AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 911:

  An auditor would most likely verify the interest earned on bond investments by:

  A. Vouching the receipt and deposit of interest checks.

  B. Confirming the bond interest rate with the issuer of the bonds.

  C. Recomputing the interest earned on the basis of face amount, interest rate, and period held.

  D. Testing the internal controls over cash receipts.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Recomputing the interest earned is the most likely method of auditing interest earned

  on bond investments.

  Choice "a" is incorrect. Vouching cash receipts would only verify the recording of checks received. This

  may not be the same as interest earned, since interest is accrued between cash payment dates.

  Choice "b" is incorrect. Confirmation of the bond interest rate with the issuer is not sufficient, as the rate

  still needs to be applied based on face amount and period held.

  Choice "d" is incorrect. Internal control testing of cash receipts would not provide evidence that earned

  interest was properly recorded, since interest is accrued between cash payment dates.

• Question 912:

  An auditor testing long-term investments would ordinarily use analytical review as the primary audit procedure to ascertain the reasonableness of the:

  A. Valuation of marketable equity securities.

  B. Classification of gains and losses on the disposal of securities.

  C. Completeness of recorded investment income.

  D. Existence and ownership of investments.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Analytical review is generally used to ascertain the reasonableness of investment

  income in relationship to the amount invested.

  Choice "a" is incorrect. Valuation would be verified using listed prices (NYSE, etc.).

  Choice "b" is incorrect. Classification of gains or losses would be evaluated based upon appropriate

  accounting principles.

  Choice "d" is incorrect. Existence and ownership is generally evaluated by inspection of securities, review

  of brokerage statements, or confirmation with an outside independent custodian.

• Question 913:

  To establish the existence and ownership of a long-term investment in the common stock of a publicly traded company, an auditor ordinarily performs a security count or:

  A. Relies on the client's internal accounting controls if the auditor has reasonable assurance that the control activities are being applied as prescribed.

  B. Confirms the number of shares owned that are held by an independent custodian.

  C. Determines the market price per share at the balance sheet date from published quotations.

  D. Confirms the number of shares owned with the issuing company.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Auditors obtain a confirmation (safekeeping list) indicating the number of shares of

  stocks held by an outside independent custodian.

  Choice "a" is incorrect. Even a good system of internal control does not necessarily provide sufficient

  evidence of existence and ownership.

  Choice "c" is incorrect. Verifying the market price does not provide evidence regarding ownership or

  existence.

  Choice "d" is incorrect. Confirmations are generally sent to the independent custodian, not to the issuing

  company.

• Question 914:

  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 unusually difficult to verify.

  C. Analytical procedures indicate that few exceptions are expected.

  D. The combined assessed level of inherent risk and control risk is low.

  Correct Answer: A

  Explanation: Choice "a" is correct. If the recipients of confirmations are likely to sign them without devoting proper attention to them, it is possible that a misstatement in the related receivable will not be discovered by the auditor (i.e., when the balance on the confirmation is incorrect and the recipient mistakenly signs it anyway). Use of the blank form of confirmation provides a greater degree of assurance in this situation because it forces the recipient to determine the receivable balance. Choice "b" is incorrect. Inability to verify subsequent cash receipts makes follow-up of unconfirmed accounts more difficult. Since blank forms may result in lower response rates (because they require additional effort), use of the blank form in this situation would be less likely. Choice "c" is incorrect. If few exceptions were expected, it would be acceptable to use positive confirmations. (Blank confirmations may provide a greater degree of assurance, which would be more important if many exceptions were expected.) Choice "d" is incorrect. In low risk situations, it would be acceptable to use positive confirmations. (Blank confirmations may provide a greater degree of assurance, which would be more important in high-risk situations.)

• Question 915:

  To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would:

  A. 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 senders.

  C. Consider the faxes to be nonresponses and evaluate them as unadjusted differences.

  D. Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. In order to validate the legitimacy of a faxed confirmation, the auditor is likely to call

  the senders to verify the sources and contents.

  Choice "a" is incorrect. Examining shipping documents is an alternative procedure that is more likely to be

  performed if the confirmation was not received at all.

  Choice "c" is incorrect. Treating the faxes as non-responses would be to ignore an important source of

  audit evidence. Treating them as unadjusted differences may cause the auditor to conclude that the

  accounts receivable balance is misstated, when in fact it is not.

  Choice "d" is incorrect. Inspecting the faxes for forgeries or alterations is beyond the professional capability

  of the CPA.

• Question 916:

  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 accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

  C. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.

  D. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

  Correct Answer: D

  Explanation: Choice "d" is correct. The use of negative confirmations most likely would be justified when there are a small number of accounts that may be in dispute and the accounts receivable balance arises from sales to many customers with small balances (e.g., utility consumer customers). Choice "a" is incorrect. Positive (not negative) confirmations should be used when a substantial number of accounts are expected to be in dispute, or if the accounts receivable balance is comprised of accounts from a few major customers. Choice "b" is incorrect. Positive (not negative) confirmations should be used when a substantial number of accounts are expected to be in dispute. Choice "c" is incorrect. Positive (not negative) confirmations should be used when the accounts receivable balance is comprised of accounts from a few major customers.

• Question 917:

  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 the internal control structure concerning the revenue cycle.

  C. Increase the assessed level of detection risk for the existence assertion.

  D. Inspect the shipping records documenting the merchandise sold to the debtors.

  Correct Answer: D

  Explanation: Choice "d" is correct. When an auditor does not receive replies to second requests on year-end accounts receivable confirmations, the auditor would most likely perform alternate procedures to support the existence of the receivables. These procedures include inspection of the shipping records to determine that the merchandise was actually sold to the debtors. Choice "a" is incorrect. Alternate procedures would also include reviewing the cash receipts journal for the months subsequent to year-end. Reviewing the cash receipts journal for the month prior to year-end would provide no evidence regarding the existence of a year-end receivable, which obviously had not been paid by year-end. Choice "b" is incorrect. Intensifying the study of the internal control structure concerning the revenue cycle would provide no additional evidence related to the specific accounts receivable confirmations that were not returned. Choice "c" is incorrect. Increasing the assessed level of detection risk for the existence assertion would provide no additional evidence related to the specific accounts receivable confirmations that were not returned by the customer. (By sending out confirmations, the auditor is already performing substantive tests).

• Question 918:

  The negative request form of accounts receivable confirmation is useful particularly when the:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: A

  Explanation:

  Choice "a" is correct. The negative request form of accounts receivable confirmation is useful particularly

  when:

  -

  the assessed level of control risk relating to receivables is low (if control risk is high, then positive

  confirmation requests would probably be sent),

  -

  there are many small balances (which would make it difficult to keep the number of positive

  confirmations to a reasonably low level), and

  -

  consideration of the confirmation by the recipient is likely (since the auditor is relying on the

  customers' consideration as the sole basis of support for the confirmation).

  Choices "b", "c", and "d" are incorrect, based on the above Explanation: .

• Question 919:

  Two assertions for which confirmation of accounts receivable balances provides primary evidence are:

  A. Completeness and valuation.

  B. Valuation and rights and obligations.

  C. Rights and obligations and existence.

  D. Existence and completeness.

  Correct Answer: C

  Explanation: Choice "c" is correct. Two assertions for which the confirmation of accounts receivable balances provides primary evidence are rights and obligations (does the client have a right to the receivable?) and existence (does the receivable really exist?). Choices "a", "b", and "d" are incorrect. Confirmation of receivables does not provide evidence about completeness, since the sample begins with recorded receivables. (To test completeness, we would be looking for unrecorded receivables). In addition, confirmation of receivables does not necessarily provide evidence related to the valuation assertion. While the existence of the receivables is confirmed, their collectability is not.

• Question 920:

  Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:

  A. 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 will reveal all legal action by vendors for nonpayment.

  D. There is likely to be other reliable external evidence available to support the balances.

  Correct Answer: D

  Explanation: Choice "d" is correct. The documents available to support accounts payable balances come from external sources, which makes them more reliable. Choice "a" is incorrect. Confirmation of accounts payable is not a duplication of cutoff tests. Cutoff testing addresses questions about proper period (allocation) while confirmation of accounts payable balances generally tests for understated balances. Choice "b" is incorrect. If liabilities are not paid before the audit is completed, accounts payable confirmations would be more important, since there would be less other evidence supporting the liability. Choice "c" is incorrect. Legal action usually takes a long time and correspondence with an attorney may not disclose all nonpayment problems. (Notice the all-inclusive word "all," usually the tip-off to a wrong answer.)