ACCT509, Ch. 9, Ch. 11, Ch. 12

Propex Corporation uses a voucher register and does not record invoices in a subsidiary ledger. Propex will probably benefit most from the additional cost of maintaining an accounts payable subsidiary ledger if

Partial payments to vendors are continuously made in the ordinary course of business.

Immediately upon receipt of cash, a responsible employee should

Prepare a remittance listing.

Which of the following statements is correct concerning internal control in an electronic data interchange (EDI) system?

Preventive controls are generally more important than detective controls in EDI systems

An auditor is studying a ratio of accounts receivable growth rate to sales growth rate. Which of the following indicates a potential risk of collection problem in accounts receivable?

Sales grew by 5% and receivables grew by 17% from year one to year two.

Which of the following internal control procedures would most likely deter lapping of collections from customers?

Segregation of duties between receiving cash and posting the accounts receivable ledger.

Analytical procedures:

are required during the planning and substantive testing phases of the audit.

An auditor is going to test the client's controls over bank reconciliations. The auditor will perform which of the following audit procedures for this test of controls?

Inquiry of the person performing the bank reconciliation and reperformance of the bank reconciliation procedure.

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

Inspect the shipping records documenting the merchandise sold to the debtors.

Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control procedure?

Make inquiries to understand the potential consequence of the deviation.

Assume an auditor is testing an IT application control over the accuracy of purchases. The auditor is most likely to submit test data for a:

voucher with different quantities than on the receiving report.

All of the following are initial procedures performed on an account balance except:

vouching items from the trial balance to supporting documentation.

Which of the following would require the auditor to increase the level of control testing for a particular control?

A high degree of reliance is to be placed on the control to limit the amount of substantive testing required.

The auditor is studying a ratio of accounts payable turnover in days. Which of the following indicates a potential risk of unrecorded liabilities?

Accounts payable turnover in days decreased from 28 days to 15 days from year one to year two.

Which of the following situations could most likely lead to an embezzlement scheme?

Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement.

For effective internal control, the billing function should be performed by the

Accounting department.

For the fiscal year ending December 31, previous year and the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and allowance for uncollectible accounts receivable of $30,000 and $50,000 respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions drawn?

Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible understatement of the allowance.

The auditor decides which controls to test by considering:

All of these answer choices are correct.

If an auditor of an issuer examines purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting

An inspection

Which of the following procedures would provide the most reliable audit evidence?

Audit evidence obtained from knowledgeable independent sources outside the client company is more reliable than audit evidence obtained from nonindependent sources.

Which of the following would not be a reason to increase the extent of a substantive test?

Auditors have time to test more items.

Which of the following fraudulent activities could most likely be perpetrated due to the lack of effective internal controls in the revenue cycle?

Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

An auditor most likely would assess control risk at a high level if the payroll department supervisor is responsible for

Authorizing payroll rate changes for all employees.

After obtaining an understanding of an entity's internal control structure, an auditor may assess control risk at the maximum level for some assertions because the auditor

Believes the internal control policies and procedures are unlikely to be effective.

How would an auditor of a nonissuer most appropriately respond to a heightened assessed risk of material misstatement?

By assigning more experienced staff or those with specialized skills to high-risk areas.

An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all

Canceled checks.

An auditor would be most likely to limit substantive audit tests of sales transactions when control risk is assessed as low for the existence or occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting

Cash receipts and accounts receivable.

A cutoff test designed to detect credit sales made before the end of the fiscal year that have been recorded in the subsequent year provides assurance about which of the following management assertions?

Classification.

Which of the following types of evidence would an auditor most likely examine to determine whether controls are operating as designed?

Client records documenting the use of computer programs.

Assume that a company has a control deficiency regarding the processing of cash receipts. Reconciliation of cash accounts by a competent individual otherwise independent of the cash function might make the likelihood of a significant misstatement due to the control deficiency remote. In this situation, reconciliation may be referred to as what type of control?

Compensating

An auditor wants to determine that all sales adjustments are recorded. This relates to which of the following transaction-class assertions?

Completeness

An auditor decided to confirm accounts payable to accomplish a low level of detection risk for the completeness assertion. Which of the following is the most reasonable sampling plan?

Confirm accounts payable with an emphasis on all vendors including zero and small balances.

During the audit the independent auditor identified the existence of a weakness in the client's internal control and communicated this finding in writing to the client's senior management and those charged with governance. The auditor should

Consider the effects of the condition on the audit.

Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should:

Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

In auditing an entity's computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning

Control and distribution of unclaimed checks.

Which assertion is typically related to income statement accounts rather than balance sheet accounts or presentation and disclosure?

Cutoff

Which of the following internal control procedures would most likely assure that all billed sales are correctly posted to the accounts receivable ledger?

Daily sales summaries are compared to daily postings to the accounts receivable ledger.

When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the

Debit memo.

If an auditor performs tests of controls and determines that the control is not effective, what should the auditor's next step in testing controls be?

Determine if a compensating control exists.

An auditor uses the knowledge provided by the understanding of internal control and the assessed level of the risks of material misstatements primarily to

Determine the nature, timing, and further audit procedures.

Which of the following circumstances would most likely cause an auditor to suspect that material misstatements exist in a client's financial statements?

Differences between reconciliations of control accounts and subsidiary records are not investigated.

Which of the following situations increases the reliability of data being used for substantive analytical procedures?

During the prior-year audit, the data was subjected to audit testing.

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that

Employees work the number of hours for which they are paid.

An auditor would most likely be concerned with internal control structure policies and procedures that provide reasonable assurance about the

Entity's ability to process and summarize financial data

Which of the following characteristics of an accounting estimate would lead to lower estimation uncertainty?

Estimate is related to routine transactions.

Walk-throughs provide evidence that helps auditors to

Evaluate design effectiveness of controls.

A client's materials-purchasing cycle begins with requisitions from user departments and ends with the receipt of materials and the recognition of a liability. An auditor's primary objective in reviewing this cycle is to

Evaluate the reliability of information generated as a result of the purchasing process.

If a customer pays its receivable in full but a client fails to record cash received from the customer, which of the following account balance assertions related to accounts receivable is misstated?

Existence.

When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the

Extent of tests of details.

If the auditor is concerned about the risk of fraud in the purchasing process, which of the following best describes the auditor's potential fraud risk assessments?

Fraudulent financial reporting-high risk; misappropriation of assets-high risk.

An auditor most likely would assess control risk at a high level if the payroll department supervisor is responsible for

Hiring all subordinate payroll department employees.

Assessing control risk at below the maximum level most likely would involve

Identifying specific internal control structure policies and procedures relevant to specific assertions.

When sending positive confirmations, which of the following would not be an appropriate way to address nonresponse by a customer?

If the customer's account balance is individually immaterial, conclude that no further work or analysis is necessary.

Which of the following can be used as both a risk assessment procedure and a substantive procedure for the audit of accounting estimates?

Inquire of management about the methods and assumptions used in developing the estimate.

Which of the following procedures would provide the most reliable audit evidence?

Inspection of bank statements obtained directly from the client's financial institution.

Which of the following situations would most likely preclude an auditor from performing substantive procedures during an interim period?

Internal controls are weak and the risk of material misstatement is high.

In a financial statement audit of a nonissuer, an auditor would consider a judgmental misstatement to be a misstatement that

Involves an estimate.

In testing controls over cash disbursements, an auditor would be most likely to determine that the person who signs checks also

Is responsible for mailing the checks.

Auditing by testing the input and output of a computer system instead of the computer program itself will

Not detect program errors which do not show up in the output sampled

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control procedures leave no audit trail of documentary evidence, the auditor will be most likely to test the procedures by

Observation and inquiry.

Which of the following audit techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of an internal control procedure?

Observation of client personnel.

Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?

Observe the consistency of the employees' use of cash registers and tapes.

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

Observe the segregation of duties concerning personnel responsibilities and payroll disbursement.

Which of the following procedures would an auditor ordinarily perform first in evaluating management's accounting estimates for reasonableness?

Obtain an understanding of how management developed its estimates.

The procedures to be applied on a particular engagement are a matter of the auditor's professional judgment.

Professional judgment.

Jackson, the purchasing agent of Judd Hardware Wholesalers, has a relative who owns a retail hardware store. Jackson arranged for hardware to be delivered by manufacturers to the retail store on a COD basis thereby enabling his relative to buy at Judd's wholesale prices. Jackson was probably able to accomplish this because of Judd's poor internal control over

Purchase orders.

Which of the following is usually a benefit of using electronic funds transfer for international cash transactions?

Reduction of the frequency of data entry errors.

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests?

Relationships involving income statement accounts

When performing an audit, a CPA notes that bad-debt expense is unusually high relative to similar firms in the industry. The CPA should recommend which of the following controls?

Require credit checks on all new customers.

Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?

Require employees to have their direct supervisors approve their time cards.

Which of the following industries would have the greatest concerns about purchases cutoff at month end, unrecorded liabilities, and accounting for advertising allowances provided by vendors?

Retail grocer.

Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements?

Review the lawyer's letter for information about litigation.

Which of the following 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.

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the

Risk that material misstatements exist in the financial statements.

Sound control activities dictate that defective merchandise returned by customers should be presented initially to:

the receiving department.

An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?

Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks

At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization be of least concern to the auditor in the conduct of an audit?

Selling of goods for cash

To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the

Shipping document file.

Assume that an auditor is auditing a public company client that manufactures computer hardware and markets significant maintenance and consulting services. The auditor should be concerned about which of the following?

Significant revenue issues associated with bundling products and services.

A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size?

Smaller measure of tolerable misstatement.

If an auditor decides to assess control risk as low based on IT application control procedures, which of the following would not be part of the auditor's strategy for testing controls?

Testing the effectiveness of management review controls used to monitor the results of operations.

A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed?

Tests of controls and tests of details

Which of the following situations increases the risk of fraud due to "lapping?"

The accounts receivable clerk also has responsibilities for receiving cash.

When obtaining an understanding of internal controls, the auditor identifies important programmed application controls over the occurrence of sales. However, the auditor also has serious concerns about the adequacy of the control environment due to a weak tone at the top about control consciousness. Which of the following best describes how the auditor should respond to this situation when planning tests of controls related to the occurrence of sales?

The auditor will probably assess control risk at the maximum irrespective of the quality of the programmed application controls.

Which of the following procedures represents a weakness in internal control for payroll?

The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department.

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following?

The planned level of assurance at the relevant assertion level.

Which of the following is an important consideration when deciding the nature of tests to use in a financial statement audit?

The procedures to be applied on a particular engagement are a matter of the auditor's professional judgment.

Which of the following could indicate source document fraud?

The same invoice number appears on different invoices.

Which of the following represents an example of an IT application control?

The software application compares all sales invoices with underlying shipping information on the bills of lading and packing slips with sales invoices. If differences are revealed, a report is generated for review and follow-up by the billing supervisor.

Which of the following control activities would most likely assure that no fictitious billings have been posted to the sales journal?

The software application compares each sales invoice with the supporting shipping documents and notes any discrepancies.

Benchmarking is a process that involves:

an audit strategy that allows the auditor to use evidence from testing an IT application control in a prior period, if the application has not been changed.

Which of the following is a good example of an IT application control over the occurrence of revenue transactions?

The software application compares information on a sales invoice with information from the bill of lading to ensure that sales invoices are only prepared for actual shipments. Any exceptions are not processed and are set aside for manual follow-up.

Which of the following controls would most likely prevent a vendor's invoice from being paid twice?

The software application has a field that identifies a vendor's invoice has been paid and the voucher number cannot be reused.

Which of the following control activities would be a reasonable control over the accuracy of recorded sales?

The software application matches sales invoice quantities with the underlying packing slip and prices with the sales order.

Which of the following IT application control procedures would be most effective in assuring that recorded purchases are accurately recorded for transactions that actually occurred?

The software application matches voucher information with information supporting purchase orders, receiving reports, and vendor invoices.

Which of the following would be the most likely reason to include more unpredictability in the selection and performance of audit procedures?

There is heightened risk of fraud.

Designing substantive procedures responds to:

the risk of material misstatement at the assertion level.

A small manufacturing company makes only credit sales. If cash receipts from sales are misappropriated, which of the following acts would most likely conceal this fraud?

Understating the cash receipts journal.

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would

Verify the sources and contents of the faxes in telephone calls to the senders.

The internal document commonly used to record a credit purchase in the purchases journal is a:

Voucher.

Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?

Yes Yes

An evaluated receipt system is:

a highly automated business process between suppliers and purchasers to exchange data electronically to execute a purchase transaction.

The key documents involved in recording a purchase adjustment involve:

a purchase return authorization, a shipping report, and a debit memo.

An audit client that manufactures and sells goods to a network of authorized dealers may create the equivalent of a consignment sale if the client:

allows an unconditional right of return at any time until the goods are sold by the dealer.

When analyzing the results of substantive procedures, auditors should beware of:

confirmation bias.

The software application compares all sales invoices with underlying shipping information on the bills of lading and packing slips with sales invoices. If differences are revealed, a report is generated for review and follow-up by the billing supervisor. This is an example of a(n):

detective control

Working papers:

document the auditor's conclusion about control risk and the basis for that conclusion.

The nature of an audit procedure refers to:

its purpose and its type.

ITGCs are important because they:

prevent unauthorized personnel from having access to data and applications.

A software application will not allow a sale to be processed if a customer is over its credit limit. This is an example of a(n):

preventive control

The auditor's best estimate of the misstatement in a population based on the misstatement found in a sample drawn from the population is called a:

projected misstatement

The purchasing process normally includes all of the following transactions:

purchases on account, purchase returns, and cash disbursements.

Describe the IT application control procedure that provides assurance that all the merchandise for which the client was billed was received. Assume the software application prepares an exception report and follow-up procedures are effective. IT application edit checks compare:

quantities on the vendor's invoice with quantities entered in receiving.