REVENUE AND COLLECTION CYCLE

11. To test the existence assertion for recorded receivables, an

auditor would select a sample from the.

A. Sales orders file.

B. Customer purchase orders.

C. Accounts receivable subsidiary ledger.

D. Shipping documents (bills of lading) file.

12. Which of the following is least likely to be typically considered

to be an alternate procedure for handling nonreplies to accounts

receivable confirmations?

A. Examine bills of lading.

B. Physically examine items sold.

C. Examine correspondence.

D. Examine subsequent cash receipts.

13. Your client performed the physical count of inventory as of

November 30, one month prior to year-end. Subsequently, your client

closed the sales journal on 12/29/XX, two days before year end, and

reported those two days' credit sales in January of the next year.

Assuming the client uses a perpetual inventory system which of the

following is most likely to be overstated relating to the year XX

financial statements?

A. Sales.

B. Cash.

C. Inventory.

D. Accounts receivable.

14. Which of the following would be least likely to diminish the

validity of evidence obtained through confirmation of accounts

receivable?

A. The confirmations are sent on the client's letterhead.

B. The confirmations are mailed to customers by the internal auditors.

C. The client's mailroom personnel closely monitor and inspect

confirmations during mailing.

D. The return address on the envelope used to send the confirmation

request is that of the client.

15. When control risk for the existence assertion is assessed at a

high level, which of the following is a likely effect with respect to

the auditors' confirmation of receivables?

A. The account balances as of year end will generally be confirmed.

B. The auditors will in general use blank rather than positive

confirmations.

C. The auditors will be required to confirm accounts as of an interim

date (during the year under audit) and as of year end.

D. Confirmations will not in general be used as the auditor will rely

primarily upon support such as vendors' invoices, purchase orders and

receiving reports.

16. What type of error is the CPA most likely to discover when he/she

examines all shipping reports dated in January of 20X1, shipped FOB

shipping point, which were recorded in December of 20X0 as credit

sales?

A. Accounts receivable are overstated at December 31, 20X0.

B. Accounts receivable are understated at December 31, 20X0.

C. Operating expenses are overstated for the 12 months ended December

31, 20X0.

D. Sales returns and allowance are overstated at December 31, 20X0.

17. Which of the following is not typically considered to be an

alternate procedure for handling nonreplies to accounts receivable

confirmations?

A. Examine sales invoices.

B. Inclusion of the information in the engagement letter.

C. Examine correspondence.

D. Examine any subsequent cash receipts.

18. Which of the following fraudulent activities most likely could be

perpetrated due to the lack of effective internal control over the

revenue cycle?

A. Fictitious transactions may be recorded that cause an

understatement of revenues and an overstatement of receivables.

B. Claims received from customers for goods returned (and unpaid for)

may be intentionally recorded in other customers' accounts permitting

a misappropriation of cash.

C. Authorization of credit memos by personnel who receive cash may

permit the misappropriation of cash.

D. The failure to prepare shipping documents may lead to an

understatement of inventory balances.

19. A client might overstate December 31 accounts receivable balances

by dating and recording January transactions in December. Such entries

recorded in which journal are most likely to achieve this end?

A. Cash receipts.

B. Payroll.

C. Purchases.

D. Sales.

20. Which of the following is a likely procedure to test the adequacy

of the allowance for doubtful accounts?

A. Examine cash receipts received after year-end.

B. Confirm receivables.

C. Examine dates of purchase orders.

D. Foot the receivables lead schedule.

21. Which of the following is most likely to be used in determining a

proper amount to be included in the allowance for doubtful accounts?

A. Accounts receivable divided by Cost of goods sold.

B. Aging of accounts receivable.

C. Cash Sales divided by Accounts receivable

D. Year 2 accounts receivable compared to year one accounts

receivable.

22. For effective internal control, the billing function should not be

performed by the:

A. Sales department.

B. Accounting department.

C. Finance department.

D. Information Processing department.

23. Which procedure would be of most assistance to an auditor

discovering a large credit sale that has erroneously been recorded

twice?

A. Footing the sales journal.

B. Sending accounts receivable confirmations.

C. Tracing the total sales in the sales journal to the general ledger.

D. Observation of the physical inventory count at year-end.

24. An audit basically consists of having the auditor form an opinion

regarding management's financial statement assertions. The auditor

therefore develops general and specific program steps to apply to the

accounts and transactions. In a particular case, s/he might do this

by:

A. Tracing sales invoices to shipping documents to tests the

completeness of reported sales.

B. Tracing shipping documents to sales invoices to test the occurrence

of reported sales.

C. Tracing sales invoices to shipping documents to test the occurrence

of reported sales.

D. Tracing sales invoices to shipping documents to test the

completeness of recorded accounts receivable.

25. The confirmation of accounts receivable is most closely associated

with

A. Business risk.

B. Detection risk.

C. Inherent risk.

D. Relative risk.

26. 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.

27. After the CPAs have selected particular accounts receivable for

confirmation:

A. As a control measure, the CPAs should carefully list the audited

values of all of those accounts before turning the letters over to the

client to type and mail.

B. It is important that every account selected that has a material

balance ultimately be verified by confirmation or the application of

alternative procedures; immaterial balances never require any follow-

up through alternative procedures.

C. All requests for confirmation should be mailed in envelopes bearing

the CPA firm's return address and should include a return envelope

addressed to the CPA firm.

D. All differences between confirmation replies and book values should

be reconciled by the CPAs, rather than the client.

28. Which of the following manipulations would understate receivables

on the financial statements?

A. Understatement of cash sales.

B. Closing the sales journal prior to year-end.

C. Closing the cash receipts journal prior to year-end.

D. Underestimating the allowance for doubtful accounts.

29. You were surprised to note that approximately 95% of returned

positive accounts receivable confirmations indicated that the

customers thought that they owed a larger balance than the amount that

had been printed by your client on the confirmation. This might be

explained by the fact that:

A. The cash receipts journal was closed before year-end.

B. The cash receipts journal was held open after year-end.

C. There are many unrecorded liabilities.

D. The sales journal was held open after year-end.

30. An auditor who uses a transaction cycle approach to assessing

control risk most likely would test control activities related to

transactions involving the sale of goods to customers with the

A. Collection of receivables.

B. Purchase of merchandise inventory.

C. Payment of accounts payable.

D. Sale of long-term debt.

31. Which of the following fraudulent activities most likely could be

perpetrated due to the lack of effective internal controls in the

revenue cycle?

A. Merchandise received is not promptly reconciled to the outstanding

purchase order file.

B. Obsolete items included in inventory balances are rarely reduced to

the lower of cost or market value.

C. The write-off of receivables by personnel who receive cash permits

the misappropriation of cash.

D. Fictitious transactions are recorded that cause an understatement

of revenue and overstatement of receivables.

32. Which of the following procedures is least likely to help auditors

to assess the adequacy of management's accounting estimate of the

allowance for doubtful accounts?

A. Investigate confirmation exceptions for indication of amounts in

dispute.

B. Review accounts which have been written off as uncollectible prior

to year-end.

C. Investigate credit ratings for large accounts receivable.

D. Discuss with the credit manager the current status of doubtful

accounts.

33. Which of the following is consistent with effective internal

control over sales transactions?

A. The accounting department prepares a shipping report authorizing

the shipment of goods.

B. The accounting department accounts for all receiving reports.

C. The billing department accounts for all shipping documents.

D. The accounts payable department annually approves the extension of

credit to customers.

34. Tracing recorded sales transactions to the bills of lading

provides evidence about the:

A. Completeness of sales transactions.

B. Collectibility of sales transactions.

C. Occurrence of sales transactions.

D. Billing of all sales transactions.

35. To obtain the best evidence regarding the completeness of recorded

accounts receivable, the auditors:

A. Trace a sample of the bills of lading to sales invoices.

B. Confirm a sample of accounts payable.

C. Review the aging of accounts receivable.

D. Trace a sample of recorded sales to shipping documents.

36. Which of the following generally provides the least evidence

regarding the valuation of accounts receivable?

A. Reviewing an aging of accounts receivable.

B. Examination of cash receipts subsequent to the balance sheet date.

C. Confirming current (0-30 day) year-end accounts receivable.

D. Reviewing credit files for selected account.

37. Which of the following would indicate the need to use positive

accounts receivable confirmations?

A. A large population consisting of small balances.

B. Good internal control over accounts receivable.

C. Most accounts are with large reputable companies.

D. A large number of accounts receivable are in dispute.

38. Which of the following is not true about the confirmation of

accounts receivable?

A. Confirmation requests should bear the auditors' return address.

B. Confirmation requests should be signed by the auditors.

C. Confirmation requests should be mailed directly by the auditors.

D. Confirmation requests should include a return envelope addressed to

the office of the auditors.

39. Which of the following is not true about the auditors'

verification of notes receivable?

A. The interest revenue on notes receivable is usually audited by

independent computation.

B. Inspecting the notes is sufficient evidence of existence of the

notes.

C. The auditors may evaluate the collectibility of notes by inspecting

credit files.

D. Confirmation of notes payable to banks may be accomplished in

conjunction with the confirmation of cash balances.

40. To verify that all sales that have been shipped to customers have

been recorded, a test of transactions should be completed on a

representative sample drawn from:

A. The sales journal.

B. The billing clerk's file of sales orders.

C. Duplicate copies of sales invoices.

D. The shipping clerk's file of duplicate copies of bills of lading.

41. Auditors may use positive and/or negative forms of confirmation

requests for accounts receivable. Of the following, which combination

is it most likely that the auditors will use?

A. The positive form for small balances, and the negative form for

large balances.

B. The positive form used for large balances and the negative form for

the small balances.

C. The positive form used for trade receivables and the negative form

for other receivables.

D. The positive form when controls related to receivables are

satisfactory, and the negative form when controls related to

receivables are unsatisfactory.

42. The auditors obtain audit evidence for accounts receivable by

using positive or negative confirmation requests. Under which of the

following circumstances might the negative form of the accounts

receivable confirmation be useful?

A. A substantial number of accounts are in disputes.

B. The combination of inherent risk and control risk is high.

C. Client records include a large number of relatively small balances.

D. The auditors believe that recipients of the requests are unlikely

to give them consideration.

43. When scheduling the audit work to be performed on an engagement,

the auditors should consider confirming accounts receivable balances

at an interim date if:

A. Subsequent collections are to be reviewed.

B. Internal control over receivables is good.

C. Negative confirmations are to be used.

D. There is a simultaneous examination of cash and accounts

receivable.

44. It is sometimes impossible for the auditors to use normal accounts

receivable confirmation procedures. In such situations the best

alternative procedure the auditors might resort to would be:

A. Examining subsequent receipts of year-end accounts receivable.

B. Reviewing accounts receivable aging schedules prepared at the

balance sheet date and at a subsequent date.

C. Requesting that management increase the allowance for uncollectible

accounts by an amount equal to some percentage of the balance in those

accounts that cannot be confirmed.

D. Applying analytical procedures to accounts receivable and sales on

a year-to-year basis.

45. The audit working papers often include a client-prepared, aged

trial balance of accounts receivable as of the balance sheet date.

This aging is best used by the auditors to:

A. Consider internal control over credit sales.

B. Test the accuracy of recorded charge sales.

C. Estimate credit losses.

D. Verify the validity of the recorded receivables.

46. Which of the following is not a primary objective of the auditors

in the examination of accounts receivable?

A. Determine the approximate realizable value.

B. Consider the adequacy of internal control.

C. Establish the existence of receivables.

D. Determine the expected day of collection of each of the

receivables.

47. Once a CPA has determined that accounts receivable have increased

due to slow collections in a "tight money" environment, the CPA would

be likely to:

A. Increase the balance in the allowance for bad debts accounts.

B. Review the going concern ramifications.

C. Review the credit and collection policy.

D. Expand tests of collectibility.

48. Which of the following sets of duties would ordinarily be

considered basically incompatible in terms of good internal control?

A. Preparation of monthly statements to customers and maintenance of

the accounts payable subsidiary ledger.

B. Posting to the general ledger and approval of additions and

terminations relating to the payroll.

C. Custody of unmailed signed checks and maintenance of expense

subsidiary ledger.

D. Collection of receipts on account and maintaining accounts

receivable records.

49. Tracing copies of sales invoices to shipping documents will

provide evidence that all

A. Shipments to customers were recorded as receivables.

B. Billed sales were shipped.

C. Debits to the subsidiary accounts receivable ledger are for sales

shipped.

D. Shipments to customers were billed.

50. Which of the following is the best argument against the use of

negative accounts receivable confirmations?

A. The cost-per-response is excessively high.

B. There is no way of knowing if the intended recipients received

them.

C. Recipients are likely to feel that in reality the confirmation is a

subtle request for payment.

D. The inference drawn from receiving no reply may not be correct.

51. When there are a large number of relatively small account

balances, negative confirmation of accounts receivable is feasible if

the combination of inherent risk and control risk is:

A. Low, and the individuals receiving the confirmation requests are

unlikely to give them adequate consideration.

B. High, and the individuals receiving the confirmation requests are

likely to give them adequate consideration.

C. High, and the individuals receiving the confirmation requests are

unlikely to give them adequate consideration.

D. Low, and the individuals receiving the confirmation requests are

likely to give them adequate consideration.

52. An auditor should perform alternative procedures to substantiate

the existence of accounts receivable when:

A. No reply to a positive confirmation request is received.

B. No reply to a negative confirmation request is received.

C. Collectibility of the receivables is in doubt.

D. Pledging of the receivables is probable.

53. Johnson is engaged in the audit of a utility which supplies power

to a residential community. All accounts receivable balances are small

and internal control is effective. Customers are billed bi-monthly. In

order to determine the validity of the accounts receivable balances at

the balance sheet date, Johnson would most likely:

A. Examine evidence of subsequent cash receipts instead of sending

confirmation requests.

B. Send positive confirmation requests.

C. Send negative confirmation requests.

D. Use statistical sampling instead of sending confirmation requests.

54. A CPA examines a sample of copies of December and January sales

invoices for the initials of the person who verified the quantitative

data. This is an example of a:

A. Test of a control.

B. Substantive test.

C. Cutoff test.

D. Statistical test.

55. Which of the following is not one of the criteria for revenue

recognition?

A. Collectibility is certain.

B. Delivery has occurred or services have been rendered.

C. Evidence of an arrangement exists and is persuasive.

D. A fixed or determinable price to buyer exists.

56. In your review of ABC Company's financials, you note that

Receivables have increased approximately 200% from the previous year,

while Cash has declined. Further investigation reveals that 70% of

ABC's receivables were booked within 7 days of the end of the quarter.

If financial statement fraud is involved, which type is most likely?

A. Fictitious revenues

B. Timing differences

C. Improper asset valuations

D. Improper disclosures

57. Recognizing a loan received as revenue instead of as a liability

has a positive effect on the reported financial statements for all of

the following except:

A. It understates liabilities.

B. It overstates revenues

C. It overstates net income.

D. It overstates assets.

58. Which of the following revenue related transactions is not linked

to the accounts indicated?

A. Recognize revenues too early--accounts receivable and revenue.

B. Understate allowance for doubtful accounts--Bad debt expense,

allowance for doubtful accounts.

C. Don't write off uncollectible receivables--sales returns, sales

discounts.

D. Don't record discounts given to customers--Cash, sales discounts,

accounts receivable.

59. The individual looking for guidance on revenue recognition is most

likely to appropriately review:

A. APB 99.

B. SAB 104.

C. ASR 44.

D. B1 Document

60. An auditor discovered that a client's accounts receivable turnover

is substantially lower for the current year than for the prior year.

This may indicate that

A. Obsolete inventory has not yet been reduced to fair market value.

B. There was an improper cutoff of sales at the end of the year.

C. An unusually large receivable was written off near the end of the

year.

D. The aging of accounts receivable was improperly performed in both

years.

EXPENDITURE AND DISBURSEMENT CYCLE

11. An auditor suspects that certain client employees are ordering

merchandise for themselves over the Internet without recording the

purchase or receipt of the merchandise. When vendors' invoices arrive,

one of the employees approves the invoices for payment. After the

invoices are paid, the employee destroys the invoices and the related

vouchers. In gathering evidence regarding the fraud, the auditor most

likely would select items for testing from the file of all

A. Cash disbursements.

B. Approved vouchers.

C. Receiving reports.

D. Vendors' invoices.

12. Which of the following is not true relating to the auditors'

observation of the client's physical inventory?

A. The auditors should evaluate the client's planning of the physical

inventory.

B. The auditors should make certain that consigned items from

suppliers are included in physical inventory totals.

C. The auditors should evaluate the adequacy of the client's counting

procedures.

D. The auditors should take test counts of the client's inventory.

13. A receiving department compares inventory items received with

copies of purchase orders. The purchase orders list the name of the

vendor and do not list the quantities of the material ordered. Using

the purchase orders, the receiving department is most likely to

detect:

A. Deliveries for which no purchase order was issued.

B. Unapproved sales orders.

C. Partial deliveries.

D. Deliveries of a greater quantity of items than those ordered

14. To measure how effectively a client employs its assets, an auditor

calculates inventory turnover by dividing the average inventory into:

A. Net sales.

B. Cost of good sold.

C. Operating income.

D. Gross sales.

15. Which of the following audit procedures most likely would provide

assurance that a manufacturing entity's inventory valuation is

proper?

A. Testing the entity's computation of standard overhead rates.

B. Obtaining confirmation of inventories pledged under loan

agreements.

C. Reviewing a cutoff procedure for inventories.

D. Tracing test counts to the entity's inventory listing.

16. A client uses a periodic inventory system. Would one expect a

credit to which of the following accounts at the point of sale?

A. Option A

B. Option B

C. Option C

D. Option D

17. A client uses a perpetual inventory system. Would one expect a

credit to which of the following accounts at the point of sale?

A. Option A

B. Option B

C. Option C

D. Option D

18. Which of the following would an auditor most likely question

included in calculation of the overhead rate for a company that

manufactures a product?

A. Factory supervisor salary.

B. Indirect materials.

C. Miscellaneous expense.

D. Sales expense.

19. A "bill and hold" scheme is most likely to include:

A. Shipment of items to a customer beyond what the customer has

ordered.

B. Recording as sales items that the company retains as of year-end.

C. Billing of items that are held by customers for future revenue

production purposes.

D. Selling items at substantial discounts near year-end.

20. Which of the following is an auditor least likely to consider a

departure from generally accepted accounting principles?

A. Valuing inventory at cost.

B. Including in inventory items that are consigned out to vendors, but

not yet sold.

C. Using standard cost as the measure of inventory cost.

D. Including in inventory items shipped subsequent to year-end, but

for which valid orders did exist at year-end.

21. Which of the following is least likely to be accurate statement

concerning characteristics of an audit?

A. An analysis of inventory turnover addresses whether the proper

method of determining inventory costs--as contrasted to market values-

-is being applied.

B. Characteristics of the double entry bookkeeping system make it

possible to test for overstated sales when tests of accounts

receivable are being performed.

C. The direction of tests for overstatement errors is generally

directed from the recorded entry to source documents.

D. Use of a perpetual rather than a periodic inventory system is

likely to affect the nature of cutoff errors made at year-end.

22. Which of the following is not a reason for the special

significance attached by the auditors to the verification of

inventories?

A. The determination of inventory valuation directly affects net

income.

B. The existence of inventories is inherently difficult to

substantiate.

C. Special valuation problems often exist for inventories.

D. Inventories are often the largest current asset of an enterprise.

23. Which of the following is true about the auditors' observation of

the client's physical inventory?

A. The count must be made at year-end.

B. The auditors should supervise the client's personnel.

C. The auditors' observation addresses the existence assertion.

D. The auditors should justify any omission of the observation in the

audit report.

24. In verifying debits to perpetual inventory records of a non-

manufacturing firm, the auditor would be most interested in examining

the:

A. Purchases journal.

B. Purchase requisitions.

C. Purchase orders.

D. Vendors' invoices.

25. In verifying credits to perpetual inventory records of a non-

manufacturing firm, the auditor would be most interested in examining

the:

A. Shipping documents.

B. Receiving reports.

C. Purchase orders.

D. Vendors' invoices.

26. The client's physical count of inventories is lower than the

inventory quantities in the perpetual records. This could be the

result of a failure to record:

A. Purchases.

B. Purchase discounts.

C. Sales.

D. Sales discounts.

27. An auditor has accounted for a sequence of inventory tags and is

now going to trace information on a representative number of tags to

the inventory summary sheets. Which assertion does this procedure

relate to most directly?

A. Completeness.

B. Existence.

C. Legality.

D. Valuation.

28. The use of a "blind" purchase order is designed to prevent errors

by the:

A. Purchase department.

B. Receiving department.

C. Stores department.

D. Accounting department.

29. An auditor performs a test to determine whether all merchandise

for which the client was billed was received. The population for this

test consists of all:

A. Merchandise received.

B. Vendor's invoices.

C. Canceled checks.

D. Receiving reports.

30. To assure that all purchases are authorized before payment is

made, accounting department personnel should match the vendor's

invoice to:

A. The purchase requisition.

B. The receiving report.

C. The purchase order.

D. The voucher.

31. Which of the following is true about the auditors' observation of

the client's physical inventory?

A. The auditors should plan the physical inventory.

B. The auditors should segregate damaged and obsolete goods.

C. The auditors should evaluate the adequacy of the client's counting

procedures.

D. The auditors should supervise the client's personnel.

32. Which of the following is not a procedure that typically is used

by the auditors in their examination of a client's goods held in the

custody of a public warehouse?

A. Confirmation.

B. Obtaining reports on internal control at the warehouse.

C. Observation.

D. Corresponding with the state agency regarding the authenticity of

the public warehouse.

33. Which of the following best describes the reason that the auditors

record their inventory test counts in the working papers?

A. To document every test count.

B. For subsequent comparison with the completed inventory listing.

C. To document compliance with generally accepted accounting

principles.

D. For use in subsequent audits.

34. Which of the following best describes the auditors' response to a

client's use of statistical sampling techniques to estimate the

inventory?

A. The auditors should satisfy themselves as to the statistical

validity of the technique, and the reasonableness of the allowance for

sampling risk and sampling error used.

B. The auditors should qualify their opinion, because the client must

perform a complete count of the inventory.

C. The auditors should increase the extent of their test counts to

compensate for the use of a statistical technique.

D. The auditors should withdraw from the engagement.

35. Which of the following best describes the reason for the auditors'

review of the client's cost accounting system?

A. To obtain evidence regarding the quantities of good described as

work-in-process.

B. To obtain evidence about the valuation of work-in-process, finished

goods, and cost of goods sold.

C. To obtain evidence about the profit margin on specific jobs.

D. To obtain evidence about compliance with Cost Accounting Standards.

36. Effective internal control for purchases generally can be achieved

in a well-planned organizational structure with a separate purchasing

department that has:

A. The ability to prepare payment vouchers based on the information on

a vendor's invoice.

B. The responsibility of reviewing purchase orders issued by user

departments.

C. The authority to make purchases of requisitioned materials and

services.

D. A direct reporting responsibility to controller of the

organization.

37. Purchase cutoff procedures should be designed to test that

merchandise is included in the inventory of the client company, if the

company:

A. Has paid for the merchandise.

B. Has physical possession of the merchandise.

C. Holds legal title to the merchandise.

D. Holds the shipping documents for the merchandise issued in the

company's name.

38. Which of the following is an internal control weakness for a

company whose inventory of supplies consists of a large number of

individual items?

A. Supplies of relatively little value are expensed when purchased.

B. The cycle basis is used for physical counts.

C. The storekeeper is responsible for maintenance of perpetual

inventory records.

D. Perpetual inventory records are maintained only for items of

significant value.

39. The auditors will usually trace the details of the test counts

made during the observation of the physical inventory taking to a

final inventory schedule. This audit procedure is undertaken to

provide evidence that items physically present and observed by the

auditors at the time of the physical inventory count are:

A. Owned by the client.

B. Not obsolete.

C. Physically present at the time of the preparation of the final

inventory schedule.

D. Included in the final inventory schedule.

40. An internal control questionnaire indicates that an approved

receiving report is required to accompany every check request for

payment of merchandise. Which of the following procedures provides the

greatest assurance that this control is operating effectively?

A. Select and examine receiving reports and ascertain that the related

canceled checks are dated no earlier than the receiving reports.

B. Select and examine receiving reports and ascertain that the related

canceled checks are dated no later than the receiving reports.

C. Select and examine canceled checks and ascertain that the related

receiving reports are dated no earlier than the checks.

D. Select and examine canceled checks and ascertain that the related

receiving reports are dated no later than the checks.

41. A client's physical count of inventories was higher than the

inventory quantities per the perpetual records. This situation could

be the result of the failure to record:

A. Sales.

B. Sales discounts.

C. Purchases.

D. Purchase returns.

42. Which one of the following procedures would not be appropriate for

the auditors in discharging their responsibilities concerning the

client's physical inventories?

A. Confirmation of goods in the hands of public warehouses.

B. Supervising the taking of the annual physical inventory.

C. Carrying out physical inventory procedures at an interim date.

D. Obtaining written representation from the client as to the

existence, quality, and dollar amount of the inventory.

43. To best ascertain that a company has properly included merchandise

that it owns in its ending inventory, the auditors should review and

test the:

A. Terms of the open purchase orders.

B. Purchase cutoff procedures.

C. Contractual commitments made by the purchasing department.

D. Purchase invoices received on or around year end.

44. Which of the following is not one of the independent auditor's

objectives regarding the examination of inventories?

A. Verifying that inventory counted is owned by the client.

B. Verifying that the client has used proper inventory pricing.

C. Ascertaining the physical quantities of inventory on hand.

D. Verifying that all inventory owned by the client is on hand at the

time of the count.

45. Purchase cutoff procedures should be designed to test whether all

inventory:

A. Owned by the company was recorded.

B. On the year end balance sheet was carried at lower of cost or

market.

C. On the year end balance sheet was paid for by the company.

D. Owned by the company is in the possession of the company.

46. Which of the following is an effective control that encourages

receiving department personnel to count and inspect all merchandise

received?

A. Quantities ordered are excluded from the receiving department copy

of the purchase order.

B. Vouchers are prepared by accounts payable department personnel only

after they match item counts on the receiving report with the purchase

order.

C. Receiving department personnel are expected to match and reconcile

the receiving report with the purchase order.

D. Internal auditors periodically examine, on a surprise basis, the

receiving department copies of receiving reports.

47. The accuracy of perpetual inventory records may be established, in

part, by comparing perpetual inventory records with:

A. Purchase requisitions.

B. Receiving reports.

C. Purchase orders.

D. Vendor payments.

48. An inventory turnover analysis is useful to the auditor because it

may detect:

A. Inadequacies in inventory pricing.

B. Methods of avoiding cyclical holding cost.

C. The optimum automatic reorder points.

D. The existence of obsolete merchandise.

49. After accounting for a sequence of inventory tags, an auditor

traces a sample of tags to the physical inventory listing to obtain

evidence that all items:

A. Included in the listing have been counted.

B. Represented by inventory tags are included in the listing.

C. Included in the listing are represented by inventory tags.

D. Represented by inventory tags are bona fide.

50. 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.

51. Tracing copies of computer-prepared sales invoices to copies of

the corresponding computer-prepared shipping documents provides

evidence that

A. Shipments to customers were properly billed.

B. Entries in the accounts receivable subsidiary ledger were for sales

actually shipped.

C. Sales billed to customers were actually shipped.

D. No duplicate shipments to customers were made.

52. In auditing a manufacturing entity, which of the following

procedures would an auditor least likely perform to determine whether

slow-moving, defective, and obsolete items included in inventory are

properly identified?

A. Test the computation of standard overhead rates.

B. Tour the manufacturing plant or production facility.

C. Compare inventory balances to anticipated sales volume.

D. Review inventory experience and trends.