SHAREHOLDER’S EQUITY d. Be defaced and sent to the secretary of state.

4. An auditor usually obtains evidence of stockholders’ equity

1. In the following questions would an auditor most likely include on an transactions by reviewing the entity’s
internal control questionnaire for notes payable?
a. Minutes of board of directors meetings.
a. Are assets that collateralize notes payable critically needed for the entity’s
continued existence? b. Transfer agent’s records.

b. Are two or more authorized signatures required on checks that repay notes c. Canceled stock certificates.
payable? d. Treasury stock certificate book.
c. Are the proceeds from notes payable used for the purchase of noncurrent 5. In performing tests concerning the granting of stock options, an
assets? auditor should
d. Are direct borrowings on notes payable authorized by the board of a. Confirm the transaction with the Secretary of State in the state of
directors? incorporation.
2. The primary responsibility of a bank acting as registrar of capital b. Verify the existence of option holders in the entity’s payroll records or
stock is to stock ledgers.
a. Ascertain that dividends declared do not exceed the statutory amount c. Determine that sufficient treasury stock is available to cover any new stock
allowable in the state of incorporation. issued.
b. Account for stock certificates by comparing the total shares outstanding to d. Trace the authorization for the transaction to a vote of the board of
the total in the shareholders subsidiary ledger. directors.
c. Act as an independent third party between the board of directors and 6. During an audit of an entity’s stockholders’ equity accounts, the
outside investors concerning mergers, acquisitions, and the sale of treasury auditor determines whether there are restrictions on retained earnings
stock. resulting from loans, agreements, or state law. This audit procedure most
d. Verify that stock is issued in accordance with the authorization of the board likely is intended to verify management’s assertion of
of directors and the articles of incorporation. a. Existence or occurrence.
3. Where no independent stock transfer agents are employed and the b. Completeness.
corporation issues its own stocks and maintains stock records, canceled
stock certificates should c. Valuation or allocation.
a. Be defaced to prevent reissuance and attached to their corresponding stubs. d. Presentation and disclosure.
b. Not be defaced but segregated from other stock certifi cates and retained
in a canceled certifi cates fi le.
c. Be destroyed to prevent fraudulent reissuance.
7. When a client company does not maintain its own stock records, the D. Fair value of the treasury shares on the date of issuance
auditor should obtain written confirmation from the transfer agent and
registrar concerning 11. The declaration and issuance of a 25% share dividend

a. Restrictions on the payment of dividends. A. Increases ordinary shares outstanding and total equity

b. The number of shares issued and outstanding. B. Decreases retained earnings but does not change total equity

c. Guarantees of preferred stock liquidation value. C. May increase or decrease share premium but does not change total equity

d. The number of shares subject to agreements to repurchase. D. Increases retained earnings and total equity

8. An audit plan for the examination of the retained earnings account 12. Which of the following statements is incorrect concerning retained
should include a step that requires verification of the earnings?

a. Market value used to charge retained earnings to account for a two-for-one A. Appropriated retained earnings shall be clearly distinguished from
stock split. appropriated retained

b. Approval of the adjustment to the beginning balance as a result of a write- earnings

down of an account receivable. B. A deficit is a debit balance in retained earnings
c. Authorization for both cash and stock dividends. C. A deficit in retained earnings shall be presented as an asset
d. Gain or loss resulting from disposition of treasury shares. D. When the deficit exceeds the total of the other capital account balances,
9. An auditor usually tests the reasonableness of dividend income from the excess is a capital deficiency
investments in publicly held companies by computing the amounts that 13. Appropriations of retained earnings should be reported as
should have been received by referring to
A. Component of equity as part of share premium
a. Dividend record books produced by investment advisory services.
B. Component of equity as part as total retained earnings
b. Stock indentures published by corporate transfer agents.
C. Component of total liabilities as current liability
c. Stock ledgers maintained by independent registrars.
D. When the deficit exceeds the total of the other capital account balances,
d. Annual audited financial statements issued by the investee companies the excess is a capital deficiency
10. Treasury shares may be reissued as dividends in which case what
amount should be charged to retained earnings
14. Which of the following conditions or events most likely would cause
A. Cost of the treasury shares an auditor to have substantial doubt about an entity’s ability to continue
B. Par value of the treasury share as a going concern?

C. Fair value of the treasury shares on the date of declarations a. Significant related-party transactions are pervasive.
b. Usual trade credit from suppliers is denied. c. YES - NO
c. Arrearages in preferred stock dividends are paid. d. NO – YES
d. Restrictions on the disposal of principal assets are present. 18. During an audit of an entity's stockholders' equity accounts, the
auditor determines whether there are restrictions on retained earnings
15. Which of the following conditions or events most likely would cause resulting from loans, agreements or state law. This audit procedure most
an auditor to have substantial doubt about an entity’s ability to continue likely is intended to verify management's assertion of
as a going concern?
A. existence or occurrence.
a. Cash flows from operating activities are negative.
B. completeness.
b. Research and development projects are postponed.
C. valuation or allocation.
c. Significant related-party transactions are pervasive.
D. presentation and disclosure.
d. Stock dividends replace annual cash dividends.
19. An auditor traces the serial numbers on equipment to a nonissuer's
16. Davis, CPA, believes there is substantial doubt about the ability of sub-ledger. Which of the following management assertions is supported
Hill Co. to continue as a going concern for a reasonable period of time. by this test?
In evaluating Hill’s plans for dealing with the adverse effects of future
conditions and events, Davis most likely would consider, as a mitigating
factor, Hill’s plans to A. Valuation and allocation.
a. Accelerate research and development projects related to future products. B. Completeness.
C. Rights and obligations.
b. Accumulate treasury stock at prices favorable to Hill’s historic price range. D. Presentation and disclosure.

c. Purchase equipment and production facilities currently being leased. 20. An auditor has substantial doubt about the entity's ability to
continue as a going concern for a reasonable period of time because of
d. Negotiate reductions in required dividends being paid on preferred stock. negative cash flows and working capital deficiencies. Under these
circumstances, the auditor would be most concerned about the
17. Davis, CPA, accepted an engagement to audit the financial statements
of Tech Resources, a nonissuer. Before the completion of the audit, Tech
A. control environment factors that affect the organizational structure.
requested Davis to change the engagement to a compilation of financial
B. correlation of detection risk and inherent risk.
statements. Before Davis agrees to change the engagement, Davis is
C. effectiveness of the entity's internal control activities.
required to consider the
D. possible effects on the entity's financial statements.
Additional audit effort necessary to complete the audit - Reason given
for Tech’s request
a. NO - NO
b. YES – YES
PAYABLES 4. Which of the following is a substantive procedure that an auditor
most likely would perform to verify the existence and valuation of
1. Which of the following procedures would an auditor most likely recorded accounts payable?
perform in searching for unrecorded liabilities?
a. Investigating the open purchase order fi le to as certain that prenumbered
a. Trace a sample of accounts payable entries recorded just before year-end purchase orders are used and accounted for.
to the unmatched receiving report file.
b. Receiving the client’s mail, unopened, for a reasonable period of time
b. Compare a sample of purchase orders issued just after year-end with the after the year-end to search for unrecorded vendors’ invoices.
year-end accounts payable trial balance.
c. Vouching selected entries in the accounts payable subsidiary ledger to
c. Vouch a sample of cash disbursements recorded just after year-end to purchase orders and receiving reports.
receiving reports and vendor invoices.
d. Confirming accounts payable balances with known suppliers who have
d. Scan the cash disbursements entries recorded just before year-end for zero balances.
indications of unusual transactions.
5. In auditing accounts payable, an auditor’s procedures most likely
2. When using confirmations to provide evidence about the completeness would focus primarily on management’s assertion of
assertion for accounts payable, the appropriate population most likely
would be a. Existence.
a. Vendors with whom the entity has previously done business. b. Presentation and disclosure.
b. Amounts recorded in the accounts payable sub sidiary ledger. c. Completeness.
c. Payees of checks drawn in the month after the year-end. d. Valuation.
d. Invoices filed in the entity’s open invoice fi le. 6. To provide assurance that each voucher is submitted and paid only
once, an auditor most likely would examine a sample of paid vouchers
3. Auditor confirmation of accounts payable balances at the balance and determine whether each voucher is
sheet date may be unnecessary because
a. Supported by a vendor’s invoice.
a. This is a duplication of cutoff tests.
b. Stamped “paid” by the check signer.
b. Accounts payable balances at the balance sheet date
c. Prenumbered and accounted for.
may not be paid before the audit is completed.
d. Approved for authorized purchases.
c. Correspondence with the audit client’s attorney will reveal all legal
action by vendors for non payment. 7 . In testing controls over cash disbursements, an auditor most
d. There is likely to be other reliable external evidence to likely would determine that the person who signs checks also
support the balances. a. is the monthly bank reconciliation.
b. Returns the checks to accounts payable.
c. Is denied access to the supporting documents. order and a prenumbered receiving report. To determine whether checks
are being issued for unauthorized expenditures, an auditor most likely
d. Is responsible for mailing the checks. would select items for testing from the population of all
8. In assessing control risk for purchases, an auditor vouches a sample a. Purchase orders.
of entries in the voucher register to the supporting documents. Which
assertion would this test of controls most likely support? b. Canceled checks.
a. Completeness. c. Receiving reports.
b. Existence or occurrence. d. Approved vouchers.
c. Valuation or allocation. 12. Which of the following questions would most likely be included in
an internal control questionnaire concerning the completeness assertion
d. Rights and obligations. for purchases?
9. Which of the following controls is not usually performed a. Is an authorized purchase order required before the receiving department
in the vouchers payable department? can accept a shipment or the vouchers payable department can record a
voucher?
a. Matching the vendor’s invoice with the related receiving report.
b. Are purchase requisitions prenumbered and independently matched with
b. Approving vouchers for payment by having an authorized employee sign vendor invoices?
the vouchers.
c. Is the unpaid voucher fi le periodically reconciled with inventory records
c. Indicating the asset and expense accounts to be debited. by an employee who does not have access to purchase requisitions?

d. Accounting for unused prenumbered purchase orders and receiving d. Are purchase orders, receiving reports, and vouchers prenumbered and
reports. periodically accounted for

10. With properly designed internal control, the same 13. For effective internal control, the accounts payable department
generally should
employee most likely would match vendors’ invoices with
a. Stamp, perforate, or otherwise cancel supporting documentation after
receiving reports and also payment is mailed.
a. Post the detailed accounts payable records. b. Ascertain that each requisition is approved as to price,
b. Recompute the calculations on vendors’ invoices. quantity, and quality by an authorized employee.
c. Reconcile the accounts payable ledger. c. Obliterate the quantity ordered on the receiving department copy of the
purchase order.
d. Cancel vendors’ invoices after payment.
d. Establish the agreement of the vendor’s invoice with the receiving report
11. An entity’s internal control requires for every check request that
and purchase order.
there be an approved voucher, supported by a prenumbered purchase
 14. Internal control is strengthened when the quantity of merchandise d. Are direct borrowings on notes payable authorized by the board of
ordered is omitted from the copy of the purchase order sent to the directors?
a. Department that initiated the requisition. 18. The primary responsibility of a bank acting as registrar of capital
stock is to
b. Receiving department.
a. Ascertain that dividends declared do not exceed the statutory amount
c. Purchasing agent. allowable in the state of incorporation.
d. Accounts payable department. b. Account for stock certificates by comparing the total shares outstanding
15. A client erroneously recorded a large purchase twice. Which of the to the total in the shareholders subsidiary ledger.
following internal control measures would be most likely to detect this c. Act as an independent third party between the board of directors and
error in a timely and efficient manner? outside investors concerning mergers, acquisitions, and the sale of treasury
a. Footing the purchases journal. stock.

b. Reconciling vendors’ monthly statements with subsidiary payable ledger d. Verify that stock is issued in accordance with the authorization of the
accounts. board of directors and the articles of incorporation.

c. Tracing totals from the purchases journal to the ledger accounts. 19. Where no independent stock transfer agents are employed and the
corporation issues its own stocks and maintains stock records, canceled
d. Sending written quarterly confirmations to all vendors. stock certificates should

16. With well-designed internal control, employees in the same a. Be defaced to prevent reissuance and attached to their corresponding
department most likely would approve purchase orders, and also stubs.

a. Reconcile the open invoice fi le. b. Not be defaced but segregated from other stock certificates and retained
in a canceled certificates file.
b. Inspect goods upon receipt.
c. Be destroyed to prevent fraudulent reissuance.
c. Authorize requisitions of goods.
d. Be defaced and sent to the secretary of state
d. Negotiate terms with vendors.
20. An auditor vouched data for a sample of employees in a payroll
17. Which of the following questions would an auditor most likely register to approved clock card data to provide assurance that
include on an internal control questionnaire for notes payable?
a. Payments to employees are computed at authorized rates.
a. Are assets that collateralize notes payable critically needed for the
entity’s continued existence? b. Employees work the number of hours for which they are paid.

b. Are two or more authorized signatures required on checks that repay c. Segregation of duties exist between the preparation and distribution of
notes payable? the payroll.

c. Are the proceeds from notes payable used for the purchase of noncurrent d. Controls relating to unclaimed payroll checks are operating effectively.
assets?
21. Which of the following is a control that most likely could help a. Periodic independent counts of work in process for comparison to
prevent employee payroll fraud? recorded amounts.
a. The personnel department promptly sends employee termination notices b. Comparison of daily journal entries with approved production orders.
to the payroll supervisor.
c. Use of time tickets to record actual labor worked on production orders.
b. Employees who distribute payroll checks forward unclaimed payroll
checks to the absent employees’ supervisors. d. Reconciliation of work-in-process inventory with periodic cost budgets.

c. Salary rates resulting from new hires are approved by the payroll 24. In meeting the control objective of safeguarding of assets, which
supervisor. department should be responsible for Distribution of paychecks

d. Total hours used for determination of gross pay are calculated by the A
payroll supervisor.
22. In determining the effectiveness of an entity’s controls relating to
the existence or occurrence assertion for payroll transactions, an
auditor most likely would inquire about and
a. Observe the segregation of duties concerning personnel responsibilities
and payroll disbursement.
b. Inspect evidence of accounting for prenumbered payroll checks. 25. Proper internal control over the cash payroll function would
c. Recompute the payroll deductions for employee fringe mandate which of the following?

benefits. a. The payroll clerk should fill the envelopes with cash and a computation
of the net wages.
d. Verify the preparation of the monthly payroll account
b. Unclaimed pay envelopes should be retained by the paymaster.
bank reconciliation.
c. Each employee should be asked to sign a receipt.
23. An auditor most likely would assess control risk at a high
d. A separate checking account for payroll be maintained.
level if the payroll department supervisor is responsible for
26. The purpose of segregating the duties of hiring personnel
a. Examining authorization forms for new employees.
and distributing payroll checks is to separate the
b. Comparing payroll registers with original batch transmittal data.
a. Authorization of transactions from the custody of related assets.
c. Authorizing payroll rate changes for all employees.
b. Operational responsibility from the recordkeeping responsibility.
d. Hiring all subordinate payroll department employees.
c. Human resources function from the controllership function.
24. Which of the following controls most likely would prevent direct
labor hours from being charged to manufacturing overhead? d. Administrative controls from the internal accounting controls.
 27. To minimize the opportunities for fraud, unclaimed cash payroll 31. In designing written audit plans, an auditor should establish
should be specific audit objectives that relate primarily to the
a. Deposited in a safe-deposit box. a. Timing of audit procedures.
b. Held by the payroll custodian. b. Cost-benefit of gathering evidence.
c. Deposited in a special bank account. c. Selected audit techniques.
d. Held by the controller. d. Financial statement assertions.
B.5. The Audit Plan 32. With respect to planning an audit, which of the following statements
is always true?
28. An auditor should design the audit plan so that
a. It is acceptable to perform a portion of the audit of a continuing audit
a. All material transactions will be selected for substantive testing. client at interim dates.
b. Substantive tests prior to the balance sheet date will be minimized. b. An engagement should not be accepted after the client’s year-end.
c. The audit procedures selected will achieve specific audit objectives. c. An inventory count must be observed at year-end.
d. Each account balance will be tested under either tests of controls or tests d. Final staffing decisions must be made prior to completion of the
of transactions. planning stage.
29. The audit plan generally is modified when 33. The element of the audit planning process most likely to be agreed
a. Results of tests of control differ from expectations. upon with the client before implementation of the audit strategy is the
determination of the
b. An engagement letter has been signed by the auditor and the client.
a. Evidence to be gathered to provide a sufficient basis for the auditor’s
c. A significant defciency has been communicated to the audit committee of opinion.
the board of directors.
b. Procedures to be undertaken to discover litigation, claims, and
d. The search for unrecorded liabilities has been performed and obtained assessments.
results as had been expected during the planning of the audit.
c. Pending legal matters to be included in the inquiry of the client’s
30. Audit plans should be designed so that attorney.

a. Most of the required procedures can be performed as interim work. d. Timing of inventory observation procedures to be performed.

b. Inherent risk is assessed at a sufficiently low level. 34. When a CPA observes that the recorded interest expense seems to
be excessive in relation to the balance in the bonds payable account, the
c. The auditor can make constructive suggestions to management. CPA might suspect that
d. The audit evidence gathered supports the auditor’s conclusions. a. Discount on bonds payable is understated.
b. Bonds payable are understated. a. Trace transactions from the subsidiary ledger to the general ledger.
c. Bonds payable are overstated. b. Send confirmations to customers.
d. Premium on bonds payable is overstated. c. Trace a sample of invoices to recording in the general ledger.
35. An auditor most likely would inspect loan agreements under which d. Determine that all shipments before year end are recorded as sales
an entity’s inventories are pledged to support management’s financial
statement assertion of 39. In auditing accounts payable, an auditor's procedures most likely
will focus primarily on management's assertion of
a. Presentation and disclosure.
a. Existence or occurrence
b. Valuation or allocation.
c. Completeness
c. Existence or occurrence.
b. Presentation and disclosure
d. Completeness.
d. Valuation or allocation
36. In auditing long-term bonds payable, an auditor most likely would
40. An auditor performs a test to determine whether all merchandise
a. Perform analytical procedures on the bond premium and discount for which the client was billed was received. The population for this test
accounts. consists of all
b. Examine documentation of assets purchased with bond proceeds for a. Merchandise received
liens.
c. Canceled checks
c. Compare interest expense with the bond payable amount for
reasonableness. b. Vendors' invoices

d. Confirm the existence of individual bond holders at year-end. d. Receiving reports

37. The auditor can best verify a client’s bond sinking fund 41. The primary audit test to determine if accounts payable are valued
transactions and year-end balance by properly is

a. Confirmation with individual holders of retired bonds. a. Confirmation of accounts payable

b. Confirmation with the bond trustee. b. Vouching accounts payable to supporting documentation

c. Recomputation of interest expense, interest pay able, C. An analytical procedure

and amortization of bond discount or premium. d. Verification that accounts payable was reported as a current liability in
the balance sheet.
d. Examination and count of the bonds retired during the year
42. Which of the following procedures is least likely to be performed
38. Which of the following procedures would be appropriate to test the before the balance sheet date?
existence assertion during an audit of accounts receivable?
a. Observation of inventory
b. Testing of internal control over cash
c. Search for unrecorded liabilities
d. Confirmation of receivables
43. The audit objective that all transactions and accounts that should be
presented in the financial statements are in fact included is related to
which of the PCAOB assertions?

A. Existence
B. Rights and obligations
C. Completeness
D. Valuation
44. The confirmation of an account payable balance selected from the
general ledger provides primary evidence regarding which
management assertion?
A. Completeness
B. Valuation
C. Allocation
D. Existence
46. In obtaining an understanding of a manufacturing entity’s internal
control over inventory balances, an auditor most likely would
a. Analyze the liquidity and turnover ratios of the inventory.
b. Perform analytical procedures designed to identify cost variances.
c. Review the entity’s descriptions of inventory policies and procedures.
d. Perform test counts of inventory during the entity’s physical count.