AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 961:

  Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

  A. Determine that changes in employee pay rates after year-end were properly authorized.

  B. Recompute depreciation charges for plant assets sold after year-end.

  C. Inquire about payroll checks that were recorded before year-end but cashed after year-end.

  D. Investigate changes in long-term debt occurring after year-end.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Long-term debt that matures within one year is reported as a current liability on the

  balance sheet. An auditor reviews changes in long-term debt occurring after year-end to evaluate whether

  such debt is appropriately classified on the balance sheet.

  Choice "a" is incorrect. Subsequent changes in employee pay rates are not relevant to the current year's

  audit report.

  Choice "b" is incorrect. Depreciation charges for assets sold in the subsequent period are not relevant to

  the current year's audit report.

  Choice "c" is incorrect. Payroll checks that were recorded close to (but before) year-end often are not

  cashed until the subsequent period. The auditor would not be particularly concerned about this.

• Question 962:

  Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?

  A. Compare the amounts included in the statement of cash flows to similar amounts in the prior year's statement of cash flows.

  B. Reconcile the cutoff bank statements to verify the accuracy of the year-end bank balances.

  C. Vouch all bank transfers for the last week of the year and first week of the subsequent year.

  D. Reconcile the amounts included in the statement of cash flows to the other financial statements' balances and amounts.

  Correct Answer: D

  Explanation: Choice "d" is correct. To audit the statement of cash flows, the auditor reconciles the amounts on the statement to amounts on other financial statements. Choice "a" is incorrect. Comparison of amounts on the cash flow statement with those of the previous period is an analytical procedure that is not commonly used to audit the statement of cash flows, since sources and uses of cash in the current year are not necessarily predictable based on sources and uses from the prior year. Choice "b" is incorrect. Reconciling the cutoff bank statement is a procedure used to audit the cash balance, rather than the statement of cash flows. Choice "c" is incorrect. Vouching all bank transfers is a procedure used to audit the cash balance, rather than the statement of cash flows.

• Question 963:

  Which of the following would not be considered an analytical procedure?

  A. Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked.

  B. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics.

  C. Computing accounts receivable turnover by dividing credit sales by the average net receivables.

  D. Developing the expected current-year sales based on the sales trend of the prior five years.

  Correct Answer: B

  Explanation: Choice "b" is correct. Analytical procedures involve comparison of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. Projecting an error rate from a statistical sample does not involve such a comparison. Choice "a" is incorrect. An analytical procedure involves comparison of an independently developed expectation to a recorded amount. Comparing an estimate of payroll expense (developed by multiplying the number of employees by the average hourly rate and the total hours worked) to the recorded expense is an analytical procedure. Choice "c" is incorrect. An analytical procedure involves comparison of an independently developed expectation to a recorded amount. Ratio analysis is often performed in order to compare recorded results to industry norms or to past performance, and therefore calculation of accounts receivable turnover is likely to be an analytical procedure. Choice "d" is incorrect. An analytical procedure involves comparison of an independently developed expectation to a recorded amount. Comparing an estimate of sales (developed based on a trend analysis) to the recorded amount is an analytical procedure.

• Question 964:

  Analytical procedures used in the overall review stage of an audit generally include:

  A. Gathering evidence concerning account balances that have not changed from the prior year.

  B. Retesting control activities that appeared to be ineffective during the assessment of control risk.

  C. Considering unusual or unexpected account balances that were not previously identified.

  D. Performing tests of transactions to corroborate management's financial statement assertions.

  Correct Answer: C

  Explanation: Choice "c" is correct. The objective of analytical procedures used in the overall review stage of the audit is to assist the auditor in assessing conclusions reached and in the evaluation of the overall financial statement presentation. Analytical procedures applied in the overall review stage are used to consider the adequacy of evidence gathered in response to unusual or unexpected balances identified in planning the audit, and to identify unusual or unexpected balances or relationships that were not previously identified. Choice "a" is incorrect. If analytical procedures are used to gather evidence about account balances that have not changed from last year, they are functioning as a substantive test rather than as a final review procedure. Choice "b" is incorrect. Analytical procedures are not used to test controls. Choice "d" is incorrect. If analytical procedures are used as a test of transactions, they are functioning as a substantive test rather than as a final review procedure.

• Question 965:

  In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of:

  A. Valuation and allocation.

  B. Existence.

  C. Completeness.

  D. Rights and obligations.

  Correct Answer: A

  Explanation: Choice "a" is correct. Assertions about valuation and allocation deal with whether assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts. Recalculation of the amortization and review of the amortization period would test the valuation and allocation assertion. Choice "b" is incorrect. Assertions about existence deal with whether assets, liabilities, and equity interests exist at a given date. Evaluating amortization does not relate to this assertion. Choice "c" is incorrect. Assertions about completeness deal with whether all assets, liabilities, and equity interests that should be presented in the financial statements are so included. Evaluating amortization does not relate to this assertion.

  Choice "d" is incorrect. Assertions about rights and obligations deal with whether assets are the rights of the entity and liabilities are the obligations of the entity at a given date. Evaluating amortization does not relate to this assertion.

• Question 966:

  Tracing shipping documents to prenumbered sales invoices provides evidence that:

  A. No duplicate shipments or billings occurred.

  B. Shipments to customers were properly invoiced.

  C. All goods ordered by customers were shipped.

  D. All prenumbered sales invoices were accounted for.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. By tracing from the shipping documents to the invoices, the auditor confirms that

  goods that were shipped were properly billed.

  Choice "a" is incorrect. Tracing shipping documents to prenumbered invoices would not provide assurance

  that duplicate shipments or billings did not occur.

  Choice "c" is incorrect. In order to test whether all goods that were ordered were shipped, the auditor

  would trace customer purchase orders to shipping documents.

  Choice "d" is incorrect. Determining that all prenumbered sales invoices are accounted for does not require

  examining shipping documents.

• Question 967:

  An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting:

  A. Opening and closing inventory balances.

  B. Cash receipts and accounts receivable.

  C. Shipping and receiving activities.

  D. Cutoffs of sales and purchases.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Examination of accounts receivable and cash receipts provides the auditor with

  evidence with respect to both the completeness and the occurrence of sales transactions, thus limiting the

  need to test sales transactions.

  Choice "a" is incorrect. Examination of beginning and ending inventory balances may provide limited

  evidence of the occurrence of purchases and the cost of goods sold, but not of sales.

  Choice "c" is incorrect. Examination of shipping and receiving activities would not necessarily reduce the

  testing of sales transactions.

  Choice "d" is incorrect. Cutoffs of sales and purchases provides evidence regarding the sales occurring

  close to year-end, not necessarily all sales for the year.

• Question 968:

  An auditor's analytical procedures most likely would be facilitated if the entity:

  A. Segregates obsolete inventory before the physical inventory count.

  B. Uses a standard cost system that produces variance reports.

  C. Corrects material weaknesses in internal control before the beginning of the audit.

  D. Develops its data from sources solely within the entity.

  Correct Answer: B

  Explanation: Choice "b" is correct. An auditor's analytical procedures are facilitated when an entity uses a standard cost system with variance reports because the comparison of actual to budget will already have been performed. In addition, it is likely that management will already be aware of significant variations from budget and will be better able to address any questions the auditor may have. Choice "a" is incorrect. Segregation of obsolete inventory would not be an important factor in determining whether analytical procedures would be effective. Choice "c" is incorrect. Correction of internal control weaknesses prior to the beginning of the audit would not affect analytical procedures. Choice "d" is incorrect. Analytical procedures using data developed solely within the entity are not as reliable as analytical procedures using data developed externally.

• Question 969:

  An auditor may achieve audit objectives related to particular assertions by:

  A. Performing analytical procedures.

  B. Adhering to a system of quality control.

  C. Preparing audit documentation.

  D. Increasing the level of detection risk.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. The auditor relies on substantive tests to achieve audit objectives related to particular

  assertions. Analytical procedures are one type of substantive procedure.

  Choice "b" is incorrect. CPA firms performing audits are required to adhere to a system of quality control,

  but adhering to such a system does not directly help the firm achieve specific audit objectives.

  Choice "c" is incorrect. Audit documentation is used to record the results of audit procedures that have

  been performed to achieve audit objectives. Mere preparation of audit documentation does not achieve

  audit objectives.

  Choice "d" is incorrect. Increasing the level of detection risk does not enable the auditor to achieve audit

  objectives related to a particular assertion.

• Question 970:

  Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?

  A. The current year's accounts receivable with the prior year's accounts receivable.

  B. The current year's payroll expense with the prior year's payroll expense.

  C. The budgeted current year's sales with the prior year's sales.

  D. The budgeted current year's warranty expense with the current year's contingent liabilities.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. The most likely analytical review procedure involving costs and expenses would be to

  compare the current year's payroll expense (average amount per employee) to the prior year, taking into

  consideration an average increase in wage rates. This is a very effective technique in auditing payroll

  expense.

  Choice "a" is incorrect. Comparing the current year's accounts receivable balance with the prior year

  provides little evidence because accounts receivable may fluctuate based on timing of cash payments,

  which is unpredictable.

  Choice "c" is incorrect. Comparing the budgeted current year's sales with the prior year's sales provides evidence regarding the reasonableness of the current year sales budget, but does not provide evidence about costs and expenses. Choice "d" is incorrect. The current year's budgeted warranty expense would likely be compared to the current year's actual warranty expense, not to all of the contingent liabilities for the year.