AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 941:

  The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to:

  A. Observe physical counts of the inventory items.

  B. Trace the total on the inventory listing to the general ledger inventory account.

  C. Obtain a confirmation from the client indicating inventory ownership.

  D. Analytically compare the current-year inventory balance to the prior-year balance.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. The auditor's personal observation is generally one of the most reliable forms of

  evidence. Observing physical inventory counts provides reliable evidence that the inventory actually exists.

  Choice "b" is incorrect. Tracing totals from the inventory listing to the general ledger inventory account

  provides evidence of completeness, not existence.

  Choice "c" is incorrect. A confirmation from the client indicating ownership provides some evidence

  regarding rights and obligations, but does not provide evidence of existence.

  Choice "d" is incorrect. Analytical comparisons of current year to prior year inventory balances might

  provide some evidence regarding completeness, existence, and valuation, but this is not as reliable a procedure for verifying existence, as is the auditor's direct personal observation.

• Question 942:

  Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?

  A. A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year.

  B. Internal control activities over the recording of cash receipts have been improved since the end of the prior year.

  C. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.

  D. The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.

  Correct Answer: C

  Explanation: Choice "c" is correct. If a second, similar retail outlet were opened, one would expect sales and accounts receivable to double. As long as the collection rates for the new outlet's receivables were expected to be similar to those of the original outlet, the allowance for doubtful accounts as a percentage of accounts receivable would remain the same. Choice "a" is incorrect. If more receivables are potentially uncollectible in the current year (as opposed to the prior year), the allowance for doubtful accounts as a percentage of receivables should increase to reflect the greater level of estimated bad debts. Choice "b" is incorrect. Improved control activities related to the recording of cash receipts might result in a decrease in accounts receivable in the current year as compared to the prior year, not an increase. In addition, improving such controls would not be likely to affect the allowance for doubtful accounts as a percentage of receivables. Choice "d" is incorrect. If the client sold less merchandise to customers with poor credit ratings, the allowance for doubtful accounts as a percentage of receivables should decrease to reflect the lower level of estimated bad debts.

• Question 943:

  An auditor most likely would apply analytical procedures in the overall review stage of an audit to:

  A. Enhance the auditor's understanding of subsequent events.

  B. Identify auditing procedures omitted by the staff accountants.

  C. Determine whether additional audit evidence may be needed.

  D. Evaluate the effectiveness of the internal control activities.

  Correct Answer: C

  Explanation: Choice "c" is correct. In performing analytical procedures as an overall review, the auditor determines whether adequate evidence has been gathered in response to unusual or unexpected balances identified during the audit, and may decide that additional audit procedures are warranted. In addition, the auditor may identify unusual or unexpected balances not already noted during the audit, which would also require the application of further auditing procedures. Choice "a" is incorrect. Analytical procedures applied during the overall review stage of the audit are meant to evaluate the overall financial statement presentation, and to assess the conclusions reached by the auditor. This is a high-level review, and one that focuses on the financial statements. As such, it would not be likely to enhance the auditor's understanding of subsequent events. Choice "b" is incorrect. Analytical procedures applied during the overall review stage of the audit are meant to evaluate the overall financial statement presentation, and to assess the conclusions reached by the auditor. This is a high-level review, and one that focuses on the financial statements. As such, it would not be likely to identify omitted auditing procedures. Choice "d" is incorrect. Analytical procedures applied during the overall review stage of the audit are meant to evaluate the overall financial statement presentation, and to assess the conclusions reached by the auditor. This is a high-level review, and one that focuses on the financial statements. As such, it would not be useful in evaluating the effectiveness of the client's internal control activities.

• Question 944:

  An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that:

  A. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year.

  B. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

  C. The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions.

  D. Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

  Correct Answer: B

  Explanation: Choice "b" is correct. Unrealized gains on available-for-sale securities should properly be recorded in other comprehensive income. If such gains were erroneously recorded in the income account for trading securities, this might be discovered through comparison of the current year and prior year revenues and expenses (assuming the error occurred only in the current year, and not in the prior year). Choice "a" is incorrect. If payroll taxes were properly accrued and recorded, there is unlikely to be a significant change in revenues and expenses for the current year as compared to the prior year. Payables would not be part of the comparison of revenues and expenses. Choice "c" is incorrect. In times of worsening economic conditions, one would expect the annual provision for uncollectible accounts to increase. Since this answer option indicates that the provision was inadequate, it would appear that the client did not increase the provision appropriately. Investigating changes in revenues and expenses would not be likely to identify this error, since failing to increase the provision would likely result in there being little change between the two years. Choice "d" is incorrect. An increase in property tax rates should cause a corresponding increase in accrued property tax expense; however, the question indicates that the appropriate increase was not recorded in the current year. Investigating changes in revenues and expenses would not be likely to identify this error, since failing to increase the expense would likely result in there being little change between the two years.

• Question 945:

  Which of the following types of audit evidence generally is the most reliable?

  A. Inquiries made of management.

  B. Confirmation of account information.

  C. Analytical procedures.

  D. Review of prior-year audit procedures.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Confirmations are among the most reliable types of evidence, as they constitute

  external evidence sent directly to the auditor.

  Choice "a" is incorrect. Inquiries provide oral evidence, which is less reliable than confirmations.

  Choice "c" is incorrect. Analytical procedures provide the auditor with direct personal knowledge, but

  because these procedures often are based on internal accounting data, the evidence obtained is not as

  reliable as that obtained from confirmations.

  Choice "d" is incorrect. Review of audit procedures from the previous year does not provide appropriate

  audit evidence regarding the current year's financial statements.

• Question 946:

  Analytical procedures performed in the final review stage of an audit generally would include:

  A. Reassessing the factors that assisted the auditor in deciding on preliminary materiality levels and audit risk.

  B. Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.

  C. Summarizing uncorrected misstatements specifically identified through tests of details of transactions and balances.

  D. Calculating projected uncorrected misstatements estimated through audit sampling techniques.

  Correct Answer: B

  Explanation: Choice "b" is correct. Analytical procedures applied during the final review stage should be used to determine whether adequate evidence has been gathered in response to unusual or unexpected balances identified during the audit. Choice "a" is incorrect. Analytical procedures generally involve comparison of recorded amounts to auditor expectations. Reassessing the factors used to establish materiality levels and audit risk would not involve such comparisons. Choice "c" is incorrect. Analytical procedures generally involve comparison of recorded amounts to auditor expectations. Summarizing uncorrected misstatements would not involve such comparisons. Choice "d" is incorrect. Analytical procedures generally involve comparison of recorded amounts to auditor expectations. Calculating projected uncorrected misstatements would not involve such comparisons.

• Question 947:

  An independent auditor asked a client's internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure?

  A. The internal auditor did not sign the form.

  B. The form was mailed by the controller.

  C. The form was prepared by the internal auditor.

  D. The account was closed, so the balance was zero.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. The auditor should control the mailing of independent confirmations.

  Choice "a" is incorrect. It is appropriate for a member of management, such as the controller, to sign the

  confirmation request.

  Choice "c" is incorrect. It is acceptable for an internal auditor to provide direct assistance to the external

  auditor, such as by preparing confirmation forms.

  Choice "d" is incorrect. Confirmations may be sent to accounts that show a zero balance, to test for

  understatement errors or to obtain information about loans.

• Question 948:

  At December 31, 20X2, ABC Co. had the following balances in selected asset accounts:

  

  ABC also had current liabilities of $1,000 at December 31, 20X2, and net credit sales of $7,200 for the year

  then ended.

  What was the average number of days to collect ABC's accounts receivable during 20X2?

  A. 30.4

  B. 40.6

  C. 50.7

  D. 60.8

  Correct Answer: C

  Explanation:

  Choice "c" is correct. The average number of days to collect accounts receivable is calculated by dividing

  365 days by the accounts receivable turnover. Accounts receivable turnover is net credit sales divided by

  the average accounts receivable:

  

  Choice "a" is incorrect. The denominator should be net credit sales ($7,200) divided by average

  receivables $1,000), or 7.2, not 12.

  Choice "b" is incorrect. The average receivable balance is $1,000, not $800. The right-hand column shows

  the increase over 20X1, so the 20X1 receivable balance was $1,200 − $400, or $800. Since the 20X2

  receivable balance was given as $1,200, the average receivable balance is $1,000.

  Choice "d" is incorrect. Average inventory ($1,000), not ending inventory ($1,200), should be used.

• Question 949:

  At December 31, 20X2, ABC Co. had the following balances in selected asset accounts:

  

  ABC also had current liabilities of $1,000 at December 31, 20X2, and net credit sales of $7,200 for the year then ended.

  What is ABC's acid-test ratio at December 31, 20X2?

  A. 1.5

  B. 1.6

  C. 2.0

  D. 2.1

  Correct Answer: A

  Explanation:

  Choice "a" is correct. The acid-test ratio is calculated by taking the current assets excluding inventory and

  prepaid expenses and dividing by current liabilities. In this case, cash and accounts receivable ($300 +

  $1,200 = $1,500) are divided by current liabilities ($1,000), resulting in a ratio of $1,500/$1,000, or 1.5.

  Choice "b" is incorrect. The numerator in the acid-test ratio formula includes only cash and accounts

  receivable. It would not include prepaid expenses.

  Choice "c" is incorrect. The numerator in the acid-test ratio formula includes only cash and accounts

  receivable. It would not include inventory.

  Choice "d" is incorrect. The numerator in the acid-test ratio formula includes only cash and accounts

  receivable. It would not include inventory and prepaid expenses.

• Question 950:

  At December 30, 20X3, ABC Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of .5:1. On December 31, 20X3, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: A

  Explanation: Choice "a" is correct. The current ratio equals current assets divided by current liabilities. Since the current assets exceed the current liabilities (as evidenced by a current ratio of 1.5:1), when each is decreased by the same amount, there will be a greater percentage reduction of the current liabilities. Thus, the ratio will increase since the current assets are now proportionately larger than the current liabilities. The quick ratio equals quick assets (including cash) divided by current liabilities. Since the quick assets are less than the current liabilities (as evidenced by a quick ratio of .5:1), when each is decreased by the same amount, the percentage decrease of the quick assets will be greater than that of the current liabilities. Thus, the ratio will decrease since the quick assets are now proportionately smaller than the current liabilities. Choices "b", "c", and "d" are incorrect, per the above Explanation: .