Substantive Audit Testing: Expenditure Cycle

1. Auditor confirmation of accounts payable balances at the

balance sheet date may be unnecessary because .
d. There is likely to be other reliable external evidence 18. Which of the following would be the best procedure to
to support the balances. determine whether purchases were properly authorized?
c. Determine whether a sample of entries in the
2. What form of analytical review might uncover the existence purchase journal is supported by properly executed
of obsolete merchandise? purchase orders.
a. Inventory turnover rates.
19. In a manufacturing company, which one of the following
3. A weakness in internal accounting control over recording audit procedures would give the least assurance of the
retirements of equipment may cause the auditor to valuation of inventory at the audit date?
d. Select certain items of equipment from the d. Obtaining confirmation of inventories pledged under
accounting records and locate them in the plant. loan agreements.

4. When auditing inventories of raw materials, purchased parts, 20. In conducting a search for unrecorded liabilities, the auditor
and/or merchandise inventory, the auditor's most effective should do all but the following:
means for evaluating the valuation assertion is to d. Examine invoices paid a few days prior to the balance
a. Examine recent invoices from vendors, along with sheet date.
freight bills and compare with client's unit costs, as
adjusted for freight and discount. 21. An attorney responding to an auditor as a result of the
client's letter of audit inquiry may appropriately limit the
5.The auditor tests the quantity of materials charged to work in response to
process by tracing these quantities to d. Matters to which the attorney has given substantive
d. Material requisitions. attention in the form of legal consultation or
representation.
6. The most effective means for the auditor to determine
whether a recorded intangible asset possesses the 22. Which of the following errors is most likely to be detected
characteristics of an asset is to by examining unrecorded expenditure invoices on randomly
c. Evaluate the future revenue-producing capacity of the selected dates during the month after fiscal year-end?
intangible asset. c. Accounts payable are understated at fiscal year-end.

7. Which of the following accounts would most likely be 23. Patentex developed a new secret formula which is of great
reviewed by the auditor to gain reasonable assurance that value because it resulted in a virtual monopoly. Patentex has
additions to the equipment account are not understated? capitalized all research and development costs associated with
a. Repairs and maintenance expense. this formula. Greene, CPA, who is examining this account, will
probably
8. The most significant audit step in substantiating additions to a. Confer with management regarding transfer of then
the office furniture account balance is amount from the balance sheet to the income statement.
a. Examination of vendors' invoices and receiving
reports for current year's acquisitions. 24. In auditing inventories, a major objective relates to the
existence assertion. Of the following audit procedures relating
9. Instead of taking a physical inventory count on the balance to inventories, which does not support the existence assertion?
sheet date, the client may take physical counts prior to the c. The auditor performs a lower of cost or market test for
yearend if internal controls are adequate and major categories of inventory.
a. Computerized records of perpetual inventory are
maintained. 25. When perpetual inventory records are maintained in
10. The probability of a significant idle capacity loss increases quantities and in dollars, and internal accounting control over
under which of the following conditions? inventory is weak, the auditor would probably
c. Sales and production have declined materially during a. Want the client to schedule the physical inventory
the period under audit. count at the end of the year.

11. Which of the following is not one of the independent 26. In auditing plant assets and accumulated depreciation for
auditor's objectives regarding the audit of inventories? proper valuation, the auditor should do all except the following:
d. Verifying that all inventory owned by the client is on b. Physically inspect major plant assets additions.
hand at the time of the count.
27. The primary reason an auditor requests letters of inquiry be
12. An auditor is verifying the existence of newly acquired fixed sent to a client's attorneys is to provide the auditor with
assets recorded in the accounting records. Which of the d. Corroboration of the information furnished by
following is the best evidence to help achieve this objective? management concerning litigation, claims, and
b. Physical examination of a sample of newly recorded assessments.
fixed assets.
28. To verify the proper value of costs charged to real property
13. The auditor's primary means of obtaining corroboration of records for improvements to the property, the best source of
management's information concerning litigation is a evidence would be:
a. Letter of audit inquiry to the client's lawyer. c. Original invoices supporting entries into the
accounting records.
14. Which of the following audit procedures is not designed
primarily to test for the correctness of purchases and sales 29. When auditing contingent liabilities, which of the following
cutoff? procedures would be least effective?
d. Trace client's unit costs to the auditor's copies of c. Examining customer confirmation replies.
audited price lists.

15. The accuracy of perpetual inventory records may be 30. An auditor should obtain evidential matter relevant to all
established in part by comparing perpetual inventory records the following factors concerning third-party litigation against a
with client except the
b. Receiving reports. c. Jurisdiction in which the matter will be resolved.

16. An auditor's observation of physical inventories at the main 31. Purchase cutoff procedures should be designed to test
plant at year-end would provide direct evidence to support whether or not all inventory
which of the following objectives? c. Purchased and received before the end of the year
c. Identification of obsolete or damaged merchandise was recorded.
to evaluate allowance for obsolescence.
32. Which of the following accounts would contain the best data
17. When auditing merchandise inventory at year end, the for an auditor performing an analytical review to evaluate the
auditor performs a purchase cutoff test to obtain evidence that reasonableness of the annual payroll?
d. All goods owned at year end are included in the a. Payroll taxes expense.
inventory balance.
33. When there are few property and equipment transactions until the following accounting period. Net income, in this
during the year, the continuing auditor usually makes a instance, was _______________ (overstated or understated).
d. Preliminary review of the related internal controls and OVERSTATED
performs extensive tests of current year property and
equipment transactions. 50. Although goods were shipped prior to year end, and
excluded from the ending inventory, the sale was not recorded
34. An audit procedure applicable to testing the year-end cutoff until the following accounting period. Net income in this
of liabilities is instance, was ___________(overstated or understated) by the
d. Examining vendor invoices received subsequent to amount of the ___________ (selling price or gross profit)
year-end for shipment date and terms of shipment. UNDERSTATED, SELLING PRICE

35. An auditor has accounted for a sequence of inventory tags 51. The purpose for analyzing plant asset additions
and is now going to trace information on a Representative simultaneously with the repairs accounts is to detect material
number of tags to the physical inventory sheets. The purpose ____________ errors. CLASSIFICATION
of this procedure is to obtain assurance that
b. All inventory represented by an inventory tag is 52. The most effective means for evaluating the valuation
listed on the inventory sheets. assertion as it relates to depreciation expense is to
________________ depreciation on a test basis. RECOMPUTE
36. An auditor analyzes repairs and maintenance accounts (RECALCULATE)
primarily to obtain evidence in support of the audit assertion
that all 53. Examining documentation supporting major plant asset
b. Expenditures for property and equipment have not additions is commonly referred to as ________ plant asset
been charged to expense. additions. VOUCHING

37. Unrecorded liabilities are most likely to be found during the 53. Just as plant asset accounts are audited simultaneously with
review of which of the following documents? repairs expense, the intangible asset accounts should be
a. Unpaid bills. audited simultaneously with _________________expense. In both
cases, the objective is to detect ________________ errors.
38. For manufactured inventories, the valuation assertion is RESEARCH AND DEVELOPMENT, CLASSIFICATION
best tested by
b. Tracing unit costs appearing on final inventory listings 55. The letter of audit inquiry to the client's legal counsel is a
to auditor's copy of audited finished goods unit costs. form of ___________________.
CONFIRMATION
39. The auditor may conclude that depreciation charges are
insufficient by noting 56. To gain assurance as to proper valuation of accruals, the
c. Excessive recurring losses on assets retired. auditor should ___________ them on a test basis. RECALCULATE
(RECOMPUTE)
40. To test the accuracy of the current year's depreciation
charges, an auditor should rely most heavily on MATCHING:
d. Re-computation of depreciation for a sample of plant 57. Match each of the listed objectives with the auditing
assets. procedure that best meets the objective.

41. The audit procedure of analyzing the repairs and A. Inspect major additions on a test basis
maintenance accounts is primarily designed to provide B. Examine paid and unpaid invoices for a short period
evidence in support of the audit proposition that all following the balance sheet date
d. Expenditures for fixed assets have been capitalized. C. Confirm inventories in public warehouses and goods out on
consignment.
42. An auditor might use several different procedures to test for D. Control auditor’s copies of inventory tags and account for all
the proper accounting for retirement of plant and equipment. tag numbers, both used and unused. Trace to final inventory
Which of the following tests would be the most effective in listings on final audit
providing evidence about the retirement of fixed assets? E. Recompute liabilities for product warranty, pensions, profit-
a. Analysis of debits to the accumulated depreciation sharing, bonuses, and vacation pay
account. F. Test inventory for proper cutoff
G. Note inventory condition during observation of the physical
43. The auditor is most likely to seek information from the plant inventory, and perform inventory turnover tests as part of
manager with respect to the analytical procedures
c. Existence of obsolete machinery. H. Relate intangible assets to revenue produced by them
I. Vouch additions to intangible asset accounts
44. In performing an audit on the existence of inventory J. Physically inspect intangible assets
contained in a warehouse, an auditor is primarily concerned K. Vouch debits to property, plant, and equipment accounts
with
a. Observing and testing the number of units on hand. C 1. Verify existence of inventories in distant warehouses
F 2. Determine that inventories are owned by the client
45. Which of the following audit procedures would provide the A 3. Verify existence of recorded plant asset acquisitions
least reliable evidence that the client has legal title to K 4. Determine that ordinary repairs have not been improperly
inventories? capitalized
b. Analytical review of inventory balances compared to I 5. Verify existence of recorded intangible assets
purchasing and sales activities. H 6. Ascertain whether recorded intangible assets possess
future economic benefit
46. An auditor would most efficiently test for the B 7. Determine that all significant liabilities are reflected on the
misclassification of capital acquisitions as expenses by balance sheet
d. Scanning repair and maintenance records and E 8. Determine the reasonableness of management’s estimates
investigating large dollar-value entries. relating to accrued liabilities
G 9. Evaluate ending inventory balances for possible
COMPLETION: obsolescence
47. Inventory in transit from vendor to client should be added to D 10. Verify that client has not added nonexistent inventory
the client's physical inventory provided the goods were shipped after the physical inventory has been completed
prior to year end and the transportation terms were F.O.B. Compact Computers, Inc. manufactures and sells personal
_______________ . SHIPPING POINT computers through various retail distributors. The company
took
a physical inventory as of December 31, 2002 and adjusted its
48. Inventory in transit from the client to customers should be
perpetual records to agree with the physical inventory, by
excluded from the client's inventory provided the goods were debiting “Computers” and crediting “Cost of Goods Sold.” The
shipped prior to year end and the transportation terms were following is a summary of postings to the “Computers” and
F.O.B. _________ “Cost
SHIPPING POINT of Goods Sold” accounts:
COMPUTERS
49. Goods were received prior to year end and included in the Debits Credits
1/2/02 Balance 145,000 3,000,000 1/2-12/31/02
physical inventory. The purchase, however, was not recorded
1/2-12/31/02 3,100,000
12/31/02 AJE 120,000
COST OF GOODS SOLD-COMPUTERS
Debits Credits