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model based testing for embedded systems
Wiley CPA Exam Review Problems And Solutions Vol 2 2011-2012 38th Edition O. Ray Whittington, Patrick R. Delaney - Solutions
Which of the following statements is correct concerning an auditor’s use of the work of a specialist?a. The work of a specialist who is related to the client may be acceptable under certain circumstances.b. If an auditor believes that the determinations made by a specialist are unreasonable, only
“There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements.” The foregoing passage is most likely from aa. Report on internal control.b. Special
A purpose of a management representation letter is to reducea. Audit risk to an aggregate level of misstatement that could be considered material.b. An auditor’s responsibility to detect material misstatements only to the extent that the letter is relied on.c. The possibility of a
A limitation on the scope of the auditor’s examination sufficient to preclude an unqualified opinion will always result when managementa. Prevents the auditor from reviewing the working papers of the predecessor auditor.b. Engages the auditor after the year-end physical inventory count is
A written representation from a client’s management which, among other matters, acknowledges responsibility for the fair presentation of financial statements, should normally be signed by thea. Chief executive officer and the chief financial officer.b. Chief financial officer and the chairman of
When considering the use of management’s written representations as audit evidence about the completeness assertion, an auditor should understand that such representationsa. Complement, but do not replace, substantive tests designed to support the assertion.b. Constitute sufficient evidence to
Which of the following statements ordinarily is included among the written client representations obtained by the auditor?a. Compensating balances and other arrangements involving restrictions on cash balances have been disclosed.b. Management acknowledges responsibility for illegal actions
ABC Company is presenting comparative financial statements on Years 1 and 2, both of which were audited by William Jones, CPA. For which year(s) should Jones obtain written representations from these two individuals?Year 1 Year 2a. No Nob. No Yesc. Yes Nod. Yes Yes
The current chief executive and financial officers have only been employed by ABC Company for the past five months of year
Which of the following matters would an auditor most likely include in a management representation letter?a. Communications with the audit committee concerning weaknesses in internal control.b. The completeness and availability of minutes of stockholders’ and directors’ meetings.c. Plans to
The date of the management representation letter should coincide with the date of thea. Balance sheet.b. Latest interim financial information.c. Auditor’s report.d. Latest related-party transaction.
To which of the following matters would materiality limits not apply in obtaining written management representations?a. The availability of minutes of stockholders’ and directors’ meetings.b. Losses from purchase commitments at prices in excess of market value.c. The disclosure of compensating
For which of the following matters should an auditor obtain written management representations?a. Management’s cost-benefit justifications for not correcting internal control weaknesses.b. Management’s knowledge of future plans that may affect the price of the entity’s stock.c. Management’s
Recorded entries in which of the following accounts are most likely to relate to the property, plant, and equipment completeness assertion?a. Allowance for doubtful accounts.b. Marketable securities.c. Property, plant, and equipment.d. Repairs and maintenance expense.
Which of the following accounts is the practice of“channel stuffing” for sales most likely to most directly affect, and thereby result in additional audit procedures?a. Accrued liabilities.b. Allowance for sales returns.c. Cash.d. Marketable investments.
The most likely risk involved with a bill and hold transaction at year-end is a(n)a. Accrued liability may be overstated as of yearend.b. Buyer may have made an absolute purchase commitment.c. Sale may inappropriately have been recorded as of year-end.d. Buyer may have assumed the risk and reward
An auditor usually tests the reasonableness of dividend income from investments in publicly held companies by computing the amounts that should have been received by referring toa. Dividend record books produced by investment advisory services.b. Stock indentures published by corporate transfer
An auditor most likely would perform substantive tests of details on payroll transactions and balances whena. Cutoff tests indicate a substantial amount of accrued payroll expense.b. The assessed level of control risk relative to payroll transactions is low.c. Analytical procedures indicate unusual
An audit program for the examination of the retained earnings account should include a step that requires verification of thea. Market value used to charge retained earnings to account for a two-for-one stock split.b. Approval of the adjustment to the beginning balance as a result of a write-down
When a client company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerninga. Restrictions on the payment of dividends.b. The number of shares issued and outstanding.c. Guarantees of preferred stock liquidation
During an audit of an entity’s stockholders’ equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management’s assertion ofa. Existence or
In performing tests concerning the granting of stock options, an auditor shoulda. Confirm the transaction with the Secretary of State in the state of incorporation.b. Verify the existence of option holders in the entity’s payroll records or stock ledgers.c. Determine that sufficient treasury
In auditing payroll, an auditor most likely woulda. Verify that checks representing unclaimed wages are mailed.b. Trace individual employee deductions to entity journal entries.c. Observe entity employees during a payroll distribution.d. Compare payroll costs with entity standards or budgets.
Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme?a. There are significant unexplained variances between standard and actual labor cost.b. Payroll checks are disbursed by the same employee each payday.c. Employee time cards are
When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures anda. Observing the distribution of paychecks.b. Footing and crossfooting the payroll register.c. Inspecting payroll tax
An auditor usually obtains evidence of stockholders’equity transactions by reviewing the entity’sa. Minutes of board of directors meetings.b. Transfer agent’s records.c. Canceled stock certificates.d. Treasury stock certificate book.
The auditor can best verify a client’s bond sinking fund transactions and year-end balance bya. Confirmation with individual holders of retired bonds.b. Confirmation with the bond trustee.c. Recomputation of interest expense, interest payable, and amortization of bond discount or premium.d.
In auditing long-term bonds payable, an auditor most likely woulda. Perform analytical procedures on the bond premium and discount accounts.b. Examine documentation of assets purchased with bond proceeds for liens.c. Compare interest expense with the bond payable amount for reasonableness.d.
An auditor most likely would inspect loan agreements under which an entity’s inventories are pledged to support management’s financial statement assertion ofa. Presentation and disclosure.b. Valuation or allocation.c. Existence or occurrence.d. Completeness.
When a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the bonds payable account, the CPA might suspect thata. Discount on bonds payable is understated.b. Bonds payable are understated.c. Bonds payable are overstated.d. Premium on bonds payable is
In auditing accounts payable, an auditor’s procedures most likely would focus primarily on management’s assertion ofa. Existence.b. Presentation and disclosure.c. Completeness.d. Valuation.
Which of the following is a substantive test that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable?a. Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for.b. Receiving the
Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary becausea. This is a duplication of cutoff tests.b. Accounts payable balances at the balance sheet date may not be paid before the audit is completed.c. Correspondence with the audit client’s attorney
When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would bea. Vendors with whom the entity has previously done business.b. Amounts recorded in the accounts payable subsidiary ledger.c. Payees of checks drawn in
Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?a. Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file.b. Compare a sample of purchase orders issued just after year-end with
When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection. The policy’s absence most likely indicates the possibility of a(n)a. Insurance premium due but not recorded.b. Deficiency in the coinsurance provision.c.
In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management’s financial statement assertion ofa. Valuation or allocation.b. Existence or occurrence.c. Completeness.d. Rights and
In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management’s assertions of Existence or Presentation and occurrence disclosurea. Yes Yesb. Yes Noc. No Yesd. No No
Treetop Corporation acquired a building and arranged mortgage financing during the year. Verification of the related mortgage acquisition costs would be least likely to include an examination of the relateda. Deed.b. Canceled checks.c. Closing statement.d. Interest expense.
The auditor is most likely to seek information from the plant manager with respect to thea. Adequacy of the provision for uncollectible accounts.b. Appropriateness of physical inventory observation procedures.c. Existence of obsolete machinery.d. Deferral of procurement of certain necessary
An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that alla. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period.b. Expenditures for property and equipment have been recorded in the
In testing for unrecorded retirements of equipment, an auditor most likely woulda. Select items of equipment from the accounting records and then locate them during the plant tour.b. Compare depreciation journal entries with similar prior year entries in search of fully depreciated equipment.c.
Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts?a. The estimated remaining useful lives of plant assets were revised upward.b. Plant assets were retired during the year.c. The prior
Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment?a. Accumulated depreciation.b. Insurance expense.c. Property, plant, and equipment.d. Purchase returns and allowances.
In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of thea. Completeness of recorded investment income.b. Classification between current and noncurrent portfolios.c. Valuation of marketable equity securities.d. Existence of
When an auditor is unable to inspect and count a client’s investment securities until after the balance sheet date, the bank where the securities are held in a safe-deposit box should be asked toa. Verify any differences between the contents of the box and the balances in the client’s
In establishing the existence and ownership of a longterm investment in the form of publicly traded stock, an auditor should inspect the securities ora. Correspond with the investee company to verify the number of shares owned.b. Inspect the audited financial statements of the investee company.c.
An auditor who physically examines securities should insist that a client representative be present in order toa. Detect fraudulent securities.b. Lend authority to the auditor’s directives.c. Acknowledge the receipt of securities returned.d. Coordinate the return of securities to the proper
When auditing inventories, an auditor would least likely verify thata. The financial statement presentation of inventories is appropriate.b. Damaged goods and obsolete items have been properly accounted for.c. All inventory owned by the client is on hand at the time of the count.d. The client has
An auditor usually examines receiving reports to support entries in thea. Voucher register and sales returns journal.b. Sales journal and sales returns journal.c. Voucher register and sales journal.d. Check register and sales journal.
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management’s assertions abouta. Existence.b. Rights.c. Presentation.d. Valuation.
An auditor selected items for test counts while observing a client’s physical inventory. The auditor then traced the test counts to the client’s inventory listing. This procedure most likely obtained evidence concerning management’s assertion ofa. Rights.b. Completeness.c. Existence.d.
An auditor concluded that no excessive costs for idle plant were charged to inventory. This conclusion most likely related to the auditor’s objective to obtain evidence about the financial statement assertions regarding inventory, including presentation and disclosure anda. Valuation.b.
A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probablya. Increase the extent of tests of controls of the inventory cycle.b. Request the client to schedule the physical inventory count at the end of the
Which of the following auditing procedures most likely would provide assurance about a manufacturing entity’s inventory valuation?a. Testing the entity’s computation of standard overhead rates.b. Obtaining confirmation of inventories pledged under loan agreements.c. Reviewing shipping and
To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory intoa. Net sales.b. Cost of goods sold.c. Operating income.d. Gross sales.
To gain assurance that all inventory items in a client’s inventory listing schedule are valid, an auditor most likely would tracea. Inventory tags noted during the auditor’s observation to items listed in the inventory listing schedule.b. Inventory tags noted during the auditor’s observation
While observing a client’s annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client’s perpetual records. This situation could be the result of the client’s failure to recorda.
An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management’s financial statement assertion ofa. Valuation.b. Rights.c. Existence.d. Presentation.
Which of the following strategies most likely could improve the response rate of the confirmation of accounts receivable?a. Including a list of items or invoices that constitute the account balance.b. Restricting the selection of accounts to be confirmed to those customers with relatively large
Which of the following statements would an auditor most likely add to the negative form of confirmations of accounts receivable to encourage timely consideration by the recipients?a. “This is not a request for payment; remittances should not be sent to our auditors in the enclosed envelope.”b.
In confirming accounts receivable, an auditor decided to confirm customers’ account balances rather than individual invoices. Which of the following most likely would be included with the client’s confirmation letter?a. An auditor-prepared letter explaining that a nonresponse may cause an
Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations?a. The recipients are likely to sign the confirmations without devoting proper attention to them.b. Subsequent cash receipts are
In auditing accounts receivable, the negative form of confirmation request most likely would be used whena. The total recorded amount of accounts receivable is immaterial to the financial statements taken as a whole.b. Response rates in prior years to properly designed positive confirmation
To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely woulda. Examine the shipping documents that provide evidence for the existence assertion.b. Verify the sources and contents of the faxes in telephone calls to the
To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely woulda. Request the senders to mail the original forms to the auditor.b. Examine subsequent cash receipts for the accounts in question.c. Consider the e-mail
In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?a. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.b. A substantial number of
Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?a. Review the cash receipts journal for the month prior to the year-end.b. Intensify the study of internal control
An auditor should perform alternative procedures to substantiate the existence of accounts receivable whena. No reply to a positive confirmation request is received.b. No reply to a negative confirmation request is received.c. Collectibility of the receivables is in doubt.d. Pledging of the
Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables’a. Valuation.b. Classification.c. Existence.d. Completeness.
In confirming a client’s accounts receivable in prior years, an auditor found that there were many differences between the recorded account balances and the confirmation replies. These differences, which were not misstatements, required substantial time to resolve. In defining the sampling unit
When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely woulda. Inspect the allowance account to verify whether the accounts were subsequently written off.b. Increase the assessed level of detection risk for the valuation
Which of the following statements is correct concerning the use of negative confirmation requests?a. Unreturned negative confirmation requests rarely provide significant explicit evidence.b. Negative confirmation requests are effective when detection risk is low.c. Unreturned negative confirmation
The tick mark ???? most likely indicates that the amount was traced to thea. Deposits in transit of the applicable bank reconciliation.b. December cash receipts journal.c. January cash receipts journal.d. Year-end bank confirmations.
The tick mark ???? most likely indicates that the amount was traced to thea. December cash disbursements journal.b. Outstanding check list of the applicable bank reconciliation.c. January cash disbursements journal.d. Year-end bank confirmations.
An auditor observes the mailing of monthly statements to a client’s customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management’s financial statement assertion(s) of Presentation and disclosure Existence
The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is toa. Detect kiting activities that may otherwise not be discovered.b. Corroborate information regarding deposit and loan balances.c. Provide the data
A cash shortage may be concealed by transporting funds from one location to another or by converting negotiable assets to cash. Because of this, which of the following is vital?a. Simultaneous confirmations.b. Simultaneous bank reconciliations.c. Simultaneous verification.d. Simultaneous surprise
Which of the following cash transfers results in a misstatement of cash at December 31, 2005?Bank Transfer Schedule Disbursement Receipt Transfer Recorded in books Paid by bank Recorded in books Received by banka. 12/31/05 1/4/06 12/31/05 12/31/05b. 1/4/06 1/5/06 12/31/05 1/4/06c. 12/31/05 1/5/06
To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following excepta. Cutoff bank statement.b. Year-end bank statement.c. Bank confirmation.d. General ledger.
An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period to detect whethera. The cash receipts journal was held open for a few days after the year-end.b. The last checks recorded before the year-end were actually mailed by the year-end.c.
Which of the following checks illustrate deposits/transfers in transit at December 31, 2005?a. #101 and #202.b. #101 and #303.c. #202 and #404.d. #303 and #404.
Which of the following checks might indicate kiting?a. #101 and #303.b. #202 and #404.c. #101 and #404.d. #202 and #303.
An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supportinga. Opening and closing inventory balances.b. Cash receipts and
The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form maya. Not believe that the bank is obligated to verify confidential information to a third party.b. Sign and return the form without inspecting the accuracy of the client’s
Which of the following sets of information does an auditor usually confirm on one form?a. Accounts payable and purchase commitments.b. Cash in bank and collateral for loans.c. Inventory on consignment and contingent liabilities.d. Accounts receivable and accrued interest receivable.
Audit documentation for audits performed under the requirements of the Public Company Accounting Oversight Board should be retained fora. The shorter of five years, or the period required by law.b. Seven years.c. The longer of seven years, or the period required by law.d. Indefinitely.
Under the requirements of the PCAOB, audit documentation must contain sufficient information to allow what type of auditor to understand the nature, timing, extent, and results of procedures performed?a. An experienced audit team member.b. An experienced auditor having no previous connection with
No deletions of audit documentation are allowed after thea. Client’s year-end.b. Documentation completion date.c. Last date of significant fieldwork.d. Report release date.
Which of the following documentation is required for an audit in accordance with generally accepted auditing standards?a. A flowchart or an internal control questionnaire that evaluates the effectiveness of the entity’s controls.b. A client engagement letter that summarizes the timing and details
The audit working paper that reflects the major components of an amount reported in the financial statements is thea. Interbank transfer schedule.b. Carryforward schedule.c. Supporting schedule.d. Lead schedule.
Which of the following factors most likely would affect an auditor’s judgment about the quantity, type, and content of the auditor’s working papers?a. The assessed level of control risk.b. The likelihood of a review by a concurring (second)partner.c. The number of personnel assigned to the
Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?a. A flowchart or narrative of the accounting system describing the recording and classification of transactions for financial reporting.b. An audit program setting forth in detail
Which of the following is least likely to be a factor in the auditor’s decision about the extent of the documentation of a particular audit area?a. The risk of material misstatement.b. The extent of the judgment involved in performing the procedures.c. The nature and extent of exceptions
An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns fora. Cash flow increases and decreases.b. Audit objectives and assertions.c. Reclassifications and adjustments.d. Reconciliations and tick marks.
The permanent file of an auditor’s working papers generally would not includea. Bond indenture agreements.b. Lease agreements.c. Working trial balance.d. Flowchart of internal control.
An auditor’s working papers serve mainly toa. Provide the principal support for the auditor’s report.b. Satisfy the auditor’s responsibilities concerning the Code of Professional Conduct.c. Monitor the effectiveness of the CPA firm’s quality control procedures.d. Document the level of
Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?a. Notes receivable and interest income.b. Accrued interest receivable and accrued interest payable.c. Notes payable and notes receivable.d. Interest income and interest expense.
Ignoring any particular legal or regulatory requirement, audit documentation should be retaineda. A minimum of five years.b. As long as lead schedules have relevance to forthcoming audits.c. Until 3 years after the client selects another auditor.d. Working papers must be maintained indefinitely.
Which statement is correct concerning the deletion of audit documentation?a. Superseded audit documentation should always be deleted from the audit file.b. After the audit file has been completed, the auditor should not delete or discard audit documentation.c. Auditors should use professional
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