Free CPA-AUDITING Practice Test

Choice "a" is correct. If substantial doubt about the entity's ability to continue as a going concern has been removed in the current period, the explanatory paragraph included in the prior period auditor's report should not be repeated, and no description of the reasons or plans for recovery need be included. Choice "b" is incorrect. If doubt about the going concern assumption has been removed in the current period, it is not appropriate to include the explanatory paragraph from the prior year in the auditor's report for the current year. Choice "c" is incorrect. If doubt about the going concern assumption has been removed in the current period, no explanatory paragraph is required since the situation no longer exists. The auditor does not have to explain the reason for the change. Choice "d" is incorrect. If doubt about the going concern assumption has been removed in the current period, no explanatory paragraph is required since the situation no longer exists. The entity does not have to describe its plans for the future.

Choice "b" is correct. By vouching to time card data, the auditor is testing the existence assertion for hours worked. Choice "a" is incorrect. Vouching to approved time card data would provide evidence about hours worked, not pay rates. Pay rates would be tested by comparing to personnel records. Choice "c" is incorrect. Vouching to approved time cards does not provide evidence about segregation of duties. Choice "d" is incorrect. Vouching to the approved time cards does not provide evidence about internal controls related to unclaimed paychecks. The auditor would need to observe a payroll distribution to evaluate these controls.

Choice "c" is correct. Examining an analysis of inventory turnover helps identify slow-moving, excess, defective, and obsolete items included in inventories. In order for inventory to be properly valued, these items may need to be written down. Choice "a" is incorrect. Testing shipping and receiving cutoff provides evidence regarding completeness of inventory and rights and obligations related to inventory, but it does not provide evidence regarding the identification and valuation of slow-moving and obsolete items. Choice "b" is incorrect. Confirming inventories at locations outside the entity's premises provides evidence regarding existence and completeness of inventory, but it does not provide evidence regarding the identification and valuation of slow-moving and obsolete items. Choice "d" is incorrect. Tracing inventory observation test counts to perpetual listings provides evidence regarding the completeness of inventory, but it does not provide evidence regarding the identification and valuation of slow-moving and obsolete items.

Choice "a" is correct. The auditor provides an opinion on the entity's financial statements and on the effectiveness of internal control. The auditor is not required to provide an opinion on the audit committee's oversight (but is required to report to the board when such oversight is ineffective). Choices "b", "c", and "d" are incorrect, based on the Explanation: above.

Choice "c" is correct. Kiting occurs when a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank. Frequent kiting may result in a high level of deposits coupled with a low average balance. Choice "a" is incorrect. High turnover of employees who have access to cash may be normal in certain industries, or it may be indicative of poor hiring policies, but it would not be indicative of check kiting. Choice "b" is incorrect. More checks may arrive on Mondays simply because Monday's mail includes the mail from over the weekend. This characteristic is not particularly indicative of check kiting. Choice "d" is incorrect. Frequent ATM checking account withdrawals indicate a frequent need for cash, but this situation is not particularly indicative of check kiting.

Choice "c" is correct. Compensating balance arrangements may be maintained by or for related parties. Choice "a" is incorrect. Performing tests of controls concerning the segregation of duties relates to the allocation of responsibilities among company employees; related party transactions typically relate to transactions with affiliates, owners, or management. Choice "b" is incorrect. Evaluating the reasonableness of management's accounting estimates would not provide any evidence of transactions with affiliates, owners, or management. Choice "d" is incorrect. Related party transactions are more likely to be nonrecurring than recurring.

Choice "b" is correct. Average number of days sales in inventory is defined as 365 days per year divided by the inventory turnover. Choice "a" is incorrect. The denominator used to determine average days sales in inventory is inventory turnover. Inventory turnover is cost of goods sold divided by average inventory, not simply average inventory. Choice "c" is incorrect. The days sales in inventory calculation uses the cost of goods sold figure, not the sales figure. Choice "d" is incorrect. The days sales in inventory calculation uses 365 in the numerator, not sales divided by 365.

Choice "d" is correct. Monitoring is the process of assessing the quality of internal control performance over time and taking necessary corrective actions. Eliminating a control that is not operating effectively would not be an appropriate corrective action. Choice "a" is incorrect. Information derived from external parties (such as customer complaints and regulator comments) may be useful in identifying problems with the internal control structure. Choices "b" and "c" are incorrect. Assessing the quality of internal control performance over time and improving controls that are not operating effectively are part of the monitoring process.

Choice "b" is correct. Joint custody by two company officials over assets like cash and marketable securities helps safeguard the assets. Under joint custody, collusion is required for a defalcation to occur. Choice "a" is incorrect. Review of investment decisions made by the treasurer might reduce the probability of poor investment policies, but would not be likely to safeguard marketable securities after purchase. Choice "c" is incorrect. Tracing purchases and sales from the subsidiary ledger to the general ledger would help ensure that all existing securities are recorded in the financial statements, but would not help safeguard marketable securities. Choice "d" is incorrect. An annual count by the chairman of the board might provide a small safeguard, but the infrequent performance of the control makes it a fairly weak one.

Choice "a" is correct. Assertions about valuation and allocation deal with whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts, and any resulting valuation adjustments are appropriately recorded. For example, management asserts that trade accounts receivable included in the balance sheet are stated at net realizable value. Choice "b" is incorrect. Assertions about understandability and classification deal with whether financial information is appropriately presented and described, and disclosures are clearly expressed. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion. Choice "c" is incorrect. Assertions about existence deal with whether assets, liabilities, and equity interest of the entity exist at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of 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. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion.