Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because:
A. A majority of recipients usually lack the willingness to respond objectively.
B. Some recipients may report incorrect balances that require extensive follow-up.
C. The auditor cannot infer that all nonrespondents have verified their account information.
D. Negative confirmations do not produce audit evidence that is statistically quantifiable.
Correct Answer: C
Explanation:
Choice "c" is correct. Negative confirmation of accounts receivable is less effective than positive
confirmation of accounts receivable because the auditor cannot infer that all nonrespondents have verified
their account information.
Choice "a" is incorrect. Both positive and negative confirmations are equally affected by recipients' lack of
willingness to respond objectively.
Choice "b" is incorrect. Both positive and negative confirms are equally affected by recipients' reporting of
incorrect balances.
Choice "d" is incorrect. Negative confirmations returned do produce information (e.g., errors noted in
accounts) that can be statistically quantifiable.
Question 922:
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.
Correct Answer: C
Explanation:
Choice "c" is correct. Confirmation of accounts receivable provides evidence that the customer and the
receivable exist.
Choice "a" is incorrect. Accounts receivable confirmations do not provide evidence regarding valuation,
since they do not indicate whether customers have the intent or the ability to pay.
Choice "b" is incorrect. Accounts receivable confirmations do not provide evidence regarding the
appropriate classification of receivables in the financial statements.
Choice "d" is incorrect. Accounts receivable confirmations are sent to recorded customers, so they do not
provide evidence regarding the possible omission of valid accounts (i.e., completeness).
Question 923:
In a comparison of 20X2 to 20X1, ABC Co.'s inventory turnover ratio increased substantially although sales and inventory amounts were essentially unchanged. Which of the following statements explains the increased inventory turnover ratio?
A. Cost of goods sold decreased.
B. Accounts receivable turnover increased.
C. Total asset turnover increased.
D. Gross profit percentage decreased.
Correct Answer: D
Explanation:
Choice "d" is correct. Gross profit percentage decreased.
In order for the inventory turnover ratio to increase, either cost of sales must increase or average inventory must decrease. Since the question indicates that inventory is unchanged, cost of sales must have increased. If the cost of sales increased and sales remained constant, the gross profit percentage would decrease. Choice "a" is incorrect. If cost of goods sold decreases, the inventory turnover ratio would also decrease. Choice "b" is incorrect. Accounts receivable turnover is calculated as sales divided by receivables. If sales remain the same while this ratio increases, receivables have likely declined. This would have no impact on
inventory turnover.
Choice "c" is incorrect. Total asset turnover is calculated as sales divided by total assets. If sales remain
the same while this ratio increases, total assets have likely declined. This would have no impact on
inventory turnover.
Question 924:
An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that:
A. Payments to employees are computed at authorized rates.
B. Employees work the number of hours for which they are paid.
C. Segregation of duties exists between the preparation and distribution of the payroll.
D. Internal controls relating to unclaimed payroll checks are operating effectively.
Correct Answer: B
Explanation:
Choice "b" is correct. By vouching to time card data, the auditor is testing the existence assertion for hours
worked.
Choice "a" is incorrect. Vouching to approved time card data would provide evidence about hours worked,
not pay rates. Pay rates would be tested by comparing to personnel records.
Choice "c" is incorrect. Vouching to approved time cards does not provide evidence about segregation of
duties.
Choice "d" is incorrect. Vouching to the approved time cards does not provide evidence about internal
controls related to unclaimed paychecks. The auditor would need to observe a payroll distribution to
evaluate these controls.
Question 925:
An auditor most likely would extend substantive tests of payroll when:
A. Payroll is extensively audited by the state government.
B. Payroll expense is substantially higher than in the prior year.
C. Overpayments are discovered in performing tests of details.
D. Employees complain to management about too much overtime.
Correct Answer: C
Explanation:
Choice "c" is correct. An auditor most likely would extend (increase) substantive tests of payroll when
significant errors, such as overpayments, are discovered in performing the tests of details.
Choice "a" is incorrect. The extensive auditing of payroll by the state government might serve to decrease
substantive testing since presumably the extensive audit would have already flushed out any problem
areas.
Choice "b" is incorrect. A substantial increase in payroll expense would not necessarily increase the substantive tests of payroll if the increase is readily explainable and supportable with analytical review procedures. Choice "d" is incorrect. An increase in overtime would not necessarily cause the auditor to extend substantive tests of payroll, as long as the effect on payroll is supportable with analytical review procedures.
Question 926:
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the:
A. Human resources function from the controllership function.
B. Administrative controls from the internal accounting controls.
C. Authorization of transactions from the custody of related assets.
D. Operational responsibility from the recordkeeping responsibility.
Correct Answer: C
Explanation: Choice "c" is correct. The purpose of segregating the duties of hiring personnel (personnel department/human resources) and distributing payroll checks (treasurer's department) is to separate the authorization of transactions (hiring, pay rates, etс. are authorized by the personnel department/human resources) from the custody of related assets (cash or checks are held in the treasurer's department). Choice "a" is incorrect. Segregation of hiring personnel (human resources/personnel) from distribution of payroll checks (treasurer's department) does not involve the controllership function. Choice "b" is incorrect. Keeping administrative controls (management's directives) and accounting controls separate is not accomplished by segregating the hiring and distribution functions. Choice "d" is incorrect. Neither operational responsibility nor recordkeeping responsibility includes distributing checks or hiring personnel.
Question 927:
An auditor most likely would perform substantive tests of details on payroll transactions and balances when:
A. 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 fluctuations in recurring payroll entries.
D. Accrued payroll expense consists primarily of unpaid commissions.
Correct Answer: C
Explanation:
Choice "c" is correct. An auditor most likely would perform substantive tests of details on payroll
transactions and balances when analytical procedures indicate unusual fluctuations in recurring payroll
entries. Generally an auditor can audit the payroll accounts utilizing mostly analytical procedures; however
if the results of such procedures indicate unusual fluctuations, the auditor would employ more persuasive,
substantive tests of details.
Choice "a" is incorrect. A substantial amount of accrued payroll expense would not necessarily cause the
auditor to perform substantive tests of details on payroll transactions, since the balance may be effectively
tested using analytical procedures.
Choice "b" is incorrect. When the assessed level of control risk relative to payroll is low, the auditor would
probably perform only analytical procedures to test the related balances. If control risk rose to a high level,
then substantive tests of details would probably be utilized.
Choice "d" is incorrect. Unpaid commissions may be tested effectively with analytical procedures.
Question 928:
Which of the following procedures most likely would be considered a weakness in an entity's internal controls over payroll?
A. A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary.
B. Payroll checks are prepared by the payroll department and signed by the treasurer.
C. The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department.
D. The personnel department sends employees' termination notices to the payroll department.
Correct Answer: C
Explanation: Choice "c" is correct. If the employee who distributes payroll checks returns unclaimed checks to the payroll department, an unscrupulous payroll department employee might be able to set up a fictitious employee and convert the checks once they are returned to the payroll department. Unclaimed checks should be turned over to the cashier in the treasurer's department. Choices "a", "b", and "d" are incorrect. All of the following procedures are good controls over the payroll system:
A. A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary.
B. Payroll checks are prepared by the payroll department and signed by the treasurer.
D. The personnel department sends employees' hire and termination notices to the payroll department.
Question 929:
The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a (an):
A. Clock card or time ticket.
B. Employee Form W-2.
C. Employee personnel record.
D. Payroll register entry.
Correct Answer: D
Explanation:
Choice "d" is correct. To test controls pertaining to the existence of payroll transactions, entries in the
payroll register would be the population from which the sample is selected. (To test existence, the auditor
needs to start with the accounting records and vouch backward to the source documents.)
Choice "a" is incorrect. After the sample is taken from the payroll register, the selected samples are traced
to clock cards or time tickets to verify that payroll transactions really exist/occurred.
Choices "b" and "c" are incorrect. Sampling employee form W-2s and employee personnel records would
test controls related to the completeness of recorded payroll, not existence of specific transactions.
Question 930:
In evaluating the reasonableness of an accounting estimate, an auditor would be least likely to use which of the following approaches?
A. Review subsequent events or transactions occurring prior to audit completion.
B. Develop an independent expectation of the estimate.
C. Review and test the process used to develop the estimate.
D. Review the minutes of board of directors and shareholder meetings for discussion of the estimate.
Correct Answer: D
Explanation: Choice "d" is correct. Even if estimates were discussed during board meetings and/or shareholder meetings, it is unlikely that review of such discussion would provide evidence that the estimate is reasonable. Choices "a", "b", and "c" are incorrect. Reviewing subsequent events, developing an independent expectation, and reviewing and testing the process used to develop the estimate are all appropriate methods used to evaluate the reasonableness of an accounting estimate.
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