AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 901:

  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 (an):

  A. Insurance premium due but not recorded.

  B. Deficiency in the coinsurance provision.

  C. Lien on the plant equipment.

  D. Understatement of insurance expense.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. If an auditor discovers that the original insurance policy on plant equipment is not

  available for inspection, this most likely indicates that there is a lien on the plant equipment, since the

  original policy would likely be in the possession of the lien holder.

  Choices "a", "b", and "d" are incorrect. The absence of the original policy does not necessarily indicate that

  there is an insurance premium due but not recorded, that there is a deficiency in the coinsurance provision,

  or that insurance expense is understated, since the policy must be reviewed before any of these

  conclusions can be drawn.

• Question 902:

  Which of the following controls is most likely to prevent the improper disposition of equipment?

  A. A separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders.

  B. The use of serial numbers to identify equipment that could be sold.

  C. Periodic comparison of removal work orders to authorizing documentation.

  D. A periodic analysis of the scrap sales and the repairs and maintenance accounts.

  Correct Answer: A

  Explanation: Choice "a" is correct. Separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders is most likely to prevent the improper disposition of equipment. Choice "b" is incorrect. Serial number tracking is a good audit and control activity but it will not prevent improper dispositions of equipment. Choices "c" and "d" are incorrect. Periodic comparison of removal work orders to authorizing documentation and periodic analysis of scrap sales and the repairs and maintenance accounts may identify improper dispositions that have already occurred, but such procedures will not prevent improper dispositions.

• Question 903:

  Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal accounting control system that provides for:

  A. Investigation of variances within a formal budgeting system.

  B. Review and approval of the monthly depreciation entry by the plant supervisor.

  C. Segregation of duties of employees in the accounts payable department.

  D. Examination by the internal auditor of vendor invoices and canceled checks for property acquisitions.

  Correct Answer: A

  Explanation: Choice "a" is correct. Investigation of variances in a formal budget might show maintenance costs over budget or acquisition costs under budget, either of which would trigger an investigation. Choice "b" is incorrect. Review of journal entries relating to depreciation would not disclose acquisitions misclassified as maintenance expense, since no depreciation would be recorded for the misclassified items. Choice "c" is incorrect. Segregation of duties in the accounts payable department would have no effect on the account classification of an approved invoice. Choice "d" is incorrect. Since the internal auditor would be looking at invoices and checks related to recorded property acquisitions, he or she would not be likely to identify payments that were erroneously excluded from the property account.

• Question 904:

  A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will:

  A. Request the bank to confirm to the auditor the contents of the safe deposit box at the balance sheet date.

  B. Examine supporting evidence for transactions occurring during the year.

  C. Count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the balance sheet date.

  D. Request the client to have the bank seal the safe deposit box until the auditor can count the securities at a subsequent date.

  Correct Answer: D

  Explanation: Choice "d" is correct. If the auditor is unable to count the securities at the balance sheet date the auditor should request the client to have the bank seal the safe deposit box until the auditor can count the securities. Choice "a" is incorrect. Bank employees are not present when items are put into or taken from the safety deposit box and do not keep records of safety deposit box contents. They would therefore be unable to provide any information to the auditors. Choice "b" is incorrect. Examining supporting evidence for the transactions occurring during the year is inefficient, as many of the securities purchased during the year may have been sold before the balance sheet date. Counting securities is preferable as it provides direct external evidence of the securities on hand at year-end. Choice "c" is incorrect. Bank employees are not present when items are put into or taken from the safety deposit box and do not keep records of safety deposit box contents. They would therefore be unable to provide any information to the auditors.

• Question 905:

  Which of the following internal controls would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?

  A. Senior management verifies that securities in the bank safe deposit box are registered in the entity's name.

  B. The internal auditor compares the securities in the bank safe deposit box with recorded investments.

  C. The treasurer vouches the acquisition of securities by comparing brokers' advices with canceled checks.

  D. The controller compares the current market prices of recorded investments with the brokers' advices on file.

  Correct Answer: B

  Explanation: Choice "b" is correct. Requiring the internal auditor to compare the securities in the bank safe deposit box with recorded investments is the procedure an entity most likely would use in satisfying the completeness assertion related to long-term investments. Choice "a" is incorrect. Verifying that securities in the bank safe deposit box are registered in the entity's name provides evidence regarding rights and obligations, not completeness. Choice "c" is incorrect. Vouching the acquisition of securities by comparing brokers' advices with canceled checks provides evidence regarding rights and obligations, not completeness. Choice "d" is incorrect. The controller comparing the current market prices of recorded investments with the broker advices on file provides assurance that the long-term investments are properly valued, and that unrealized gains and losses are properly recognized.

• Question 906:

  In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the:

  A. Completeness of recorded investment income.

  B. Classification between balance sheet portfolios.

  C. Valuation of marketable equity securities.

  D. Existence of unrealized gains or losses in the portfolio.

  Correct Answer: A

  Explanation: Choice "a" is correct. In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the completeness of recorded investment income. These procedures would probably include a comparison of the recorded investment income with the expected amount (based upon the related interest rate, dividends declared, etc.) and the income balance audited in the prior year. Choice "b" is incorrect. Classification between balance sheet portfolios would most likely be tested by confirming the terms of the investment and making inquiries of management regarding how long they intend to hold the securities. Choice "c" is incorrect. To test the valuation of marketable equity securities an auditor would most likely compare to market quotations (cost method) or examine the audited financial statements of the investee company (equity method). Choice "d" is incorrect. To identify and quantify the existence of unrealized gains and losses in the portfolio, an auditor would examine the trading prices in the Wall Street Journal (or other source) for those long-term investments carried under the cost method. For those carried under the equity method, an auditor would review the audited financial statements of the investee company.

• Question 907:

  Which of the following controls most likely would give the greatest assurance that securities held as investments are safeguarded?

  A. There is no access to securities between the year-end and the date of the auditor's security count.

  B. Proceeds from the sale of investments are received by an employee who does not have access to securities.

  C. Investment acquisitions are authorized by a member of the Board of Directors before execution.

  D. Access to securities requires the signatures and presence of two designated officials.

  Correct Answer: D

  Explanation: Choice "d" is correct. Requiring the signatures and presence of two designated officials in order to gain access to securities is an internal control that provides assurance regarding the safeguarding of securities. Choice "a" is incorrect. Having no access to securities between the year-end and the date of the auditor's security count would assure that no securities are added or taken away before the auditor counts them, but it would not ensure that securities are safeguarded for the entire year. Choice "b" is incorrect. Proceeds from the sale of investments should be received by an employee who does not have access to securities, but this control does not prevent the theft of investments that are not sold.

  Choice "c" is incorrect. Requiring authorization from a member of the board of directors before execution assures that investment purchases are approved and consistent with the financial philosophy of the organization (level of financial risk that the company is willing to accept), but this approval does not provide assurance that the assets will be safeguarded.

• Question 908:

  Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities?

  A. An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities.

  B. The internal auditor verifies the marketable securities in the entity's safe each year on the balance sheet date.

  C. The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to the general ledger.

  D. A designated member of the board of directors controls the securities in a bank safe-deposit box.

  Correct Answer: A

  Explanation: Choice "a" is correct. The control most likely to be used by an entity in safeguarding against the loss of marketable securities is that an independent trust company that has no direct contact with the employees who have recordkeeping responsibilities, has possession of the securities. For good internal control over the safeguarding of any asset, the individual who has the recordkeeping responsibilities over that asset should never have access to it. Choice "b" is incorrect. Verifying the securities held in the entity's safe would detect that the loss occurred, but it would not prevent the loss. Choice "c" is incorrect. Tracing purchases and sales of marketable securities would verify that the transactions were properly recorded, but would not safeguard against loss. Choice "d" is incorrect. Having one person control the securities in a bank safe-deposit box is a weakness in internal control because that one person can steal the securities. A better system requires that at least two employees have joint control over the securities in a bank safe-deposit box.

• Question 909:

  To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would:

  A. Inspect the stock certificates evidencing the investment.

  B. Examine the audited financial statements of the investee company.

  C. Review the broker's advice or canceled check for the investment's acquisition.

  D. Obtain market quotations from financial newspapers or periodicals.

  Correct Answer: B

  Explanation: Choice "b" is correct. To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would examine the audited financial statements of the investee company, performing recalculations of prorata share of income/loss and analytical procedures to determine if the investment is carried at the lower of cost or market. Choices "a" and "c" are incorrect. Inspecting the stock certificates evidencing the investment or reviewing the broker's advice or canceled check for the investment's acquisition are procedures that satisfy the existence assertion, not the valuation assertion. Choice "d" is incorrect. Obtaining market quotations from financial newspapers or periodicals would satisfy the valuation assertion for an investment accounted for by the cost method.

• Question 910:

  Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained?

  A. Direct access to securities in the safety deposit box is limited to only one corporate officer.

  B. Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger.

  C. The purchase and sale of investments are executed on the specific authorization of the board of directors.

  D. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel.

  Correct Answer: D

  Explanation: Choice "d" is correct. An independent person comparing the contents of the safety deposit box with the recorded balances in the investment subsidiary ledger is an effective control for assuring that the proper custody of assets in the investing cycle is maintained. Choice "a" is incorrect. Direct access to securities in the safety deposit box being limited to only one corporate officer is a weakness in internal control since there is no independent verification of the box's contents. Good internal control generally requires that two or more individuals be present when the safety deposit box is opened. Choice "b" is incorrect. While it is a good idea to have separate employees post investment transactions to the general and subsidiary ledgers (so they can later be reconciled), this control relates to recordkeeping, not to custody. Choice "c" is incorrect. Authorization of the purchase and sale of investments by the board of directors is a good control over the approval of investment transactions but does little to assure that proper custody of assets is maintained.