Which of the following would the auditor likely do to obtain assurance that all inventory items in a clients inventory listing are valid?

On receiving a client's bank cut-off statement, an auditor most likely would trace

Prior-year checks listed in the cut-off statement to the year-end outstanding checklist.A cut-off bank statement is a regular bank statement that is prepared by the bank for a shorter period than normal. It is sent directly to (or picked up by) the auditors.

The cut-off bank statement is used by the auditors to verify the components of the client's bank reconciliation. The correct answer is A-the auditor would trace the prior year checks clearing in the cut-off statement to the outstanding check list in the bank reconciliation as a means of verifying the completeness and accuracy of the outstanding check list.

Which of the following statements would an auditor most likely add to the negative form of confirmations of accounts receivable to encourage timely consideration by the recipients?

"If you do not report any differences within 15 days, it will be assumed that this statement is correct."
The auditor would most likely add message C to encourage recipients to respond quickly. The other choices provide information, but do not help with timely response.

Two assertions for which confirmation of accounts receivable balances provides primary evidence are

Rights and obligations and existence.
Confirmations of accounts receivable balances provide primary evidence for rights and obligations and existence. Direct responses from third parties provide proof that the accounts receivable are valid (that they exist) and that the amounts are properly owed to the entity.

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would

Ask the client to contact the customers to request that the confirmations be returned.
Asking the client to contact the customers wins by default, as the other choices are incorrect. Practically speaking, the auditor would indeed request the client's assistance to increase the response rate in a confirmation effort. Note that the confirmations would still be returned directly to the auditor. The assistance that is rendered by the client is simply the "gentle nudging" of customers to get them to return the confirmations.

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose

Individual invoices.
When there are "many differences" at the account-balance level for accounts receivable (particularly when those do not involve misstatements), the auditor may choose to focus on specific transactions represented by individual invoices for audit sampling purposes. That may make it easier for customers to respond accurately.

Tracing bills of lading to sales invoices provides evidence that

Shipments to customers were invoiced.
Tracing bills of lading to sales invoices provides evidence that shipments to customers were invoiced. This is a test of the completeness of the sales process.

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?

Use more experienced audit team members to perform year-end testing.
AICPA Professional Standards discuss responses to the auditor's assessment of the risks of material misstatement at two levels: (1) overall response; and (2) response at the relevant assertion level. At the overall level, the auditor might assign more experienced staff to the engagement in response to a higher risk of material misstatement.

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

Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets.
Tracing items listed in the records (inventory listing schedule) to inventory tags and the auditor's recorded count sheets is correctly a test of the validity of the listing. By tracing from the records to the tags and count sheets, the auditor is verifying that the items on the listing existed.

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?

Performing cut-off procedures for shipping and receiving.
The completeness assertion pertains to transactions that have NOT been recorded or are missing. Performing cut-off procedures for shipping and receiving enables the auditor to detect late transactions that may not have been recorded in the proper period and may be missing from the current (audit) year.

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

Testing the entity's computation of standard overhead rates.
Gaining assurance about the valuation of inventory requires, among other things, determining that inventories have been properly priced at the lower of cost or market. The determination of cost is obtained by reviewing current production costs, which might include testing the entity's computation of standard overhead rates.

An auditor testing long-term investments would ordinarily use analytical procedures to ascertain the reasonableness of the

Completeness of recorded investment income.
Analytical procedures would be effective and efficient in evaluating the completeness of recorded investment income. For example, notes receivable could be multiplied by an average interest rate to determine the amount of interest income that should have been recorded for the year.

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

Examine the audited financial statements of the investee company.
The equity method requires that the investment be valued by reflecting changes in the investee's equity. As a result, the auditor must examine copies of the audited financial statements of the investee company.

When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection.The policy's absence most likely indicates the possibility of a(n)

Lien on the plant equipment.
Given the normal condition of a company's insurance records, it would not be surprising to find the original policy missing. However, an alert auditor might find a missing policy indicative of a lien on the plant equipment, as the lienholders would want to know that their collateral was insured and might require that they be listed as the beneficiaries of such policies.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be

Vendors with whom the entity has previously done business.
In auditing the completeness assertion for accounts payable, the auditor is concerned about the possible understatement of accounts payable. The appropriate population for a confirmation effort would, therefore, be vendors with whom the entity has previously done business, in order to try to identify unrecorded payables.

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to

Determine that purchases were properly recorded.
Tracing a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal will enable the auditor to determine that the purchases were properly recorded. Going from the detail into the records tests for the proper inclusion and recording of the items.

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

Confirmation of accounts payable.
Performing substantive tests before the balance sheet date increases the risk that the auditor will not detect material misstatements in the balances at the balance sheet date. In selecting procedures to perform before the balance sheet date, the auditor must consider the problems involved in controlling this increase in risk. The auditor's primary concern with accounts payable is completeness. Confirmation efforts in this area would, therefore, be directed toward zero or low-balance accounts and would be least likely to be performed before the balance sheet date, as it would have to be re-performed as of the balance sheet date.

In auditing long-term bonds payable, an auditor most likely would

Compare interest expense with the bond payable amount for reasonableness.
In auditing long-term bonds payable, an auditor would compare interest expense with the bond payable amount for reasonableness. This procedure would provide evidence supporting the completeness and proper statement of interest expense, including limited evidence related to the amortization of bond premium and discounts. It would also provide evidence supporting the completeness and proper statement of the bonds payable balance.

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to

Identify potential liabilities for unpaid payroll taxes.
The review of payroll tax reconciliations is performed to identify potential liabilities for unpaid payroll taxes. The salaries and wages on which the payroll taxes are based are typically reconciled to gross salaries and wages per the general ledger. If the amounts differ, it may indicate additional payroll tax liabilities.

In auditing payroll, an auditor most likely would

Compare payroll costs with entity standards or budgets.
In auditing payroll, an auditor would be likely to compare payroll costs with entity standards or budgets. This comparison would enable the auditor to detect unusual fluctuations or amounts that might indicate a material misstatement is present.

Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?

Preliminary judgments about materiality levels.
In planning the sample, the auditor must determine how many and how much, i.e., how many cash receipts and what dollar cut-off. Both are affected by materiality levels.

Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management's assertion of

Valuation.
The valuation assertion addresses the proper valuation of inventory at net realizable value (at the lower of cost or market). Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management's assertion of valuation.

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to

Determine that purchases were properly recorded.
Tracing a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal will enable the auditor to determine that the purchases were properly recorded. Going from the detail into the records tests for the proper inclusion and recording of the items.

An auditor's program to examine long-term debt most likely would include steps that require

Correlating interest expense recorded for the period with outstanding debt.
The audit program for long-term debt would include an analysis of related interest expense. The auditor would thus correlate current interest expense with outstanding debt to ascertain the reasonableness of recorded interest expense.

When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and

Recalculating payroll accruals.
When control risk is assessed as low, substantive procedures in this area are typically limited to analytical procedures and recalculating year-end accruals.