Auditors will need to perform more substantive tests than normal to obtain sufficient appropriate evidence that a financial instrument is fairly stated if which of the following conditions exist?

Auditors will need to perform more substantive tests than normal to obtain sufficient appropriate evidence that a financial instrument is fairly stated if which of the following conditions exist? 

A. Management is objective and transparent in their assumptions.

B. Management's key assumptions are subject to volatility.

C. The entity's portfolio is composed of only stocks issued by Fortune 100 firms traded in an active market.

D. The entity does not have control weaknesses in its valuation processes.


Answer: Management's key assumptions are subject to volatility

Which of the following procedures would be most important in the audit of an investment valued at fair value?

Which of the following procedures would be most important in the audit of an investment valued at fair value? 

A. Compare the balance in the investment account to the prior year.

B. Read the footnote disclosure related to the investment.

C. Inquire of management's regarding the accuracy and reliability of the underlying data.

D. Develop an independent estimate of the fair value measurement.


Answer: Develop an independent estimate of the fair value measurement

Which of the following would provide the best form of evidential matter pertaining to the annual valuation of a long-term investment in which the entity owns a 45 percent voting interest?

Which of the following would provide the best form of evidential matter pertaining to the annual valuation of a long-term investment in which the entity owns a 45 percent voting interest? 

A. Market quotations of the investee company's stock.

B. The current fair value of the investee company's assets.

C. Historical costs of the investee company's assets.

D. Audited financial statements of the investee company.


Answer: Audited financial statements of the investee company.

When an auditor is unable to inspect and count an entity's investment securities until after the balance sheet date, the bank where the securities are held in a safe-deposit box should be notified on or before the balance sheet date that it will be asked to

When an auditor is unable to inspect and count an entity's investment securities until after the balance sheet date, the bank where the securities are held in a safe-deposit box should be notified on or before the balance sheet date that it will be asked to 

A. Verify any differences between the contents of the box and the balances in the entity's subsidiary ledger.

B. Provide a list of securities added and removed from the box between the balance sheet date and the security-count date.

C. Confirm that there has been no access to the box between the balance sheet date and the security-count date.

D. Count the securities in the box so that the auditor will have an independent direct verification.


Answer: Confirm that there has been no access to the box between the balance sheet date and the security-count date

When there is a large number of negotiable securities in multiple locations, careful planning of the physical inspection and count of the securities by the auditor is necessary to guard against

When there is a large number of negotiable securities in multiple locations, careful planning of the physical inspection and count of the securities by the auditor is necessary to guard against 

A. Unauthorized negotiation of the securities before they are counted.

B. Unrecorded sales of securities after they are counted.

C. Substitution of securities already counted at one location for other securities that should be on hand at a different location but are not.

D. Substitution of authentic securities with counterfeit securities.


Answer: Substitution of securities already counted at one location for other securities that should be on hand at a different location but are not

Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed?

Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed? 

A. The investment committee of the board of directors periodically reviews the investment decisions delegated to the treasurer.

B. Two company officials must be present to access marketable securities, which are kept in a bank safe-deposit box.

C. The internal auditor and the controller independently trace all purchases and sales of marketable securities from the subsidiary ledgers to the general ledger.

D. The chairman of the board verifies the marketable securities, which are kept in a bank safe-deposit box, each year on the balance sheet date.


Answer: Two company officials must be present to access marketable securities, which are kept in a bank safe-deposit box

Which of the following control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?

Which of the following control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments? 

A. Senior management verifies that securities in the bank safe-deposit box are registered in the entity's name.

B. The internal auditor compares the securities in the bank safe-deposit box with recorded investments.

C. The treasurer vouches the acquisition of securities by comparing brokers' advices with canceled checks.

D. The controller compares the current market prices of recorded investments with the brokers' advices on file.


Answer: The internal auditor compares the securities in the bank safe-deposit box with recorded investments

The primary purpose of sending a standard confirmation request to financial institutions with which the entity has done business during the year is to

The primary purpose of sending a standard confirmation request to financial institutions with which the entity has done business during the year is to 

A. Detect kiting activities that may otherwise not be discovered.

B. Corroborate information regarding deposit and loan balances.

C. Provide the data necessary to prepare a proof of cash.

D. Request information about contingent liabilities and secured transactions.


Answer: Corroborate information regarding deposit and loan balances.

As one of the year-end audit procedures, the auditor instructed the entity's personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the entity's treasurer had signed the request, it was mailed to the bank by the assistant treasurer. What is the major flaw in this audit procedure?

As one of the year-end audit procedures, the auditor instructed the entity's personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the entity's treasurer had signed the request, it was mailed to the bank by the assistant treasurer. What is the major flaw in this audit procedure? 

A. The confirmation request was signed by the treasurer.

B. Sending the request was meaningless because the account was closed before the year-end.

C. The request was mailed by the assistant treasurer.

D. The CPA did not sign the confirmation request before it was mailed.


Answer: The request was mailed by the assistant treasurer

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fund maintained on an imprest basis?

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fund maintained on an imprest basis? 

A. Reimbursement vouchers are not prenumbered.

B. Reimbursement of the fund from the general cash account occurs twice or more each week.

C. The custodian occasionally uses the cash fund to cash employee checks.

D. The custodian endorses reimbursement checks.


Answer: Reimbursement of the fund from the general cash account occurs twice or more each week

Examining brokers' advices for a sample of securities purchased during the year is a test for the assertion of

Examining brokers' advices for a sample of securities purchased during the year is a test for the assertion of 

A. Completeness.

B. Disclosure.

C. Valuation and allocation.

D. Rights and obligations.


Answer: Rights and obligations

In establishing the existence and ownership of a long-term investment in stock of a publicly traded company, an auditor should inspect the securities or

In establishing the existence and ownership of a long-term investment in stock of a publicly traded company, an auditor should inspect the securities or 

A. Correspond with the investee company to verify the number of shares owned.

B. Inspect the audited financial statements of the investee company.

C. Confirm the number of shares owned that are held by an independent custodian.

D. Determine that the investment is carried at the lower-of-cost-or-market.


Answer: Confirm the number of shares owned that are held by an independent custodian.

An entity has a large and active investment portfolio that is kept in a bank safe-deposit box. If the auditor is unable to examine and count the securities at the balance sheet date but will examine and count the securities shortly thereafter, the auditor most likely will

An entity has a large and active investment portfolio that is kept in a bank safe-deposit box. If the auditor is unable to examine and count the securities at the balance sheet date but will examine and count the securities shortly thereafter, the auditor most likely will 

A. Request that the bank confirm to the auditor the contents of the safe-deposit box at the balance sheet date.

B. Examine supporting evidence for transactions occurring during the year.

C. Count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the balance sheet date.

D. Request that the entity have the bank seal the safe-deposit box until the auditor can count the securities at a subsequent date.


Answer: Request that the entity have the bank seal the safe-deposit box until the auditor can count the securities at a subsequent date

Jones was engaged to examine the financial statements of Virginia Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?

Jones was engaged to examine the financial statements of Virginia Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? 

A. Tracing recorded dividend income to cash receipts records and validated deposit slips.

B. Utilizing analytical procedures and statistical sampling.

C. Comparing recorded dividends with amounts appearing on federal information forms 1099.

D. Comparing recorded dividends with a standard financial reporting service's record of dividends.


Answer: Comparing recorded dividends with a standard financial reporting service's record of dividends

Which of the following is not one of the auditor's primary objectives in an examination of marketable securities?

Which of the following is not one of the auditor's primary objectives in an examination of marketable securities? 

A. To determine whether securities are authentic.

B. To determine whether securities are the property of the entity.

C. To determine whether securities actually exist.

D. To determine whether securities are properly classified on the balance sheet.


Answer: To determine whether securities are authentic

The auditor should insist that a representative of the entity be present during the physical examination of securities in order to

The auditor should insist that a representative of the entity be present during the physical examination of securities in order to 

A. Lend authority to the auditor's directives.

B. Detect forged securities.

C. Coordinate the return of all securities to proper locations.

D. Acknowledge the receipt of securities returned.


Answer: Acknowledge the receipt of securities returned

In a manufacturing company, which one of the following audit procedures would give the least assurance for the existence of the general ledger balance of investment in stocks and bonds at the audit date?

In a manufacturing company, which one of the following audit procedures would give the least assurance for the existence of the general ledger balance of investment in stocks and bonds at the audit date? 

A. Confirmation from the broker.

B. Inspection and count of stocks and bonds.

C. Vouching all changes during the year to brokers' advices and statements.

D. Examination of canceled checks issued in payment of securities purchased.


Answer: Examination of canceled checks issued in payment of securities purchased

When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the

When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the 

A. Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.

B. Securities are registered in the name of the trust company, rather than the entity itself.

C. Interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities.

D. Trust company places the securities in a bank safe-deposit vault under the custodian's exclusive control.


Answer: Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? 

A. The cashier posts the receipts to the accounts receivable subsidiary ledger cards.

B. The cashier makes the daily deposit at a local bank.

C. The cashier prepares the daily deposit.

D. The cashier endorses the checks.


Answer: The cashier posts the receipts to the accounts receivable subsidiary ledger cards

Which of the following procedures most likely would give the greatest assurance that securities held as investments are safeguarded?

Which of the following procedures most likely would give the greatest assurance that securities held as investments are safeguarded? 

A. There is no access to securities between the year-end and the date of the auditor's security count.

B. Proceeds from the sale of investments are received by an employee who does not have access to securities.

C. Investment acquisitions are authorized by a member of the Board of Directors before execution.

D. Access to securities requires the presence of two designated officials.

Answer: Access to securities requires the presence of two designated officials

Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities?

Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities? 

A. An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities.

B. The internal auditor verifies the marketable securities in the entity's safe each year on the balance sheet date.

C. The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to the general ledger.

D. A designated member of the board of directors controls the securities in a bank safe-deposit box.


Answer: An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities

A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for collections of periodic interest probably should be delegated to the

A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for collections of periodic interest probably should be delegated to the 

A. Chief Accountant.

B. Internal Auditor.

C. Cashier.

D. Treasurer.


Answer: Treasurer

A company has additional temporary funds to invest. The Board of Directors decided to purchase marketable securities and assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to make periodic reviews of the investment activity authorized by that executive should be

A company has additional temporary funds to invest. The Board of Directors decided to purchase marketable securities and assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to make periodic reviews of the investment activity authorized by that executive should be 

A. An investment committee of the Board of Directors.

B. The chief operating officer.

C. The corporate controller.

D. The treasurer.


Answer: An investment committee of the Board of Directors

A primary purpose of the proof of cash is to

A primary purpose of the proof of cash is to 

A. Prevent fraud.

B. Reconcile actual cash receipts and disbursements to budgeted receipts and disbursements.

C. Investigate variances from expected cash balances.

D. Ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account.


Answer: Ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account.

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except the:

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except the: 

A. Cutoff bank statement.

B. Year-end bank statement.

C. Bank confirmation.

D. General ledger.


Answer: General ledger

An auditor should trace interbank transfers for the last part of the audit period and first part of the subsequent period to detect whether

An auditor should trace interbank transfers for the last part of the audit period and first part of the subsequent period to detect whether 

A. The cash receipts journal was held open for a few days after the year-end.

B. The last checks recorded before the year end were actually mailed by the year-end.

C. Cash balances were overstated because of kiting.

D. Any unusual payments to or receipts from related parties occurred.


Answer: Cash balances were overstated because of kiting

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily to

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily to 

A. Verify the cash balance reported on the bank confirmation inquiry form.

B. Verify reconciling items on the entity's bank reconciliation.

C. Detect lapping.

D. Detect kiting.


Answer: Verify reconciling items on the entity's bank reconciliation

The auditor should ordinarily mail confirmation requests to all banks with which the entity has conducted any business during the year, regardless of the year-end balance, since

The auditor should ordinarily mail confirmation requests to all banks with which the entity has conducted any business during the year, regardless of the year-end balance, since 

A. The confirmation form also seeks information about indebtedness to the bank.

B. This procedure will detect kiting activities that would otherwise not be detected.

C. The mailing of confirmation forms to all such banks is required by generally accepted auditing standards.

D. This procedure relieves the auditor of any responsibility with respect to nondetection of forged checks.


Answer: The confirmation form also seeks information about indebtedness to the bank

The cashier of Brooke Company covered a shortage in the cash working fund with cash obtained on December 31 from a local bank by cashing, but not recording, a check drawn on the company's out-of-town bank. How would the auditor discover this manipulation?

The cashier of Brooke Company covered a shortage in the cash working fund with cash obtained on December 31 from a local bank by cashing, but not recording, a check drawn on the company's out-of-town bank. How would the auditor discover this manipulation? 

A. Confirming all December 31 bank balances.

B. Counting the cash working fund at the close of business on December 31.

C. Preparing independent bank reconciliations as of December 31.

D. Preparing and detail testing a bank transfer schedule.


Answer: Preparing and detail testing a bank transfer schedule

Examining a sample of cancelled checks for an authorized signature tests which of the following assertions for cash?

Examining a sample of cancelled checks for an authorized signature tests which of the following assertions for cash? 

A. Authorization.

B. Completeness.

C. Cutoff.

D. Accuracy.


Answer: Authorization

Tracing a sample of remittance advices to entries in the cash receipts journal tests which of the following assertions for cash?

Tracing a sample of remittance advices to entries in the cash receipts journal tests which of the following assertions for cash? 

A. Occurrence.

B. Completeness.

C. Authorization.

D. Cutoff.


Answer: Completeness

An auditor ordinarily should send a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance, because this procedure

An auditor ordinarily should send a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance, because this procedure 

A. Provides for confirmation regarding compensating balance arrangements.

B. Detects kiting activities that may not otherwise be discovered.

C. Seeks information about indebtedness to the bank.

D. Verifies securities held by the bank in safekeeping.


Answer: Seeks information about indebtedness to the bank

An imprest cash account is

An imprest cash account is 

A. Used for investing in marketable securities.

B. The principal cash account for an entity.

C. One that contains a stipulated amount of money and is used for limited purposes.

D. The principal checking account for a branch of an entity.


Answer: One that contains a stipulated amount of money and is used for limited purposes

All of the following can assist the auditor in testing the existence assertion for investment securities except:

All of the following can assist the auditor in testing the existence assertion for investment securities except: 

A. Physical examination.

B. Comparing fair value to cost.

C. Confirmation with the issuer.

D. Confirmation with the custodian.


Answer: Comparing fair value to cost

In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the entity's name, an auditor most likely gathers evidence in support of management's financial statement assertions regarding

In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the entity's name, an auditor most likely gathers evidence in support of management's financial statement assertions regarding 

A. Existence.

B. Rights and obligations.

C. Completeness.

D. All of these.


Answer: All of these

Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?

Which of the following pairs of accounts would an auditor most likely analyze on the same working paper? 

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.


Answer: Notes receivable and interest income

An auditor usually tests the reasonableness of dividend income from investments in stock of public companies by computing the amounts that should have been received by referring to

An auditor usually tests the reasonableness of dividend income from investments in stock of public companies by computing the amounts that should have been received by referring to 

A. Dividend record books produced by investment advisory services.

B. Stock indentures published by corporate transfer agents.

C. Stock ledgers maintained by independent registrars.

D. Annual audited financial statements issued by the investee companies.


Answer: Dividend record books produced by investment advisory services

To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would

To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would 

A. Inspect the stock certificates evidencing the investment.

B. Examine the audited financial statements of the investee company.

C. Review the broker's advice or canceled check for the investment's acquisition.

D. Obtain market quotations from financial newspapers or periodicals.


Answer: Examine the audited financial statements of the investee company

An auditor testing long-term investments would ordinarily use substantive analytical procedures as the primary audit evidence to support the reasonableness of the

An auditor testing long-term investments would ordinarily use substantive analytical procedures as the primary audit evidence to support the reasonableness of the 

A. Valuation of marketable equity securities.

B. Classification of gains and losses on the disposal of securities.

C. Completeness of recorded investment income.

D. Existence and ownership of investments.


Answer: Completeness of recorded investment income

Of the following, which is the most efficient audit procedure for verification of interest earned on bond investments?

Of the following, which is the most efficient audit procedure for verification of interest earned on bond investments? 

A. Tracing interest declarations to an independent record book.

B. Recomputing interest earned using the interest rate and bond amount.

C. Confirming the interest rate with the issuer of the bonds.

D. Vouching the receipt and deposit of interest checks.


Answer: Recomputing interest earned using the interest rate and bond amount

If fraud is suspected, auditors may complete all of the following procedures except:

If fraud is suspected, auditors may complete all of the following procedures except: 

A. Testing for kiting.

B. Footing the bank reconciliation and the outstanding checks listing.

C. Performing a proof of cash.

D. Performing extended bank reconciliation procedures, including detailed examination of reconciling items.


Answer: Footing the bank reconciliation and the outstanding checks listing

An interbank transfer schedule

An interbank transfer schedule 

A. Is another name for the proof of cash.

B. Helps the auditor test for kiting.

C. Is on a standard bank confirmation.

D. Is used to examine entity bank reconciliations.


Answer: Helps the auditor test for kiting.

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting between intercompany banks?

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting between intercompany banks? 

A. Review the composition of authenticated deposit slips.

B. Review subsequent bank statements received directly from the banks.

C. Prepare a schedule of bank transfers.

D. Prepare year-end bank reconciliations.


Answer: Prepare a schedule of bank transfers

An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the

An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the 

A. Check register for the last month is reviewed.

B. Cutoff bank statement is reconciled.

C. Bank confirmation is reviewed.

D. Search for unrecorded liabilities is performed.


Answer: Cutoff bank statement is reconciled

Which of the following audit procedures is the most appropriate when internal control over cash is weak or when an entity requests an investigation of cash transactions?

Which of the following audit procedures is the most appropriate when internal control over cash is weak or when an entity requests an investigation of cash transactions? 

A. Proof of cash.

B. Bank reconciliation.

C. Cash confirmation.

D. Evaluate ratio of cash to current liabilities.


Answer: Proof of cash.

The least crucial element of internal control over cash is

The least crucial element of internal control over cash is 

A. Separation of cash record-keeping from custody of cash.

B. Preparation of the monthly bank reconciliation.

C. Batch processing of checks.

D. Separation of cash receipts from cash disbursements.


Answer: Batch processing of checks

Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?

Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees? 

A. A bank lockbox system.

B. Prenumbered remittance advices.

C. Monthly bank reconciliations.

D. Daily deposit of cash receipts.


Answer: A bank lockbox system

In order to efficiently establish the correctness of the accounts payable cutoff, an auditor will be most likely to

In order to efficiently establish the correctness of the accounts payable cutoff, an auditor will be most likely to 

A. Coordinate cutoff tests with physical inventory observation.

B. Compare cutoff reports with purchase orders.

C. Compare vendors' invoices with vendors' statements.

D. Coordinate mailing of confirmations with cutoff tests.


Answer: Coordinate cutoff tests with physical inventory observation

Which of the following is a question that the auditor would expect to find on the production process section of an internal control questionnaire?

Which of the following is a question that the auditor would expect to find on the production process section of an internal control questionnaire? 

A. Are vendors' invoices for raw materials approved for payment by an employee who is independent of the cash disbursements function?

B. Are signed checks for the purchase of raw materials mailed directly after signing without being returned to the person who authorized the invoice processing?

C. Are all releases by storekeepers of raw materials from storage based on approved requisition documents?

D. Are details of individual disbursements for raw materials balanced with the total to be posted to the appropriate general ledger account?


Answer: Are all releases by storekeepers of raw materials from storage based on approved requisition documents?

Which assertion for ending inventory is most likely violated if the gross profit percentage is much greater than last year?

Which assertion for ending inventory is most likely violated if the gross profit percentage is much greater than last year? 

A. Existence.

B. Completeness.

C. Rights and obligations.

D. Valuation and allocation.


Answer: Completeness

An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the financial statement assertions regarding inventory, including presentation and disclosure, and

An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the financial statement assertions regarding inventory, including presentation and disclosure, and 

A. Valuation and allocation.

B. Completeness.

C. Existence.

D. Rights and obligations.


Answer: Valuation and allocation

Which of the following is not one of the independent auditor's objectives regarding the examination of inventories?

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 entity.

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

C. Ascertaining the physical quantities of inventory on hand.

D. Verifying that all inventory owned by the entity is on hand at the time of the count.


Answer: Verifying that all inventory owned by the entity is on hand at the time of the count

When an auditor tests an entity's cost accounting system, the auditor's tests are primarily designed to determine that

When an auditor tests an entity's cost accounting system, the auditor's tests are primarily designed to determine that 

A. Quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand.

B. Physical inventories are in substantial agreement with book inventories.

C. The system is in accordance with generally accepted accounting principles and is functioning as planned.

D. Costs have been properly assigned to work in process, finished goods, and cost of goods sold.


Answer: Costs have been properly assigned to work in process, finished goods, and cost of goods sold

Observing an entity's inventory held on consignment by others tests the assertion of

Observing an entity's inventory held on consignment by others tests the assertion of 

A. Existence.

B. Completeness.

C. Valuation.

D. Rights and obligations.


Answer: Existence

To gain assurance that all inventory items in an entity's inventory listing schedule are valid, an auditor most likely would trace

To gain assurance that all inventory items in an entity's inventory listing schedule are valid, an auditor most likely would trace 

A. Inventory tags noted during the auditor's observation to items listed in the inventory listing schedule.

B. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices.

C. Items listed in the inventory listing schedule to inventory tags and the count sheets.

D. Items listed in receiving reports and vendors' invoices to the inventory listing schedule.


Answer: Items listed in the inventory listing schedule to inventory tags and the count sheets

The element of the audit planning process most likely to be agreed upon with the entity before implementation of the audit strategy is the determination of the

The element of the audit planning process most likely to be agreed upon with the entity before implementation of the audit strategy is the determination of the 

A. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.

B. Procedures to be undertaken to discover litigation, claims, and assessments.

C. Pending legal matters to be included in the inquiry of the entity's attorney.

D. Timing of inventory observation procedures to be performed.


Answer: Timing of inventory observation procedures to be performed

In an audit of inventories, an auditor would least likely verify that

In an audit of inventories, an auditor would least likely verify that 

A. All inventory owned by the entity is on hand at the time of the count.

B. The entity has used proper inventory pricing.

C. The financial statement presentation of inventories is appropriate.

D. Damaged goods and obsolete items have been properly accounted for.


Answer: All inventory owned by the entity is on hand at the time of the count

The physical count of inventory of a retailer was higher than shown in its perpetual records. Which of the following could explain the difference?

The physical count of inventory of a retailer was higher than shown in its perpetual records. Which of the following could explain the difference? 

A. Inventory items had been counted but tags placed on the items had not been taken off the items and added to the inventory accumulation sheets.

B. Credit memos for several items returned by customers had not been prepared.

C. No journal entry had been made on the retailer's books for several items returned to its suppliers.

D. An item purchased "FOB shipping point" had not arrived at the date of the inventory count and had not been reflected in the perpetual records.


Answer: Credit memos for several items returned by customers had not been prepared

Which of the following is the best audit procedure for the discovery of damaged merchandise in an entity's ending inventory?

Which of the following is the best audit procedure for the discovery of damaged merchandise in an entity's ending inventory? 

A. Compare the physical quantities of slow-moving items with corresponding quantities of the prior year.

B. Observe the condition of merchandise and raw materials during the entity's physical inventory count.

C. Review the management's inventory representation letter for accuracy.

D. Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average.


Answer: Observe the condition of merchandise and raw materials during the entity's physical inventory count

When outside firms of non-accountants specializing in physical inventory counts are used to count, list, price, and subsequently compute the total dollar amount of inventory on hand at the date of the physical count, the auditor will ordinarily

When outside firms of non-accountants specializing in physical inventory counts are used to count, list, price, and subsequently compute the total dollar amount of inventory on hand at the date of the physical count, the auditor will ordinarily 

A. Consider the report of the outside inventory firm to be an acceptable alternative procedure to the observation of physical inventories.

B. Make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions.

C. Increase the extent of work on the physical count of inventory.

D. Consider the reduced audit effort with respect to the physical count of inventory as a scope limitation.


Answer: Make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions

Which one of the following procedures would not be appropriate for an auditor in discharging his or her responsibilities concerning the entity's physical inventories?

Which one of the following procedures would not be appropriate for an auditor in discharging his or her responsibilities concerning the entity's physical inventories? 

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

B. Supervising the annual physical inventory count.

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

D. Obtaining written representation from the entity as to the existence, quality, and dollar amount of the inventory.


Answer: Supervising the annual physical inventory count

Purchase cutoff activities should be designed to test that merchandise is included in the inventory of the entity company if the company

Purchase cutoff activities should be designed to test that merchandise is included in the inventory of the entity 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.


Answer: Holds legal title to the merchandise

The auditor tests the quantity of materials charged to work in process by tracing these quantities to

The auditor tests the quantity of materials charged to work in process by tracing these quantities to 

A. Cost ledgers.

B. Perpetual inventory records.

C. Receiving reports.

D. Material requisitions.


Answer: Material requisitions

Tracing costs used to price inventory to vendors' invoices test which of the following assertions?

Tracing costs used to price inventory to vendors' invoices test which of the following assertions? 

A. Occurrence.

B. Cutoff.

C. Accuracy.

D. Classification.


Answer: Accuracy

An inventory turnover analysis is useful to the auditor because it may detect

An inventory turnover analysis is useful to the auditor because it may detect 

A. Inadequacies in inventory pricing.

B. Methods of avoiding cyclical holding costs.

C. The optimum automatic reorder points.

D. The existence of obsolete merchandise.


Answer: The existence of obsolete merchandise

Which of the following control activities would most likely be used to maintain accurate perpetual inventory records?

Which of the following control activities would most likely be used to maintain accurate perpetual inventory records? 

A. Independent storeroom count of goods received.

B. Periodic independent reconciliation of control and subsidiary records.

C. Periodic independent comparison of records with goods on hands.

D. Independent matching of purchase orders, receiving reports, and vendors' invoices.


Answer: Periodic independent comparison of records with goods on hands

For several years, an entity's physical inventory count has been lower than what was shown on the books at the time of the count so that downward adjustments to the inventory account were required. Contributing to the inventory problem could be weaknesses in internal controls that led to the failure to record some

For several years, an entity's physical inventory count has been lower than what was shown on the books at the time of the count so that downward adjustments to the inventory account were required. Contributing to the inventory problem could be weaknesses in internal controls that led to the failure to record some 

A. Purchases returned to vendors.

B. Sales returns received.

C. Sales discounts allowed.

D. Cash purchases.


Answer: Purchases returned to vendors

In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would

In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would 

A. Review the entity's description of inventory policies and procedures.

B. Perform test counts of inventory during the entity's physical count.

C. Analyze inventory turnover statistics to identify slow-moving and obsolete items.

D. Analyze monthly production reports to identify variances and unusual transactions.


Answer: Review the entity's description of inventory policies and procedures

An entity maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably

An entity maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably 

A. Increase the extent of tests of controls for the inventory cycle.

B. Request that the entity schedule the physical inventory count at the end of the year.

C. Insist that the entity perform physical counts of inventory items several times during the year.

D. Apply gross profit tests to ascertain the reasonableness of the physical counts.


Answer: Request that the entity schedule the physical inventory count at the end of the year

When perpetual inventory records are maintained in quantities and in dollars and internal control over inventory is weak, the auditor would probably

When perpetual inventory records are maintained in quantities and in dollars and internal control over inventory is weak, the auditor would probably 

A. Want the entity to schedule the physical inventory count at the end of the year.

B. Insist that the entity perform physical counts of inventory items several times during the year.

C. Increase the extent of tests for unrecorded liabilities at the end of the year.

D. Have to disclaim an opinion on the income statement for that year.


Answer: Want the entity to schedule the physical inventory count at the end of the year

An auditor generally tests physical security controls over inventory by

An auditor generally tests physical security controls over inventory by 

A. Test counts and cutoff procedures.

B. Examination and reconciliation.

C. Inspection and recomputation.

D. Inquiry and observation.


Answer: Inquiry and observation

Key segregations of duties in the inventory management process include all of the following except separating:

Key segregations of duties in the inventory management process include all of the following except separating: 

A. Cost accounting from review of variance reports.

B. Inventory management from cost accounting.

C. Cost accounting from the general ledger function.

D. Supervision of physical inventory from inventory management.


Answer: Cost accounting from review of variance reports

Which of the following is a plausible explanation for a large increase in the number of days outstanding in inventory?

Which of the following is a plausible explanation for a large increase in the number of days outstanding in inventory? 

A. Obsolete inventory.

B. New product line where sales exceed production.

C. Manufacturing overhead was not allocated to the production process.

D. Manufacturing salaries were recorded as administrative expenses.


Answer: Obsolete inventory

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of 

A. Valuation.

B. Rights and obligations.

C. Existence.

D. Completeness.


Answer: Valuation

Which of the following is least likely to be a possible cause of book-to-physical differences in inventory quantities?

Which of the following is least likely to be a possible cause of book-to-physical differences in inventory quantities? 

A. Inventory cutoff errors.

B. Misapplication of LIFO.

C. Unreported scrap or spoilage.

D. Theft.


Answer: Misapplication of LIFO

In a manufacturing company, which one of the following audit procedures would give the least assurance about the valuation of inventory at the audit date?

In a manufacturing company, which one of the following audit procedures would give the least assurance about the valuation of inventory at the audit date? 

A. Testing the computation of standard overhead rates.

B. Examining paid vendors' invoices.

C. Reviewing direct labor rates.

D. Obtaining confirmation of inventories pledged under loan agreements.


Answer: Obtaining confirmation of inventories pledged under loan agreements

An auditor selected items for test counts while observing an entity's physical inventory. The auditor then traced the test counts to the entity's inventory listing. This procedure most likely provided evidence concerning management's assertion of

An auditor selected items for test counts while observing an entity's physical inventory. The auditor then traced the test counts to the entity's inventory listing. This procedure most likely provided evidence concerning management's assertion of 

A. Rights and obligations.

B. Completeness.

C. Existence.

D. Valuation.

Answer: Completeness

If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded

If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded 

A. Sales.

B. Sales discounts.

C. Purchases.

D. Purchase discounts.


Answer: Purchases

An entity'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

An entity'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.


Answer: Purchases

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 physical inventory sheets. The purpose of this procedure is to obtain assurance that

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 physical inventory sheets. The purpose of this procedure is to obtain assurance that 

A. The final inventory is valued at cost.

B. All inventory represented by an inventory tag is listed on the inventory sheets.

C. All inventory represented by an inventory tag is bona fide.

D. Inventory sheets do not include untagged inventory items.


Answer: All inventory represented by an inventory tag is listed on the inventory sheets

An entity's physical count of inventories was lower than the inventory quantities shown in its perpetual records. This situation could be the result of the failure to record

An entity's physical count of inventories was lower than the inventory quantities shown in its perpetual records. This situation could be the result of the failure to record 

A. Sales.

B. Sales returns.

C. Purchases.

D. Purchase discounts.


Answer: Sales

An auditor will usually trace the details of the test counts made during the observation of the physical inventory count to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are

An auditor will usually trace the details of the test counts made during the observation of the physical inventory count to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are 

A. Owned by the entity.

B. Not obsolete.

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

D. Included in the final inventory schedule.


Answer: Included in the final inventory schedule

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation?

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation? 

A. Vouching the raw materials' costs to vendors' invoices.

B. Obtaining confirmation of inventories pledged under loan agreements.

C. Reviewing shipping and receiving cutoff activities for inventories.

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


Answer: Vouching the raw materials' costs to vendors' invoices

For the purpose of determining proper cutoff for inventory, the auditor will select a sample from which of the following for a few days before and after year-end?

For the purpose of determining proper cutoff for inventory, the auditor will select a sample from which of the following for a few days before and after year-end? 

A. Materials requisitions.

B. Production schedules.

C. Receiving documents.

D. Purchase orders.


Answer: Receiving documents

The audit of year-end physical inventories should include steps to verify that the entity's purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a

The audit of year-end physical inventories should include steps to verify that the entity's purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a 

A. Sale in the subsequent period.

B. Purchase in the current period.

C. Sale in the current period.

D. Purchase return in the subsequent period.


Answer: Sale in the current period

Which of the following audit procedures would provide the least reliable evidence that the entity has legal title to inventories?

Which of the following audit procedures would provide the least reliable evidence that the entity has legal title to inventories? 

A. Confirmation of inventories at locations outside the entity's facilities.

B. Analytical review of inventory balances compared to purchasing and sales activities.

C. Observation of physical inventory counts.

D. Examination of paid vendors' invoices.


Answer: Analytical review of inventory balances compared to purchasing and sales activities

Failure to record inventory in the proper period can affect all of the following accounts except:

Failure to record inventory in the proper period can affect all of the following accounts except: 

A. Sales.

B. Receivables.

C. Cost of Goods Sold.

D. Prepaid Expenses.


Answer: Prepaid Expenses

Which of the following is not a misstatement related to the occurrence assertion for inventory?

Which of the following is not a misstatement related to the occurrence assertion for inventory? 

A. Consigned goods are included as part of inventory.

B. Unauthorized production activity.

C. Fictitious inventory.

D. Recorded inventory is not on hand because of theft.


Answer: Unauthorized production activity

The safeguarding of inventory most likely includes

The safeguarding of inventory most likely includes 

A. Comparison of the information contained on the purchase requisitions, purchase orders, receiving reports, and vendors' invoices.

B. Periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count.

C. Analytical procedures for raw materials, goods in process, and finished goods that identify unusual transactions, theft, and obsolescence.

D. Application of established overhead rates on the basis of direct labor hours or direct labor costs.


Answer: Periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count

Auditors are most likely to ensure that no production activity is scheduled prior to

Auditors are most likely to ensure that no production activity is scheduled prior to 

A. Determining standard costs.

B. Observing physical inventory.

C. Completing the book to physical adjustment.

D. Determining the amount of consigned inventory.


Answer: Observing physical inventory

Which of the following best describes the occurrence assertion for inventory?

Which of the following best describes the occurrence assertion for inventory? 

A. Purchase requisitions initiated by authorized personnel.

B. Recorded inventory actually exists.

C. Inventory properly accumulated from journals and ledgers.

D. All inventory is recorded.


Answer: Recorded inventory actually exists

Which of the following departments typically approves purchase requisitions?

Which of the following departments typically approves purchase requisitions? 

A. Raw materials stores.

B. Cost accounting.

C. Inventory management.

D. IT.


Answer: Inventory management

Shipping orders are forwarded from the revenue process to

Shipping orders are forwarded from the revenue process to 

A. The materials requisitions department.

B. Finished goods stores.

C. Raw materials stores.

D. Inventory management.


Answer: Finished goods stores

A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be:

A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be:

A. the net deferred tax consequences of temporary differences that will result in net
taxable amounts during the next year.
B. totally eliminated from the financial statements if the amount is related to a
noncurrent asset.
C. based on the classification of the related asset or liability for financial reporting purposes.
D. the total of all deferred tax consequences that are not expected to reverse in the
operating period or one year, whichever is greater.


Answer: based on the classification of the related asset or liability for financial reporting purposes

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be:

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be:

A. handled retroactively in accordance with the guidance related to changes in
accounting principles.
B. considered, but it should only be recorded in the accounts if it reduces a deferred
tax liability or increases a deferred tax asset.
C. reported as an adjustment to tax expense in the period of change.
D. applied to all temporary or permanent differences that arise prior to the date of
the enactment of the tax rate change, but not subsequent to the date of the
change.


Answer: reported as an adjustment to tax expense in the period of change

Which of the following differences would result in future taxable amounts?

Which of the following differences would result in future taxable amounts?

A. Expenses or losses that are tax deductible after they are recognized in financial
income.
B. Revenues or gains that are taxable before they are recognized in financial
income.
C. Revenues or gains that are recognized in financial income but are never included
in taxable income.
D. Expenses or losses that are tax deductible before they are recognized in financial
income.


Answer: Expenses or losses that are tax deductible before they are recognized in financial
income

Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income?

Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income?

A. Subscriptions received in advance.
B. Prepaid royalty received in advance.
C. An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes.
D. Interest received on a municipal obligation.


Answer: An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes

Which of the following is a permanent difference that is recognized for tax purposes but not for financial reporting purposes?

Which of the following is a permanent difference that is recognized for tax purposes but not for financial reporting purposes?

A. The deduction for dividends received from U.S. corporations.
B. Interest received on state and municipal bonds.
C. Compensation expense associated with certain employee stock options.
D. A litigation accrual.


Answer: The deduction for dividends received from U.S. corporations

The use of accelerated depreciation for tax purposes and straight-line depreciation for accounting purposes results in:

The use of accelerated depreciation for tax purposes and straight-line depreciation for accounting purposes results in:

A. a larger amount of depreciation expense shown on the tax return than on the
income statement, over the asset's useful life.
B. the asset being fully depreciated for tax purposes in half the time it takes to
become fully depreciated for accounting purposes.
C. a larger amount of depreciation expense shown on the income statement than on the tax return in the last year of the asset's useful life.
D. a loss on the sale of the asset in question if it is sold for its book value before its
useful life expires.


Answer: a larger amount of depreciation expense shown on the income statement than on
the tax return in the last year of the asset's useful life

A major distinction between temporary and permanent differences is:

A major distinction between temporary and permanent differences is:

A. permanent differences are not representative of acceptable accounting practice.
B. temporary differences occur frequently, whereas permanent differences occur
only once.
C. once an item is determined to be a temporary difference, it maintains that status;
however, a permanent difference can change in status with the passage of time.
D. temporary differences reverse themselves in subsequent accounting periods,
whereas permanent differences do not reverse.


Answer: temporary differences reverse themselves in subsequent accounting periods,
whereas permanent differences do not reverse

All of the following are procedures for the computation of deferred income taxes except to

All of the following are procedures for the computation of deferred income taxes except to

a. identify the types and amounts of existing temporary differences.
b. measure the total deferred tax liability for taxable temporary differences.
c. measure the total deferred tax asset for deductible temporary differences and operating loss carrybacks.
d. All of these are procedures in computing deferred income taxes.


Answer: measure the total deferred tax asset for deductible temporary differences and operating loss carrybacks

A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be

A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be

a. the net deferred tax consequences of temporary differences that will result in net taxable amounts during the next year.
b. totally eliminated from the financial statements if the amount is related to a noncurrent asset.
c. based on the classification of the related asset or liability for financial reporting purposes.
d. the total of all deferred tax consequences that are not expected to reverse in the operating period or one year, whichever is greater.


Answer: based on the classification of the related asset or liability for financial reporting purposes

Tanner, Inc. incurred a financial and taxable loss for 2015. Tanner therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2015 financial statements?

Tanner, Inc. incurred a financial and taxable loss for 2015. Tanner therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2015 financial statements?

a. The reduction of the loss should be reported as a prior period adjustment.
b. The refund claimed should be reported as a deferred charge and amortized over five years.
c. The refund claimed should be reported as revenue in the current year.
d. The refund claimed should be shown as a reduction of the loss in 2015.


Answer: The refund claimed should be shown as a reduction of the loss in 2015

Deferred tax amounts that are related to specific assets or liabilities should be classified as current or noncurrent based on

Deferred tax amounts that are related to specific assets or liabilities should be classified as current or noncurrent based on

a. their expected reversal dates.
b. their debit or credit balance.
c. the length of time the deferred tax amounts will generate future tax deferral benefits.
d. the classification of the related asset or liability.


Answer: the classification of the related asset or liability

Deferred taxes should be presented on the balance sheet

Deferred taxes should be presented on the balance sheet

a. as one net debit or credit amount.
b. in two amounts: one for the net current amount and one for the net noncurrent amount.
c. in two amounts: one for the net debit amount and one for the net credit amount.
d. as reductions of the related asset or liability accounts.


Answer: in two amounts: one for the net current amount and one for the net noncurrent amount

Accounting for income taxes can result in the reporting of deferred taxes as any of the following except

Accounting for income taxes can result in the reporting of deferred taxes as any of the following except

a. a current or long-term asset.
b. a current or long-term liability.
c. a contra-asset account.
d. All of these are acceptable methods of reporting deferred taxes.


Answer: a contra-asset account

Major reasons for disclosure of deferred income tax information is (are)

Major reasons for disclosure of deferred income tax information is (are)

a. better assessment of quality of earnings.
b. better predictions of future cash flows.
c. predicting future cash flows for operating loss carryforwards.
d. All of these answer choices are correct.


Answer: All of these answer choices are correct.

With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when

With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when

a. it is probable and can be reasonably estimated.
b. there is at least a 51% probability that the uncertain tax position will be approved by the taxing authorities.
c. it is more likely than not that the tax position will be sustained upon audit.
d. Any of the above exist.


Answer: it is more likely than not that the tax position will be sustained upon audit

Uncertain tax positions I. Are positions for which the tax authorities may disallow a deduction in whole or in part. II. Include instances in which the tax law is clear and in which the company believes an audit is likely. III. Give rise to tax expense by increasing payables or increasing a deferred tax liability.

Uncertain tax positions

I. Are positions for which the tax authorities may disallow a deduction in whole or
in part.
II. Include instances in which the tax law is clear and in which the company believes
an audit is likely.
III. Give rise to tax expense by increasing payables or increasing a deferred
tax liability.

a. I, II, and III.
b. I and III only.
c. II only.
d. I only.


Answer: I only

Recognizing a valuation allowance for a deferred tax asset requires that a company

Recognizing a valuation allowance for a deferred tax asset requires that a company

a. consider all positive and negative information in determining the need for a valuation allowance.
b. consider only the positive information in determining the need for a valuation allowance.
c. take an aggressive approach in its tax planning.
d. pass a recognition threshold, after assuming that it will be audited by taxing authorities.


Answer: consider all positive and negative information in determining the need for a valuation allowance

Recognition of tax benefits in the loss year due to a loss carryforward requires

Recognition of tax benefits in the loss year due to a loss carryforward requires

a. the establishment of a deferred tax liability.
b. the establishment of a deferred tax asset.
c. the establishment of an income tax refund receivable.
d. only a note to the financial statements.


Answer: the establishment of a deferred tax asset

Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet ifTax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if

Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if

a. it is probable that a future tax rate change will occur.
b. it appears likely that a future tax rate will be greater than the current tax rate.
c. the future tax rates have been enacted into law.
d. it appears likely that a future tax rate will be less than the current tax rate.


Answer: the future tax rates have been enacted into law

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be

a. handled retroactively in accordance with the guidance related to changes in accounting principles.
b. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset.
c. reported as an adjustment to income tax expense in the period of change.
d. applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate change, but not subsequent to the date of the change.


Answer: reported as an adjustment to income tax expense in the period of change

Which of the following is not considered a permanent difference?

Which of the following is not considered a permanent difference?

a. Interest received on municipal bonds.
b. Fines resulting from violating the law.
c. Premiums paid for life insurance on a company's CEO when the company is the beneficiary.
d. Stock-based compensation expense.


Answer: Stock-based compensation expense

Which of the following temporary differences results in a deferred tax asset in the year the temporary difference originates?

Which of the following temporary differences results in a deferred tax asset in the year the temporary difference originates?

I. Accrual for product warranty liability.
II. Subscriptions received in advance.
III. Prepaid insurance expense.


a. I and II only.
b. II only.
c. III only.
d. I and III only.


Answer: I and II only

A company records an unrealized loss on short-term securities. This would result in what type of difference and in what type of deferred income tax?

A company records an unrealized loss on short-term securities. This would result in what type of difference and in what type of deferred income tax?

Type of Difference Deferred Tax


a. Temporary Liability
b. Temporary Asset
c. Permanent Liability
d. Permanent Asset


Answer: Temporary Asset

A company uses the equity method to account for an investment for financial reporting purposes. This would result in what type of difference and in what type of deferred income tax?

A company uses the equity method to account for an investment for financial reporting purposes. This would result in what type of difference and in what type of deferred income tax?

Type of Difference Deferred Tax


a. Permanent Asset
b. Permanent Liability
c. Temporary Asset
d. Temporary Liability


Answer: Temporary Liability

Which of the following will not result in a temporary difference?

Which of the following will not result in a temporary difference?

a. Product warranty liabilities
b. Advance rental receipts
c. Installment sales
d. All of these will result in a temporary difference.


Answer: All of these will result in a temporary difference

An example of a permanent difference is

An example of a permanent difference is

a. proceeds from life insurance on officers.
b. interest expense on money borrowed to invest in municipal bonds.
c. insurance expense for a life insurance policy on officers.
d. All of these answers are correct.


Answer: All of these answers are correct

Stuart Corporation's taxable income differed from its accounting income computed for this past year. An item that would create a permanent difference in accounting and taxable incomes for Stuart would be

Stuart Corporation's taxable income differed from its accounting income computed for this past year. An item that would create a permanent difference in accounting and taxable incomes for Stuart would be

a. a balance in the Unearned Rent account at year end.
b. using accelerated depreciation for tax purposes and straight-line depreciation for book purposes.
c. a fine resulting from violations of OSHA regulations.
d. making installment sales during the year.


Answer: a fine resulting from violations of OSHA regulations

Which of the following differences would result in future taxable amounts?

Which of the following differences would result in future taxable amounts?

a. Expenses or losses that are tax deductible after they are recognized in financial income.
b. Revenues or gains that are taxable before they are recognized in financial income.
c. Revenues or gains that are recognized in financial income but are never included in taxable income.
d. Expenses or losses that are tax deductible before they are recognized in financial income.


Answer: Expenses or losses that are tax deductible before they are recognized in financial income

Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income?

Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income?

a. Subscriptions received in advance.
b. Prepaid royalty received in advance.
c. An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes.
d. Interest received on a municipal obligation.


Answer: An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes

Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income?

Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income?

a. Prepaid expenses that are deducted on the tax return in the period paid.
b. Product warranty liabilities.
c. Depreciable property.
d. Fines and expenses resulting from a violation of law.


Answer: Product warranty liabilities

A major distinction between temporary and permanent differences is

A major distinction between temporary and permanent differences is

a. permanent differences are not representative of acceptable accounting practice.
b. temporary differences occur frequently, whereas permanent differences occur only once.
c. once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time.
d. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse.


Answer: temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse

Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet?

Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet?

I. A revenue is deferred for financial reporting purposes but not for tax purposes.
II. A revenue is deferred for tax purposes but not for financial reporting purposes.
III. An expense is deferred for financial reporting purposes but not for tax purposes.
IV. An expense is deferred for tax purposes but not for financial reporting purposes.


a. item II only
b. items I and II only
c. items II and III only
d. items I and IV only


Answer: items II and III only

At the December 31, 2014 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2015, a future taxable amount will occur and

At the December 31, 2014 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2015, a future taxable amount will occur and

a. pretax financial income will exceed taxable income in 2015.
b. Unruh will record a decrease in a deferred tax liability in 2015.
c. total income tax expense for 2015 will exceed current tax expense for 2015.
d. Unruh will record an increase in a deferred tax asset in 2015.


Answer: Unruh will record a decrease in a deferred tax liability in 2015

A temporary difference arises when a revenue item is reported for tax purposes in a period

A temporary difference arises when a revenue item is reported for tax purposes in a period

After it is reported Before it is reported
in financial income in financial income


a. Yes Yes
b. Yes No
c. No Yes
d. No No


Answer: Yes Yes

Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in

Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in

Future Future
Taxable Amounts Deductible Amounts


a. Yes Yes
b. Yes No
c. No Yes
d. No No


Answer: Yes Yes

The deferred tax expense is the

The deferred tax expense is the

a. increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.
b. increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.
c. increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.
d. decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability.


Answer: increase in balance of deferred tax liability minus the increase in balance of deferred tax asset

Taxable income of a corporation differs from pretax financial income because of

Taxable income of a corporation differs from pretax financial income because of

Permanent Temporary
Differences Differences


a. No No
b. No Yes
c. Yes Yes
d. Yes No


Answer: Yes Yes

Taxable income of a corporation

Taxable income of a corporation

a. differs from accounting income due to differences in intraperiod allocation between the two methods of income determination.
b. differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination.
c. is based on generally accepted accounting principles.
d. is reported on the corporation's income statement.


Answer: differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination

Which of the following describes a permanent difference?

Which of the following describes a permanent difference? 

A. A difference that will be corrected in an amended tax return.

B. A difference arising from an uncertain tax position.

C. A fundamental difference in what constitutes revenue or expense for GAAP and tax purposes.

D. A timing difference between the recognition of revenue or expense under GAAP and tax purposes.


Answer: A fundamental difference in what constitutes revenue or expense for GAAP and tax purposes.

Which of the following describes a temporary difference?

Which of the following describes a temporary difference? 

A. A difference that will be corrected in an amended tax return.

B. A difference arising from an uncertain tax position.

C. A fundamental difference in what constitutes revenue or expense for GAAP and tax purposes.

D. A timing difference between the recognition of revenue or expense under GAAP and tax purposes.


Answer: A timing difference between the recognition of revenue or expense under GAAP and tax purposes

If payables turnover has increased significantly since the prior year, this is an indication that which of the following assertions for accounts payable might be violated?

If payables turnover has increased significantly since the prior year, this is an indication that which of the following assertions for accounts payable might be violated? 

A. Existence or occurrence.

B. Completeness.

C. Rights and obligations.

D. Valuation and allocation.


Answer: Completeness

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases? 

A. Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher?

B. Are purchase requisitions prenumbered and independently matched with vendor invoices?

C. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions?

D. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?


Answer: Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

Which of the following test(s) of details of transactions can be used as a dual-purpose test in conjunction with tests of controls?

Which of the following test(s) of details of transactions can be used as a dual-purpose test in conjunction with tests of controls? 

A. Test a sample of purchase requisitions for proper authorization.

B. Obtain selected vendors' statements and reconcile to vendor accounts.

C. Obtain listing of accounts payable and compare total to general ledger.

D. Review results of confirmations of selected accounts payable.


Answer: Test a sample of purchase requisitions for proper authorization

Assertions about account balances at the period end include

Assertions about account balances at the period end include

A. Existence, completeness, and accuracy.

B. Existence, completeness, and classification.

C. Existence, rights and obligations, and completeness.

D. Existence, rights and obligations, and classification.


Answer: Existence, rights and obligations, and completeness

Assertions about classes of transactions and events for the period under audit include

Assertions about classes of transactions and events for the period under audit include 

A. Existence, completeness, and accuracy.

B. Existence, completeness, and classification.

C. Occurrence, completeness, and cutoff.

D. Occurrence, completeness, and valuation and allocation.


Answer: Occurrence, completeness, and cutoff

The mailing of disbursement checks and remittance advices should be controlled by the employee who

The mailing of disbursement checks and remittance advices should be controlled by the employee who 

A. Signed the checks last.

B. Approved the vouchers for payment.

C. Matched the receiving reports, purchase orders and vendors' invoices.

D. Verified the mathematical accuracy of the vouchers and remittance advices.


Answer: Signed the checks last

Which of the following is an internal control that would prevent a paid disbursement voucher from being presented for payment a second time?

Which of the following is an internal control that would prevent a paid disbursement voucher from being presented for payment a second time? 

A. Vouchers should be prepared by individuals who are responsible for signing disbursement checks.

B. Disbursement vouchers should be approved by at least two responsible management officials.

C. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.

D. The official signing the check should compare the check with the voucher and should "cancel" the voucher documents by marking them "paid."


Answer: The official signing the check should compare the check with the voucher and should "cancel" the voucher documents by marking them "paid."

Which of the following control activities is not usually performed in the accounts payable department?

Which of the following control activities is not usually performed in the accounts payable department? 

A. Determining the mathematical accuracy of the vendor's invoice.

B. Having an authorized person approve the voucher.

C. Controlling the mailing of the check and remittance advice.

D. Matching the receiving report with the purchase order.


Answer: Controlling the mailing of the check and remittance advice

Budd, the purchasing agent for Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a C.O.D. basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over

Budd, the purchasing agent for Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a C.O.D. basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over 

A. Purchase requisitions.

B. Cash receipts.

C. Perpetual inventory records.

D. Purchase orders.



Answer: Purchase orders

In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of

In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of 

A. Existence.

B. Rights and obligations.

C. Completeness.

D. Valuation and allocation.


Answer: Completeness

If completeness is a concern for accounts payable, auditors will send accounts payable confirmations to

If completeness is a concern for accounts payable, auditors will send accounts payable confirmations to 

A. Primarily vendors with large accounts payable balances.

B. Primarily vendors with small or zero accounts payable balances.

C. All vendors.

D. A random sample of all vendors.


Answer: Primarily vendors with small or zero accounts payable balances

Accounts payable confirmations are used to test

Accounts payable confirmations are used to test 

A. Both the existence and completeness audit assertions.

B. Only the existence audit assertion.

C. Only the completeness audit assertion.

D. Either existence or completeness, depending upon the response rate.


Answer: Both the existence and completeness audit assertions

An examination of the balance in the accounts payable account is ordinarily not designed to

An examination of the balance in the accounts payable account is ordinarily not designed to 

A. Determine that the amounts represent obligations of the company.

B. Verify that accounts payable were properly authorized.

C. Ascertain the reasonableness of recorded liabilities.

D. Determine that all existing liabilities at the balance sheet date have been recorded.


Answer: Verify that accounts payable were properly authorized

Which of the following procedures would an auditor least likely perform before the balance sheet date?

Which of the following procedures would an auditor least likely perform before the balance sheet date? 

A. Assessment of inherent risk.

B. Observation of merchandise inventory.

C. Assessment of control risk.

D. Identification of related parties.


Answer: Observation of merchandise inventory

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? 

A. Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file.

B. Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance.

C. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.

D. Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions.


Answer: Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices

Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence of recorded accounts payable?

Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence of recorded accounts payable? 

A. Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for.

B. Receiving the entity's mail, unopened, for a reasonable period of time after the year-end to search for unrecorded vendor's invoices.

C. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.

D. Confirming accounts payable balances with known suppliers who have zero balances.


Answer: Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports