by taking a sample of recorded inventory, and trace to source documents indicating cost of inventory.
c. Review trade journals for changes in product technology.
d. Inquire of the client about sales adjustments (markdowns) that have been offered to sell any products.
e. All of the above.