The company considers the decline in value of equity securities classified as available-for-sale to be
temporary.
A. Practitioner's report on management's assertion about an entity's compliance with specified requirements.
B. Auditor's communications on significant deficiencies in internal control.
C. Audit inquiry letter to legal counsel.
D. Lawyer's response to audit inquiry letter.
E. Communication from those charged with governance to the auditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Request for bank cutoff statement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessor auditor's communication with successor auditor.
Correct Answer: N
Explanation:
Choice "N" is correct. Management's discussion regarding the temporary nature of a decline in the value of
equity securities provides information regarding recognition, measurement, and disclosure, and would be
included in the management representation letter.
Question 842:
only one source for each item.
During our audit we discovered evidence of the company's failure to safeguard inventory from loss,
damage, and misappropriation.
A. Practitioner's report on management's assertion about an entity's compliance with specified requirements.
B. Auditor's communications on significant deficiencies in internal control.
C. Audit inquiry letter to legal counsel.
D. Lawyer's response to audit inquiry letter.
E. Communication from those charged with governance to the auditor.
F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J. Accounts receivable confirmation request.
K. Request for bank cutoff statement.
L. Explanatory paragraph of an auditor's report on financial statements.
M. Partner's engagement review notes.
N. Management representation letter.
O. Successor auditor's communication with predecessor auditor.
P. Predecessor auditor's communication with successor auditor.
Correct Answer: B
Explanation:
Choice "B" is correct. Failure to safeguard inventory from loss, damage, and misappropriation is a
significant deficiency in the design or operation of internal control that could adversely affect the fairness of
the financial statements.
Question 843:
Symbol B most likely represents:
A. Customer orders.
B. Receiving reports.
C. Customer checks.
D. Sales invoices.
Correct Answer: D
Explanation:
Choice "d" is correct. The two documents most likely to be generated by the revenue cycle application are
credit memos (already identified in the flowchart) and sales invoices.
Choice "a" is incorrect. Customer orders are input at the beginning of the process, as noted in the
flowchart. Customer orders are not generated by the company's revenue cycle.
Choice "b" is incorrect. Receiving reports are part of the inventory/purchasing/cash disbursements cycle.
Choice "c" is incorrect. Customer checks and remittances are entered into the application at the top of the
flowchart. Customer checks are not an output of the revenue cycle.
Question 844:
Symbol A most likely represents:
A. Remittance advice file.
B. Receiving report file.
C. Accounts receivable master file.
D. Cash disbursements transaction file.
Correct Answer: C
Explanation:
Choice "c" is correct. The accounts receivable master file is the file most likely to be affected by sales and
cash receipts transactions, as noted immediately above symbol "A" in the flowchart.
Choice "a" is incorrect. Remittance advices are used to update the accounts receivable file, but a separate
"remittance advice file" generally is not created.
Choice "b" is incorrect. The inventory/purchase/cash disbursements cycle would include a receiving report
file, not the revenue cycle.
Choice "d" is incorrect. Cash disbursements are not part of the revenue cycle.
Question 845:
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of:
A. Existence.
B. Valuation and allocation.
C. Completeness.
D. Rights and obligations.
Correct Answer: B
Explanation: Choice "b" is correct. In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support the assertion of valuation and allocation (i.e., to determine whether the allowance for doubtful accounts properly adjusts the receivables balance to net realizable value). Choice "a" is incorrect. Evaluating the adequacy of the allowance for doubtful accounts does not pertain to existence. To support the assertion of existence, an auditor would most likely confirm accounts receivable. Choice "c" is incorrect. An auditor would trace from shipping records to the sales journal and the accounts receivable ledger to determine if all shipments were properly recorded as sales (completeness assertion). Choice "d" is incorrect. The assertion of rights and obligations relating to accounts receivable would be supported by examining appropriate supporting documentation, not by evaluating the allowance for doubtful accounts.
Question 846:
An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of:
A. Occurrence.
B. Classification.
C. Cutoff.
D. Completeness.
Correct Answer: D
Explanation:
Choice "d" is correct. An entity's periodic accounting for the numerical sequence of shipping documents
and invoices supports management's financial statement assertion of completeness of sales. A gap in
recorded sequence numbers might indicate an unrecorded sale.
Choice "a" is incorrect. An auditor would trace from the sales invoices or sales journal (accounting records)
to the shipping documents (source document) to support management's assertion of occurrence.
Choice "b" is incorrect. An auditor would examine journal entries for a sample of shipping documents to
determine whether the client has recorded the sales in the proper accounts.
Choice "c" is incorrect. An auditor would review supporting documentation for shipping documents just
before and just after year-end to determine whether appropriate cutoff has been achieved.
Question 847:
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:
A. Understandability and classification.
B. Existence.
C. Rights and obligations.
D. Valuation and allocation.
Correct Answer: D
Explanation: Choice "d" is correct. An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about valuation or allocation, which pertain to the presentation of assets, liabilities, and equity interests at appropriate amounts. The auditor is concerned with the proper valuation of those receivables. Choice "a" is incorrect. Understandability and classification deals with whether the components of the financial statements are properly presented, described, and disclosed, not whether they are properly valued. Choice "b" is incorrect. Existence relates to whether assets, liabilities, and equity interests exist. Choice "c" is incorrect. Rights and obligations pertain to ownership of assets and liabilities, not to the valuation of those accounts.
Question 848:
In a well designed internal control, employees in the same department most likely would approve purchase orders, and also:
A. Reconcile the open invoice file.
B. Inspect goods upon receipt.
C. Authorize requisitions of goods.
D. Negotiate terms with vendors.
Correct Answer: D
Explanation:
Choice "d" is correct. In a well designed internal control, employees in the purchasing department most
likely would approve purchase orders and also negotiate terms with vendors.
Choice "a" is incorrect. Personnel in the accounts payable department reconcile the open invoice file while
the purchasing agent approves purchase orders.
Choice "b" is incorrect. Employees in the receiving department inspect goods upon receipt while the
purchasing agent approves purchase orders.
Choice "c" is incorrect. The stores department (personnel in the raw materials inventory area) authorize
requisition of goods while the purchasing agent approves purchase orders.
Question 849:
The authority to accept incoming goods in receiving should be based on a (an):
A. Vendor's invoice.
B. Materials requisition.
C. Bill of lading.
D. Approved purchase order.
Correct Answer: D
Explanation: Choice "d" is correct. The authority to accept incoming goods in receiving should be based upon an approved purchase order. Choice "a" is incorrect. A vendor's invoice does not serve as an authority to accept incoming goods since it is generated by the vendor, not a responsible employee in the purchasing department. Choice "b" is incorrect. A materials requisition, which is prepared by the ultimate user of the goods, does not serve as an authority to accept incoming goods since it has not been approved by the purchasing department. Choice "c" is incorrect. A bill of lading does not serve as an authority to accept incoming goods since it is generated by the carrier, not a responsible employee in the purchasing department.
Question 850:
When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the:
A. Unpaid voucher.
B. Debit memo.
C. Vendor invoice.
D. Credit memo.
Correct Answer: B
Explanation:
Choice "b" is correct. When nonconforming goods are returned to a vendor, the purchasing department
should send a debit memo to the accounting department to ensure that the accounts payable balance is
reduced appropriately.
Choice "a" is incorrect. The unpaid voucher is sent from the accounts payable department to the
treasurer's department for payment when conforming goods are received.
Choice "c" is incorrect. The vendor invoice is sent to the accounting department when conforming goods
are received.
Choice "d" is incorrect. A credit memo is generally used to reduce accounts receivable, not accounts
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