Auditing and Assertions 6-13

"Remediation" refers to A) Management's required annual communication to the Audit Committee regarding changes in the ICFR. B) The auditor's required annual communication to the Audit Committee regarding weaknesses found in the ICFR. C) Management's testing of a new control designed to eliminate a previous material weakness. D) Corrective actions taken by management to eliminate a material weakness.

D

A reliance strategy is chosen when the auditor: A) Plans on conducting tests of controls. B) Has set the control risk at a high level. C) Has set the control risk at a lower level. D) Both a and c.

D

All of the following factors should be considered by the auditor when deciding on the extent of controls testing except: A) The nature of the control to be tested. B) The time the auditor has to test controls before a report must be issued. C) The frequency with which the control is applied. D) The importance of the control.

A

An auditor may need to obtain a service auditor's report when an entity receives accounting services such as payroll from a service organization. Which of the following statements is true regarding this service audit report? A) It should include an opinion. B) It provides the client auditor with a guarantee regarding whether the entity's control procedures have been placed in operation. C) The client auditor need not inquire about the service auditor's professional reputation. D) The client auditor should perform the procedures at the service organization to verify the information in the report.

A

In order to be able to set control risk at a lower level, the auditor must do all of the following except: A) Identify all general IT controls. B) Identify specific controls that will be relied upon. C) Perform tests of controls. D) Conclude on the achieved level of control risk.

A

Which of the following is not a requirement for management under Section 404 of the Sarbanes-Oxley Act of 2002? A) Guarantee effectiveness of the entity's ICFR. B) Accept responsibility for the effectiveness of the entity's ICFR. C) Support the evaluation of the entity's ICFR with sufficient evidence, including documentation. D) Present a written assessment regarding the effectiveness of the entity's ICFR as of the end of the most recent fiscal year.

A

Which of the following statements is false regarding the use of the test data approach in the evaluation of an accounting system? A) The test data should consist of only valid conditions. B) Only one transaction generally needs to be tested. C) The test data should consist of only those valid and invalid conditions of interest to the auditor. D) The test data should be processed on the entity's operating system under the auditor's control.

A

Which of the following steps or procedures is least likely to be performed as part of management's assessment of the effectiveness of internal controls? A) Engaging the external auditors to conduct cutoff tests. B) Determining the locations or business units to be evaluated. C) Evaluating the design effectiveness and operating effectiveness of selected controls. D) Communication of its findings to the external auditors.

A

Auditors obtain an understanding of a nonpublic entity's internal control for the primary purpose of: A) Gathering sufficient evidence to provide a reasonable basis for an opinion on the financial statements. B) Determining the nature, extent, and timing of subsequent audit procedures to be performed. C) Determining whether interim audit testing is appropriate. D) Providing documentary evidence to present to the audit committee.

B

For nonpublic companies with preliminary control risk assessments set at high, auditors are likely to: A) Use a reliance strategy. B) Complete little or no tests of controls. C) Complete interim testing of account balances. D) Test controls extensively.

B

Generalized audit software (GAS) would likely be used in the audit of accounts receivable for all of the following except: A) Selection and printing of sample accounts to be confirmed. B) Identifying weaknesses in the documentation of entity controls. C) Performing analytical procedures using entity's trial balance data. D) Recomputing an estimate of the allowance for doubtful accounts based on an accounts receivable aging analysis.

B

Place the following steps in the top-down, risk-based approach to the audit of ICFR in their proper order: 1. Identify significant accounts and disclosures and their relevant assertions. 2. Select controls to test. 3. Understand likely sources of misstatement. 4. Identify entity level controls. A) 1, 2, 3, 4. B) 4, 1, 3, 2. C) 4, 2, 1, 3. D) 3, 4, 1, 2.

B

The auditor may document the achieved level of control risk using all of the following except: A) Structured working papers. B) Flowcharts. C) Internal control questionnaire. D) A memorandum.

B

The requirements of Section 404 of the Sarbanes-Oxley Act of 2002 apply to A) All companies that are subject to an independent audit. B) Most publicly-held companies. C) All privately-held companies. D) All companies with sales in excess of $500 million.

B

Which of the following is a proper reason for not conducting tests of controls for nonpublic companies? A) The internal control structure appears very strong B) The procedures require more audit effort than the projected benefits to be obtained from lowering the control risk. C) The company does not have any flowcharts of its system available for review. D) The auditor prefers the control risk to be the minimum.

B

With regard to entities that have locations or business units that are judged to have financial reporting risks, the auditor A) Need not perform any audit procedures. B) Must first determine whether those risks are adequately addressed by entity-level controls. C) Must first determine whether the internal audit staff has performed testing at such locations. D) Must first evaluate the risk of financial reporting fraud.

B

Internal controls are designed to achieve company objectives in all of the following areas except: A) Safeguarding of assets. B) Reliability of financial reporting. C) Reduction of debt financing costs. D) Compliance with laws and regulations.

C

The auditor must report the following to the audit committee or others charged with governance: A) Only material weaknesses. B) Only significant deficiencies. C) Significant deficiencies and material weaknesses. D) All control deficiencies identified during the audit.

C

The effectiveness of internal control is reduced by: A) Computerized accounting records. B) Flowcharts. C) Human errors or mistakes. D) Both a and c.

C

The role of the registered independent auditing firm relative to its clients' internal controls under the Sarbanes-Oxley Act of 2002 is to A) Express an opinion on whether the entity is subject to all provisions of the Securities Exchange Act of 1934. B) Express an opinion on the effectiveness of the entity's control. C) Report to both the PCAOB and SEC those entities with unsatisfactory internal controls. D) Provide report feedback but disclaim an opinion on management's assessment.

C

Which of the following is not considered a general control? A) Back up and disaster recovery controls. B) Password protection on the central server. C) Reconciliation of payroll record count with the number of active employees. D) Requiring change authorization forms on all program software.

C

Which of the following statements best describes how the requirements under Sarbanes-Oxley changed the auditor's responsibility for issuing an opinion in connection with the audits of most public companies? A) CPA firms are now required to add a second opinion related to the timeliness of the financial information provided to the public in addition to an opinion on the overall fairness of the financial statements. B) CPA firms are required to rely less on their own direct evidence to support their opinion regarding the effectiveness of controls. C) CPA firms are now required to issue a second opinion related to their evaluation of the effectiveness of internal controls in addition to an opinion on the overall fairness of the financial statements. D) While the CPA firm is required to issue an additional opinion, that opinion is for internal use only and does not need to be made available in the entity's annual report.

C

Which of the following types of audit reports would not be appropriate for an auditor to issue on the effectiveness of an entity's internal controls? A) Unqualified [no material weaknesses identified]. B) Adverse [a material weakness exists]. C) Qualified [a significant deficiency exists]. D) Disclaimer [unable to perform key audit procedures].

C

All of the following controls may mitigate the risk of fraud and management override except: A) Controls over related-party transactions. B) Controls over period-end adjusting entries. C) Controls related to significant management estimates. D) Controls related to executive compensation.

D

Understanding each of the components of internal control provides knowledge about: A) The design of tests of controls. B) The assessment of inherent risks. C) Factors that affect the risk of material misstatement. D) Both a and c.

D

Which of the following is not one of the five major components of internal control? A) Risk assessment. B) Control activities. C) Information and communication system. D) Human resource background checks.

D

Which of the following represents the correct sequence of audit steps that come after first obtaining an understanding and documenting the entity's internal control? A) Test of Controls, Assess Control Risk, Determine Extent of Substantive Tests, Reassess Control Risk. B) Assess Control Risk, Test of Controls, Determine Extent of Substantive Testing, Reassess Control Risk. C) Assess Control Risk, Determine Extent of Substantive Testing, Test of Controls, Reassess Control Risk. D) Assess Control Risk, Test of Controls, Reassess Control Risk, Determine Extent of Substantive Testing.

D

Which of the following statements concerning control deficiencies is true? A) Auditors are required to report all control deficiencies to the audit committee. B) A control deficiency is a type of significant deficiency. C) Significant deficiencies are a subset of material weaknesses that must be reported to the public. D) The two dimensions of control deficiencies are likelihood of occurrence and magnitude.

D

Which of the following statements is false concerning the audit requirements of the Sarbanes-Oxley Act of 2002 and AS5 related to internal controls? A) Management's report should state its responsibility for establishing and maintaining effective internal control. B) Management should identify material weaknesses in its report. C) The auditor should evaluate whether the internal controls are effective in accurately and fairly reflecting the entity's transactions. D) The auditor should provide recommendations to the audit committee for improving internal control as part of the auditor's assessment.

D

Which of the following statements regarding auditor documentation of the entity's internal control is correct? A) Documentation must include narrative memorandums. B) No documentation is necessary to satisfy GAAS, however, oral inquiry is required at minimum. C) Internal control questionnaires are specifically tailored to meet the needs of each individual entity. D) No one particular form of documentation is necessary, and the extent of documentation may vary.

D

All of the following are inherent risk factors for the purchasing process except: A) Whether the supply of raw materials is adequate. B) How volatile raw material prices are. C) Misstatements detected in prior audits. D) A new IT system placed in operation during the year.

d

An auditor gathers receiving reports from the few days before and after year-end to determine that purchases made before the end of the current year have not been recorded in the following year to provide assurance about management's assertion of A) Valuation or allocation. B) Existence or occurrence. C) Authorization. D) Cutoff.

d

Which of the following is not considered an important element of segregation of duties in the purchasing process? A) Separating the check signing and check mailing functions. B) Separating the accounts payable and check signing functions. C) Separating the accounts payable and receiving functions. D) Separating the purchasing function from the receiving function.

a

Which of the following is the population the auditor is most likely to draw from in order to test the cutoff assertion for revenue? A) Shipping documents. B) Customer sales orders. C) Customer account receivable balances. D) The record of sales returns.

a

Accounts payable (A/P) confirmations are generally used less frequently than accounts receivable confirmations since A) Other procedures such as the search for unrecorded liabilities are generally very effective. B) A/P confirmations generally have lower response rates than accounts receivable confirmations. C) A/P confirmations do not address the existence assertion. D) A/P confirmations do not address specific audit assertions.

a

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable is most likely to obtain evidence concerning management's assertions relating to A) Valuation or allocation. B) Presentation and disclosure. C) Existence or occurrence. D) Rights and obligations.

a

The likelihood of assessing control risk too high is the risk that the sample selected to test controls A) Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the control justifies such an assessment. B) Does support the auditor's planned assessed level of control risk when the true operating effectiveness of the control does not justify such an assessment. C) Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transaction classes. D) Contains proportionately fewer monetary errors or deviations from prescribed internal controls than exist in the balance or class as a whole.

a

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 period before the balance sheet date and whether it was recorded. B) Investigating payables recorded just before and after 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 monthly vendor statements to the receiving report file to identify items received just before the balance sheet date.

a

Which of the following best illustrates the components that make up the upper deviation rate [UDR]? A) Sample deviation rate + allowance for sampling risk. B) Sample deviation rate + risk of assessing control risk too high. C) Tolerable deviation rate + allowance for sampling risk. D) Expected population deviation rate + allowance for sampling risk.

a

Which of the following comparisons would be most useful to an auditor in evaluating the overall results of an entity's sales efforts? A) Current year sales to current year budgeted sales. B) Current year ending accounts receivable to prior year ending accounts receivable. C) Current year bad debts expense as a percentage of accounts receivable to the same value for the prior year. D) Current year gross profit to prior year gross profit.

a

Which of the following does not represent a major accounting transaction type processed in the purchasing cycle? A) Requisition of goods. B) Purchase of goods and services. C) Payment of liabilities. D) Return of goods to suppliers.

a

Which of the following is not a factor that an auditor would consider when assessing the inherent risk associated with sales transactions? A) The nature of the credit authorization process. B) Billings are made using the percentage-of-completion method of revenue recognition. C) Each sales transaction is individually negotiated with the customer. D) The conditions of the sale allow for a right of return or the right to modify the purchase agreement.

a

According to SAB 101, which of the following is not a criterion for revenue recognition? A) Delivery has occurred or services have been rendered. B) Cash is received. C) The seller's price to the buyer is determinable. D) Persuasive evidence of an arrangement exists.

b

Which of the following is true regarding technological advances and auditing? A) A well-controlled, automated accounting system that processes routine transactions with few errors can reduce the number of times auditors need to utilize sampling techniques in an audit. B) A well-controlled, automated accounting system that processes routine transactions with few errors can eliminate the number of times auditors need to utilize sampling techniques in an audit. C) Powerful audit software (e.g., ACL) has eliminated the need for sampling in an audit. D) Technology, though not there yet, will eventually eliminate the need for auditors to rely on sampling in an audit.

a

Which of the following procedures involved in processing accounts payable and cash disbursements should not be performed by the accounts payable department? A) Counting and inspection of purchased materials. B) Updating of accounts payable records. C) Determining appropriate account distribution. D) Comparing the vendor's invoice against information on the receiving report.

a

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk (CR) lower than appropriate. The most likely explanation for this situation is that A) The deviation/failure rates of both the auditor's sample and the population exceed the tolerable deviation rate [TDR]. B) The deviation/failure rate in the auditor's sample is less than the TDR, but the deviation/failure rate in the population exceeds the TDR. C) The deviation/failure rate in the auditor's sample exceeds the TDR, but the deviation/failure rate in the population is less than the TDR. D) The deviation/failure rates of both the auditor's sample and the population are less than the TDR.

b

Customers are more likely to complain to the entity if which of the following assertions for cash receipts is violated? A) Existence. B) Completeness. C) Authorization. D) Rights and obligations.

b

For which of the following audit tests would an auditor most likely use attribute sampling? A) Observation of employees who control mailroom receipts. B) Examining supporting documentation for purchases for evidence of proper authorization. C) Examining invoices in support of the valuation of equipment additions. D) Selected accounts receivable for confirmation of account balances.

b

Which of the following actions would best conceal the theft of cash collections from sales on account? A) Understating the cash receipts journal amounts. B) Understating the sales journal amounts. C) Overstating the accounts receivable control [G/L] account. D) Overstating the accounts receivable subsidiary ledger.

b

Which of the following best illustrates the concept of sampling risk? A) An auditor may select audit procedures that are not appropriate to achieve the specific objective. B) A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. C) An auditor may fail to recognize errors in the documents examined for the chosen sample. D) The documents related to the chosen sample may not be available for inspection.

b

Which of the following does not represent a major classification of expenses identified by FASB Concept Statement No. 5? A) Product costs. B) Functional costs. C) Period costs. D) Allocable costs.

b

Which of the following is not one of the major steps in setting control risk for the purchasing process? A) Understand and document the purchasing process. B) Plan and perform analytical procedures on accounts used in the purchasing process. C) Plan and perform tests of controls on purchase transactions. D) Set and document the control risk for the purchasing process.

b

Which of the following procedures would an auditor most likely perform related to year-end accounts receivable confirmations when the auditor does not receive replies even after second requests? A) Review the cash receipts journal for the month prior to year-end. B) Inspect related shipping records and sales invoices documenting the merchandise sold to customers. C) Intensify the study of internal control concerning the revenue and collection cycle. D) Increase assessed detection risk related to existence assertion in this area.

b

Which of the following types of evidence is most likely to utilize sampling? A) Scanning. B) Confirmation. C) Observation. D) Analytical procedures.

b

Tracing bills of lading (shipping reports) to sales invoices as a test of controls related to the sales and collection process provides evidence that A) Shipments to customers were recorded in the sales journal. B) Recorded sales were actually shipped. C) Customers were billed for goods shipped to them. D) Customers were billed for the correct amounts.

c

An auditor plans to examine a sample of 40 accounts payable invoices for proper approval as prescribed by the entity's internal accounting control procedures. One of the invoices in the chosen sample cannot be found, and the auditor is unable to use alternative procedures to determine whether the invoice was properly approved. The auditor should A) Choose another invoice to replace the missing one in the sample. B) Consider this compliance test invalid and proceed with substantive tests because internal control cannot be relied upon. C) Treat the missing invoice as a deviation for the purpose of evaluating the sample. D) Select a completely new random set of 40 invoices.

c

An entity erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this in a timely, efficient manner? A) Periodically tracing the purchases journal daily totals to the applicable postings in the general ledger. B) Sending quarterly confirmations to all vendors. C) Reconciling monthly statement received from the vendor with the accounts payable subsidiary ledger. D) Tracing the totals from the purchases journal to the various general ledger accounts.

c

Identify the assertion that is represented by the following statement: "Accounts payable and accrued expenses are included in the financial statements at appropriate amounts." A) Existence. B) Completeness. C) Valuation and allocation. D) Rights and Obligations.

c

Most of the steps for planning and carrying out a nonstatistical test of controls are the same as those for a statistical test of controls. Which of the following represent the steps that could differ between nonstatistical and statistical sampling as discussed in the text? A) Defining the control deviation conditions, determining the sample size, calculating the upper deviation rate. B) Defining the control deviation conditions, defining the sampling unit, calculating the computed upper deviation rate. C) Determining the sample size, selecting the sample items, calculating the computed upper deviation rate. D) Defining the sampling unit, selecting the sample items, performing the audit procedures.

c

Sample size varies indirectly with which of the following: A) Desired level of confidence. B) Expected population deviation rate. C) Tolerable deviation rate. D) All of the above.

c

The risk of incorrect rejection is associated with A) Inherent risk. B) Engagement risk. C) Sampling risk. D) Audit risk.

c

To determine whether the entity's internal control operated effectively to minimize the likelihood of failing to bill a customer for a shipment of goods, the auditor should begin by selecting a sample of transactions from the population represented by the A) Accounts receivable subsidiary ledger. B) Customer order file. C) Bill of lading (shipping report) file. D) Sales invoice file.

c

When assessing the tolerable deviation rate (TDR), the auditor should consider that while deviations from control procedures increase the risk of material misstatements, such deviations may not necessarily result in errors. This explains why A) Deviations from examined control procedures at a given rate would normally be expected to result in a higher rate of dollar errors. B) A recorded disbursement that is properly authorized may nonetheless contain a material dollar error. C) A recorded disbursement that is not properly authorized may nonetheless be recorded properly in the cash disbursements journal. D) Deviations would result in dollar errors in the accounting records only when they occurred in different transactions.

c

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population would most likely be A) Payees of checks written in the month after year-end. B) Those vendors with balances in the year-end accounts payable subsidiary ledger. C) Vendors with whom the entity has done business with during the year. D) Invoices filed in the entity's open (unpaid) invoice file at year-end.

c

Which of the following is not a key segregation of duties in the revenue process? A) The credit function should be segregated from the billing function. B) The shipping function should be segregated from the billing function. C) The accounts receivable function should be segregated from the invoice preparation function. D) The cash receipts function should be segregated from the accounts receivable function.

c

Which of the following statements is true regarding nonstatistical sampling? A) It quantifies the auditor's exposure to sampling risk. B) Its use is required by the Public Company Accounting Oversight Board for small public company audits. C) Sample sizes for non-statistical sampling should be comparable to statistical sampling. D) It gives greater assurance than statistical sampling that samples are randomly selected.

c

Which of the following types of statistical testing is likely to be used for a test of controls? A) Monetary-unit sampling. B) Probability-proportional-to-size sampling. C) Attribute sampling. D) Classical variables sampling.

c

Which of the following would not be considered a test in the area of accounts receivable that relates to the existence assertion? A) Evaluate proper segregation of duties. B) Confirm accounts receivable directly with customers. C) Trace the record of shipping to inclusion in the accounts receivable subsidiary ledger. D) Review receipt of cash from customers in the period subsequent to the balance sheet date.

c

Auditors perform a test to verify that all merchandise received has been recorded, in part, to satisfy the completeness assertion with regard to accounts payable. Which of the following would represent the population of documents for this test? A) Purchase requisitions. B) Payment vouchers. C) Vendor invoices. D) Receiving reports.

d

If tolerable misstatement for the accounts receivable balance is $75,000 and the aggregate factual misstatement found by the auditor is $82,000, the auditor is most likely to A) Resign from the engagement. B) Issue a qualified opinion. C) Request that the entity adjust its accounts receivable balance by $7,000. D) Request that the entity adjust its accounts receivable balance by $82,000.

d

The negative request form of an accounts receivable confirmation is particularly useful when "# of Small Acct Bal is" "Assessed lever of CR Related to Receivables is" "Consideration by the recipient is" a Few Low Unlikely b Few High Likely c Many High Likely d Many Low Likely

d

Which of the following best represents a situation in which an auditor would use a tax specialist for the audit of the tax provision? A) The company has several temporary differences. B) The company has several permanent differences. C) The company has deferred tax liabilities. D) The company does business overseas.

d

Which of the following controls would most effectively ensure that recorded purchases are free of material misstatements? A) The receiving department compares the quantity ordered on purchase orders with the quantity received on receiving reports. B) Vendor invoices are compared with purchase orders by an employee who is independent of the receiving department. C) Receiving reports require the signature of the individual who authorized the purchase. D) Purchase orders, receiving reports, and vendor invoices are independently matched when preparing vouchers.

d

Which of the following is not a typical procedure performed related to other non-trade receivables? A) Confirmation of the amount with the other party. B) Evaluation of the collectability of other receivables. C) Examination of the note for repayment terms and interest arrangements. D) Write-off of receivables from officers against their bonus pay as those arrangements are inappropriate.

d

Which of the following statements is true in an attribute sampling plan where the tolerable deviation rate is 7%, the computed upper deviation rate is 6.5%, the sample deviation rate is 2%, and the risk of assessing control risk too low is 5%? A) The auditor is likely to increase control risk because the computed upper deviation rate is less than the risk of assessing control risk too low. B) The auditor is likely to decrease control risk because the computed upper deviation rate is less than the risk of assessing control risk too low. C) The auditor is likely to determine that the results do not support reliance on the control because the computed upper deviation rate plus the sample deviation rate is greater than the tolerable deviation rate. D) The auditor is likely to determine that the results do support reliance on the control because the computed upper deviation rate is less than the tolerable deviation rate.

d