LUO COUC 506 EXAM 3 REVIEW STUDY
SHEET 2026 ACCURATE RESPONSES FULL
SOLUTION
◉ A customer returns a negative confirmation request with the
comment, "This is correct." What should the auditor do? Answer:
document the confirmation in the workpapers and do nothing
further
◉ What is the most important year-end audit procedure for
accounts payable? Answer: the search for unrecorded liabilities
◉ During the inventory observation, the auditor will normally
obtain documentation used later in the year end audit. What is the
purpose of this documentation? Answer: To perform cutoff testing
on shipping and receiving of product
◉ Sales discounts as a percent of net revenue have suddenly
dropped from prior years. Is this a concern and why: Answer:
Customers are slowing down on their payments possibly due to cash
flow issues. This may result in higher bad debts in the future.
◉ Which of the following might the auditor attempt to do in advance
of an inventory observation?
,a. walk through the warehouse to ensure it is well organized and
clean before the count starts
b. obtain a copy of the inventory instructions provided to the client's
employees
c. write the observation memo
d. take test counts Answer: obtain a copy of the inventory
instructions provided to the client's employees
◉ When sending accounts receivable confirmations, it is normal not
to receive a few of them back in time for the audit fieldwork. Which
of the following is true of these unreturned confirmations?
a. Unreturned confirmations must be investigated to determine
whether the account receivables are valid and for the correct
amount
b. The auditor should have the auditor call all the delinquent
customers and require them them to return the confirmations
c. No action is necessary as long as a predetermined return rate is
achieved. This threshold is established during planning
d. Unreturned confirmations should be replaced with other sample
items in order to gain sufficient coverage of the accounts receivable
balance Answer: unreturned confirmations must be investigated to
determine whether the account receivables are valid and for the
correct amount
, ◉ Which of the following represents a cutoff error at the end of the
year-end?
a. recording consignment inventory held by the client
b. unrecorded accounts payable for inventory shipped FOB
destination point
c. excluding bill and hold inventory from the physical count
d. unrecorded accounts payable for inventory shipped FOB shipping
point Answer: unrecorded accounts payable for inventory shipped
FOB shipping point
◉ Which of the following is an accrued expense not normally
recorded in accounts payable?
a. immaterial amounts of travel reimbursements to employees
b. utility bills
c. payroll due but unpaid at year end
d. health insurance premium payment due Answer: Payroll due but
unpaid at year end
◉ Positive confirmations may include which of the following:
a. an itemized list of invoices being confirmed
b. single number representing the accounts receivable balance being
confirmed
c. a blank so the customer can fill in how much they owe
d. all of the above Answer: All of the above
SHEET 2026 ACCURATE RESPONSES FULL
SOLUTION
◉ A customer returns a negative confirmation request with the
comment, "This is correct." What should the auditor do? Answer:
document the confirmation in the workpapers and do nothing
further
◉ What is the most important year-end audit procedure for
accounts payable? Answer: the search for unrecorded liabilities
◉ During the inventory observation, the auditor will normally
obtain documentation used later in the year end audit. What is the
purpose of this documentation? Answer: To perform cutoff testing
on shipping and receiving of product
◉ Sales discounts as a percent of net revenue have suddenly
dropped from prior years. Is this a concern and why: Answer:
Customers are slowing down on their payments possibly due to cash
flow issues. This may result in higher bad debts in the future.
◉ Which of the following might the auditor attempt to do in advance
of an inventory observation?
,a. walk through the warehouse to ensure it is well organized and
clean before the count starts
b. obtain a copy of the inventory instructions provided to the client's
employees
c. write the observation memo
d. take test counts Answer: obtain a copy of the inventory
instructions provided to the client's employees
◉ When sending accounts receivable confirmations, it is normal not
to receive a few of them back in time for the audit fieldwork. Which
of the following is true of these unreturned confirmations?
a. Unreturned confirmations must be investigated to determine
whether the account receivables are valid and for the correct
amount
b. The auditor should have the auditor call all the delinquent
customers and require them them to return the confirmations
c. No action is necessary as long as a predetermined return rate is
achieved. This threshold is established during planning
d. Unreturned confirmations should be replaced with other sample
items in order to gain sufficient coverage of the accounts receivable
balance Answer: unreturned confirmations must be investigated to
determine whether the account receivables are valid and for the
correct amount
, ◉ Which of the following represents a cutoff error at the end of the
year-end?
a. recording consignment inventory held by the client
b. unrecorded accounts payable for inventory shipped FOB
destination point
c. excluding bill and hold inventory from the physical count
d. unrecorded accounts payable for inventory shipped FOB shipping
point Answer: unrecorded accounts payable for inventory shipped
FOB shipping point
◉ Which of the following is an accrued expense not normally
recorded in accounts payable?
a. immaterial amounts of travel reimbursements to employees
b. utility bills
c. payroll due but unpaid at year end
d. health insurance premium payment due Answer: Payroll due but
unpaid at year end
◉ Positive confirmations may include which of the following:
a. an itemized list of invoices being confirmed
b. single number representing the accounts receivable balance being
confirmed
c. a blank so the customer can fill in how much they owe
d. all of the above Answer: All of the above
