14. (1) In violation of company policy, Lowell Company erroneously capitalized the cost of painting its warehouse. The auditors examining Lowell's financial statements would most likely detect this when: A) Discussing capitalization policies with Lowell's controller. B) Examining maintenance expense accounts. C) Observing, during the physical inventory observation, that the warehouse had been painted. D) Examining the construction work orders supporting items capitalized during the year. 15. Which of the following is not one of the auditors' objectives in auditing depreciation? A) Establishing the reasonableness of the client's replacement policy. B) Establishing that the methods used are appropriate. C) Establishing that the methods are consistently applied. D) Establishing the reasonableness of depreciation computations. 16. The scope of an internal audit is initially defined by the: A) Audit objectives. B) Scheduling and time estimates. C) Preliminary survey. D) Audit program. 17. For audit purposes, a corporation's articles of incorporation are normally: A) Copied and placed on the owners' equity lead schedule. B) Copied and placed in the permanent file. C) Confirmed with the transfer agent. D) Ignored since they are not normally considered to be related to the internal control structure. 18. Arel, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied by Modit Co. regarding Modit's written assertion about its compliance with contractual requirements to pay royalties. Arel's report on these agreed-upon procedures should contain a(n): A) Disclaimer of opinion about the fair presentation of Modit's financial statements. B) List of the procedures performed (or reference thereto) and Arel's findings. C) Opinion about the effectiveness of Modit's internal control activities concerning royalty payments. D) Acknowledgment that the sufficiency of the procedures is solely Arel's responsibility 19. The auditor's primary means of obtaining corroboration of management's information concerning litigation is a: A) Letter of audit inquiry to the client's lawyer. B) Letter of corroboration from the auditor's lawyer upon review of the legal documentation. C) Confirmation of claims and assessments from the other parties to the litigation. D) Confirmation of claims and assessments from an officer of the court presiding over the litigation. 20. An auditor identified a material weakness in internal control in August. The client was informed and the client corrected the material weakness prior to year-end (December 31); the auditor agrees that the correction eliminates the material weakness prior to year-end. The appropriate audit report on internal control under PCAOB standards on reporting on internal control is: A) Adverse. B) Unqualified. C) Disclaimer. D) Qualified. 21. Which of the following auditing procedures is ordinarily performed last? A) Reading of the minutes of the directors' meetings. B) Confirming accounts payable. C) Obtaining a management representation letter. D) Testing of the purchasing function 22. When an auditor has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the current financial statement date (9/30/X1), the auditor's responsibility includes: A) Preparing prospective financial information to verify whether management's plans can be effectively implemented. B) Projecting conditions and events from one year prior to this year's date (9/30/X0) to 9/30/X1. C) Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements. D) Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern. 23. Which of the following manipulations would understate accounts payable on the financial statements? A) Overstatement of purchases. B) Closing the cash disbursements journal prior to year-end. C) Leaving the cash receipts journal open after year-end. D) Overstating purchase returns 24. An example of an internal control weakness is to assign the payroll department the responsibility for: A) Preparing the payroll expense distribution. B) Preparing the payroll checks. C) Authorizing increases in pay. D) Preparing journal entries for payroll expense 25. In governmental accounting, emphasis is placed on: A) Total assets owned by the governmental entity. B) Generating income form funds employed. C) Expenditures of funds. D) The flow of funds through the income statement. 26. In auditing long-term debt, an auditor would be most likely to: A) Perform analytical procedures on the bond prenumbered discount accounts. B) Examine documentation of assets purchased with bond proceeds for liens. C) Compare interest expense with the long-term debt amount for reasonableness. D) Confirm the existence of individual long-term debt holders at year-end. 27. Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed? A) Scan the sales journal for sequential and unusual entries. B) Examine shipping documents for matching sales invoices. C) Compare the accounts receivable ledger to daily sales summaries. D) Inspect unused sales invoices for consecutive pre-numbering. 28. Which of the following audit procedures is best for identifying unrecorded trade accounts payable? A) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the prior period. B) Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. C) Examining unusual relationships between monthly accounts payable balances and recorded cash payments. D) Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date. 29. Which of the following is true about the auditors' observation of the client's physical inventory? A) The count must be made at year-end. B) The auditors should supervise the client's personnel. C) The auditors' observation addresses the existence assertion. D) The auditors should justify any omission of the observation in the audit report. 30. Which of the following is not a reason for the special significance attached by the auditors to the verification of inventories? A) The determination of inventory valuation directly affects net income. B) The existence of inventories is inherently difficult to substantiate. C) Special valuation problems often exist for inventories. D) Inventories are often the largest current asset of an enterprise. 31. (1) When the auditors obtain an understanding of internal control for the financing cycle documentation will frequently include a written description as well as a(n): A) List of audit objectives. B) Decision table. C) Summary of tests of controls. D) Internal control questionnaire