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ACC 451

Quiz No. 4

1. Which of the following is not considered one of the three factors of the classic fraud triangle (SAS #99) increasing the probability of fraud? A) Motive. B) Lack of training. C) Opportunity. D) Rationalization. 2. Which of the following is ordinarily considered an "extended procedure" in external auditors' independent audits of financial statements? A) Send positive confirmations on recorded customer accounts receivable balances. B) Perform physical observation and test-count during the client's inventory-taking. C) Measure the time lag between the date of recording cash receipts in the books to the date of deposit credit in the bank. D) Conduct interviews with the client's sales billing personnel to learn about sales recording control procedures. 3. A payroll manager was including fictitious employees on the payroll each month and taking the checks for himself. An audit procedure that would most likely lead to discovering this would be A) recalculating the payroll amounts. B) comparing the total payroll amount to the journal entry. C) a surprise payroll distribution. D) making sure all checks clear the bank. 4. In the audit of cash the auditor obtains a bank cutoff statement primarily to A) identify old outstanding checks that the client may exclude from the year-end bank reconciliation in order to misappropriate cash. B) obtain sufficient information to reconcile the client's bank account as of year-end. C) obtain direct confirmation of the client's bank balances as of year-end. D) test the propriety of items appearing on the client's year-end bank reconciliation. 5. Which of the following sets of information does an auditor usually confirm on one form? A) Accounts payable and purchase commitments. B) Cash in bank and collateral for loans. C) Inventory on consignment and contingent liabilities. D) Accounts receivable and accrued interest receivable. 6. To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is A) supported by a vendor's invoice. B) stamped "paid" by the check signer. C) prenumbered and accounted for. D) approved for authorized purchases. 7. Building up balances in bank accounts based upon floating checks drawn against similar accounts in other banks is best called: A) Hypothecation B) Kiting. C) Money laundering. D) Lapping.

8. Which of the following gives the least indication of fraudulent activity? A) Numerous cash refunds have been made to different people at the same post office box address. B) Internal auditor cannot locate several credit memos to support reductions of customers' balances. C) Bank reconciliation has no outstanding checks or deposits older than 15 days. D) Three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later. 9. Which of the following procedures might an auditor use to detect kiting? A) Review the composition of authenticated deposit slips. B) Review subsequent bank statements. C) Prepare a schedule of bank transfers. D) Prepare a year-end bank reconciliation. 10. An auditor would least likely initiate a discussion with a client's audit committee concerning A) the methods used to account for significant unusual transactions. B) the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated. C) indications of fraud and illegal acts committed by a corporate officer that were discovered by the auditor. D) disagreements with management as to accounting principles that were resolved during the current year's audit. 11. Your client is in the process of acquiring another company. You have been requested to verify that cash for the company being acquired is properly stated. The audit technique that will yield the most persuasive evidence is A) Examination of the company's escrow account. B) Interview with the company's treasurer and cash manager. C) Preparation and review of standard bank confirmation inquiries. D) Analytical computations comparing current cash in the bank with previous accounting periods. 12. The SEC requires all of the following for revenue to be recognized except A) Cash is collected B) Persuasive evidence of an arrangement exists. C) Delivery has occurred or services have been rendered. D) The seller's price to the buyer is fixed or determinable. 13. "Bill and Hold" refers to an arrangement where A) Sales are recorded but are not shipped. B) Sales are shipped but are not recorded. C) Sales are billed but not collected. D) Inventory is held but not billed. 14. A small business owner can best offset the lack of segregation of duties by A) Creating an internal audit department B) Installing the latest computer equipment and software C) Being actively involved in the accounting process D) Relying on the external auditor to detect errors.

15. Confirmations of accounts receivable provide the most evidence for which of the following assertions? A) Existence. B) Valuation or Allocation. C) Rights and obligations. D) Completeness. 16. When an account receivable is considered uncollectible the person who generally authorizes the write off is the client's A) Credit manager. B) Treasurer. C) Accountant. D) Internal auditor. 17. In determining the adequacy of the allowance for uncollectible accounts, the most valuable evidence would be obtained from A) an aging schedule of past due accounts which the auditor has tested. B) correspondence with the client's collection agency. C) financial statements of individual customers. D) no reply to negative confirmations. 18. In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of A) existence or occurrence. B) valuation or allocation. C) completeness. D) rights and obligations. 19. Which of the following procedures is not used in the auditor's examination of litigation, claims, and assessments? A) Obtaining a description and evaluation of litigation, claims, and assessments from management. B) Examining documentary evidence regarding litigation, claims, and assessments. C) Reading minutes of meetings of stockholders, directors, and appropriate committees. D) Performing analytical procedures. 20. Which party should request a letter of inquiry regarding litigation, claims, and assessments from the client's attorney? A) Attorney. B) Auditor. C) Client. D) Securities and Exchange Commission or other regulatory body. 21. To whom should management representations be addressed? A) Auditor. B) Board of directors. C) Client. D) Stockholders.

22. Before the impact of adjusting entries proposed by auditors is included in the client's financial statements, the adjustments must be approved by the A) Client's management. B) Audit manager. C) Engagement partner. D) Second review partner. 23. A subsequent event that provides additional information about a condition that existed at the balance sheet date is referred to as a(n): A) Revised disclosure. B) Subsequent discovery of facts. C) Type I subsequent event. D) Type II subsequent event. 24. The Orange Corporation was audited for the year ended December 31 and the report was delivered on February 15. After the fieldwork was completed on January 25, the auditor learned of a two-for-one stock split on February 1. If dual dating is used, what are the proper dates for the audit report? A) December 31 and January 25. B) January 25 and February 1. C) January 25 and February 15. D) February I and February 15. 25. A second-partner review of the audit documentation and financial statements is performed to ensure that the: A) "To-do lists" are reviewed and cleared. B) Audit program procedures are "signed off." C) Tick-mark notations are cleared. D) Audit work meets the quality standards of the firm. 26. The primary objective of analytical procedures used in the final review stage of an audit is to A) Obtain evidence from details tested to corroborate management assertions. B) Obtain evidence on the validity of the assessment of control risk. C) Assist the auditor in evaluating the overall financial statement presentation. D) Identify areas that represent specific risks relevant to the audit. 27. At the review stage of an audit, the application of analytical procedures is A) Recommended by auditing standards. B) Not mentioned by auditing standards. C) Not useful, since detailed substantive tests have already been performed. D) Required by auditing standards. 28. 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 but before the audit report is issued.

29. Which of the following pairs of accounts would an auditor most likely analyze on the same audit documentation? A) Notes receivable and interest income. B) Accrued interest receivable and accrued interest payable. C) Notes payable and notes receivable. D) Interest income and interest expense. 30. The scope (middle, second) paragraph of the standard audit report does not include the statement A) "in conformity with generally accepted accounting principles." B) "audit provides a reasonable basis for an opinion." C) "an audit includes assessing the accounting principles used." D) "perform the audit to obtain reasonable assurance." 31. The opinion paragraph of the auditor's report incorporates all of the following standards, except that the A) financial statements are presented in accordance with GAAP. B) informative disclosures are adequate unless otherwise stated. C) financial statements are management's responsibility. D) report identifies circumstances in which principles have not been consistently observed. 32. If financial statements contain a "compartmentalized" departure from FASB pronouncements, the auditor should render a (an) A) qualified "except for" opinion with reference to departure. B) adverse opinion with scope limitation reference. C) adverse opinion with reference to departure. D) disclaimer of opinion. 33. An explanation of reliance on the reports of other auditors is an illustration of report departures referred to as A) qualifications. B) divisions of responsibility. C) expansions of scope. D) scope limitations. 34. An audit report included an additional paragraph disclosing a difference of opinion between the auditor and the client for which the auditor believed an adjustment to the financial statements should be made. The opinion paragraph of the audit report should express A) an unqualified opinion. B) an "except for" opinion citing a departure from generally accepted accounting principles. C) an "except for" opinion citing a scope limitation and lack of specific evidence. D) a disclaimer of opinion. 35. An auditor will issue an adverse opinion when A) a severe scope limitation has been imposed by the client. B) a violation of GAAP is sufficiently material that a qualified opinion is not justified. C) a qualified opinion cannot be rendered because the auditor lacks independence. D) the company's ability to continue as a going concern is subject to substantial doubt.

36. An auditor who is reporting on financial statements that contain a material departure from generally accepted accounting principles should include a separate explanatory paragraph and A) express a qualified or adverse opinion. B) not modify the opinion paragraph as long as the departure is adequately disclosed in a footnote. C) disclaim an opinion on the financial statements. D) express a qualified opinion or disclaim an opinion. 37. Reference in a principal auditor's report to the fact that part of the audit was performed by another auditor most likely would be an indication of A) divided responsibility between the auditors who conducted the audits of the components of the overall financial statements. B) lack of materiality of the portion of the financial statements audited by the other auditor. C) principal auditor's recognition of the other auditor's competence, reputation, and professional certification. D) different opinions the auditors are expressing on the components of the financial statements that each audited. 38. When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should A) refer to the change in an explanatory paragraph. B) explicitly concur that the change is preferred. C) not refer to consistency in the auditor's report. D) refer to the change in the opinion paragraph. 39. When financial statements contain a departure from GAAP because, due to unusual circumstances, the statements would otherwise be misleading, the auditor should explain the unusual circumstances in a separate paragraph and express an opinion that is A) unqualified. B) qualified. C) adverse. D) qualified or adverse, depending on materiality. 40. Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment as auditor and the start of fieldwork made confirmation of accounts receivable by direct communication with the debtors ineffective. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditor's report most likely contained a(an) A) unqualified opinion. B) unqualified opinion with an explanatory paragraph. C) qualified opinion due to a scope limitation. D) qualified opinion due to a departure from generally accepted auditing standards.

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