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ACCT 460 Chapter 16
Auditing 460
14
Accounting
05/09/2010

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Term
D) Overstatement of Revenues and Net Income, and understatement of Expenses.
Definition
What is ordinarily the primary concern when auditing the income statement?
A) Overstatement of Revenues, Expenses and Net Income.
B) Overstatement of Revenues and Expenses, and understatement of Net Income.
C) Overstatement of Net Income and understatement of Revenues and Expenses.
D) Overstatement of Revenues and Net Income, and understatement of Expenses.
Term
C) Sales and Bad Debt Expense.
Definition
In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable?
A) Sales and Cost of Goods Sold.
B) Interest and Bad Debt Expense.
C) Sales and Bad Debt Expense.
D) Interest and Cost of Goods Sold.
Term
C) Confirmations to advertising agencies confirming payments.
Definition
What audit procedure is not ordinarily used to examine selling, general and administrative expenses?
A) Analytical procedures.
B) Use of budgets to identify unexpected differences.
C) Confirmations to advertising agencies confirming payments.
D) Detailed tests of balances.
Term
C) Completeness.
Definition
A manufacturer's employees are paid once a month, on the 3rd of the following month. What audit issue pertaining to labor costs exists at year end?
A) Rights.
B) Existence.
C) Completeness.
D) Presentation.
Term
D) Personnel verification.
Definition
To have strong internal control over payroll, which of the following functions does not need to be separated from the others?
A) Personnel.
B) Timekeeping.
C) Payroll preparation.
D) Personnel verification.
Term
D) Employees worked the number of hours for which their pay was computed.
Definition
A common audit procedure in the audit of payroll transactions involves vouching selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit objective of determining that:
A) Only bona fide employees worked and their pay was properly computed.
B) Jobs on which employees worked were charged with the appropriate labor cost.
C) Controls relating to disbursements are operating properly.
D) Employees worked the number of hours for which their pay was computed.
Term
D) Read and consider the manner of presentation of the "other financial information."
Definition

The auditors' best course of action with respect to "other financial information" included in a client prepared annual report containing the auditors' report is to:
A) Indicate in the auditors' report that the "other financial information" is unaudited.
B) Consider whether the "other financial information is accurate by performing a review.
C) Obtain written representations from management as to the material accuracy of the "other financial information."
D) Read and consider the manner of presentation of the "other financial information."
Term
B) Unasserted claim.
Definition
A company oil tanker recently spilled a large amount of oil in a pristine fishing area. No lawsuits have yet been filed. What is the audit issue?
A) Account payable.
B) Unasserted claim.
C) Valuation of oil & gas holdings.
D) General risk contingency.
Term
B) $15,000
Definition
Management estimates the company's allowance for doubtful accounts as $100,000, and the auditors develop an estimates that suggests that the amount should be between $115,000 and $125,000. The likely misstatement in this situation is:
A) $0
B) $15,000
C) $20,000
D) $25,000
Term
C) Substantive testing of company prepaid assets
Definition
Which of the following is not a procedure to discover unasserted claims or contingent liabilities?
A) Review of Board of Director minutes.
B) Sending a letter of inquiry to a client's attorney.
C) Substantive testing of company prepaid assets.
D) Searching newspapers and other periodicals for stories on the client and its industry.
Term
D) A type II event may require adjustment to the financial statements and a type I may require note disclosure.
Definition
Which of the following is not correct concerning a type I and a type II subsequent event?
A) A type I may require adjustment to financial statements while a type II will not.
B) Both a type I and a type II subsequent event may require note disclosure.
C) A type I is an event that occurred prior to year end, but was discovered after, while a type II is one that arose subsequent to year end.
D) A type II event may require adjustment to the financial statements and a type I may require note disclosure.
Term
C) Through the date of the audit report.
Definition
Auditors should perform audit procedures relating to subsequent events?
A) Through year end.
B) Through issuance of the audit report.
C) Through the date of the audit report.
D) For a reasonable period after year end.
Term
D) $70,000
Definition
A client's previous two years of financial statements understated estimated warranty payable by $15,000 and $25,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $30,000. In this year's audit $50,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is
A) $0
B) $30,000
C) $55,000
D) $70,000
Term
C) Known, projected and other estimated misstatements in the financial statements.
Definition
In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate:
A) Likely misstatements in the financial statements.
B) Known misstatements in the financial statements.
C) Known, projected and other estimated misstatements in the financial statements.
D) Known, projected and potential misstatements in the financial statements.