Auditing Exam 2

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Which of the following is the best audit procedure for the detection of Lapping? A. Comparison of postings of cash receipts to accounts with the details of cash deposits. B. Confirmation of the cash balance. C. Reconciliation of the cash account balances. D. Preparing a proof of cash.

Which of the following is/are considered a further audit procedure(s) that may be designed after assessing the risks of material misstatement? Substantive Test of Details/Substantive Analytical Procedures A. Yes/Yes B. Yes/No C. No/Yes D. No/No

Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements? A. Understatement of outstanding checks. B. Overstatement of outstanding checks. C. Understatement of deposits in transit. D. Overstatement of bank services charges

Which of the following matters is generally included in an auditor's engagement letter? A. Limitations of the engagement. B. Factors to be considered in establishing preliminary judgments about materiality. C. Management's liability for illegal acts committed by its employees. D. The auditor's responsibility to obtain negative assurance relating to the occurrence of illegal acts.

Which of the following must the auditor communicate to the audit committee? A. Significant deficiencies and material weaknesses. B. Only significant deficiencies. C. Only material weaknesses. D. Neither significant deficiencies nor material weaknesses.

Which of the following topics is not normally included in an engagement letter? A. The auditors' preliminary assessment of internal control. B. The auditors' estimate of the fee for the engagement. C. Limitations on the scope of the engagement. D. A description of responsibility for the detection of fraud

Which of the following would be least likely to be considered a benefit of effective internal control? A. Eliminating all employee fraud. B. Restricting access to assets. C. Detecting ineffectiveness. D. Ensuring authorization of transactions.

Which of the following would be least likely to be regarded as a test of a control? A. Tests of the additions to property by physical inspection. B. Comparisons of the signatures on cancelled checks to the authorized check signer list. C. Tests of signatures on purchase orders. D. Recalculation of payroll deductions.

Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable? A. The confirmations are sent on the client's letterhead. B. The confirmations are mailed to customers by the internal auditors. C. The client's mailroom personnel closely monitor and inspect confirmations during mailing. D. The return address on the envelope used to send the confirmation request is that of the client.

Which of the following would heighten an auditor's concern about the risk of fraudulent financial reporting? A. Inability to generate positive cash flows from operations, while reporting large increases in earnings. B. Management's lack of interest in increasing the dividend paid on common stock. C. Large amounts of liquid assets that are easily convertible into cash. D. Inability to borrow necessary capital without obtaining waivers on debt covenants.

A company's decision to use the fair value option for valuation of marketable securities is most likely to affects which of the following assertions the most? A. Completeness. B. Existence. C. Fairness. D. Presentation and Disclosure

A control deficiency that is less severe than a material weakness, but important enough to merit attention by those responsible for oversight of the company's financial reporting is referred to as a(n): A. Control deficiency. B. Inherent limitation. C. Reportable deficiency. D. Significant deficiency.

A material weakness involves an amount that could result in a misstatement that is A. Smaller than inconsequential. B. Larger than inconsequential. C. Tolerable. D. Material.

A significant deficiency: A. Differs from a material weakness in that it involves internal control over operations rather than internal control over financial reporting. B. Involves an amount of discovered misstatements greater than the amount used as the planning measure of materiality. C. Is identical to a material weakness except that it need not be communicated to those responsible for oversight of the company's financial reporting. D. Is less severe than a material weakness.

A successor auditor is required to attempt communication with the predecessor auditor prior to: A. Performing test of controls B. Testing beginning balances for the current year C. Making a proposal for the audit engagement D. Accepting the engagement

The Foreign Corrupt Practices Act prohibits bribes to foreign corporate officials to obtain business

False

The auditors should count small petty cash funds at year-end to make sure that balance is not understated on the financial statements

False

The auditors' communication of internal control significant deficiencies should be addressed only to senior management of the company.

False

The auditors' tests of controls are designed to substantiate the fairness of specific financial statement accounts.

False

The department approving a sales transaction should be the shipping department.

False

The relatively low number of types of transactions incurred by small firms makes the segregation of duties impossible.

False

Well-designed internal control will prevent all fraud by top management.

False

Confirming a bank account establishes existence but not rights to the cash balance.

False

For investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the market value of the investments

False

A CPA examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitative data. This is an example of a: A. Test of a control. B. Substantive test. C. Cutoff test. D. Statistical test.

A form filed with the SEC when a company changes auditors is a: A. Form 8-K. B. Form 10-K. C. Form S-1. D. Form B-1.

A situation in which the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect material misstatements on a timely basis is referred to as a: A. Control deficiency. B. Material weakness. C. Reportable condition. D. Significant deficiency.

After documenting the client's prescribed internal control, the auditors will often perform a walk-through of each transaction cycle. An objective of a walk-through is to: A. Verify that the controls have been implemented (placed in operation). B. Replace tests of controls. C. Evaluate the major strengths and weaknesses in the client's internal control. D. Identify weaknesses to be communicated to management in the management letter.

An auditor may obtain information on the December 31 month-end balance per bank in which of the following? Standard Confirmation Form January 1-10 Cutoff Statement A. Yes Yes B. Yes No C. No Yes D. No No

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: A. No reply to a positive confirmation request is received. B. No reply to a negative confirmation request is received. C. Collectibility of the receivables is in doubt. D. Pledging of the receivables is probable.

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the A. Collection of receivables. B. Purchase of merchandise inventory. C. Payment of accounts payable. D. Sale of long-term debt

An auditor's purpose for performing tests of controls is to provide reasonable assurance that: A. Controls are operating effectively. B. The risk that the auditor may unknowingly fail to modify the opinion on the financial statements is minimized. C. Transactions are executed in accordance with management's authorization and access to assets is limited by a segregation of functions. D. Transactions are recorded as necessary to permit the preparation of the financial statements in conformity with generally accepted accounting principles.

Audits of financial statements are designed to obtain reasonable assurance of detecting misstatement due to: Errors/Misappropriation of Assets A. Yes/Yes B Yes/No C. No/Yes D. No/No

Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the: A. Check Clearing for the 21st Century Act B. Public Company Accounting Oversight Board's Standard No. 2 C. Foreign Corrupt Practices Act D. Sarbanes-Oxley Act

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect: A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An embezzlement of cash receipts not recorded in the cash receipts journal before they had been deposited into the bank. D. A receivable collected that had previously been written off as uncollectible.

By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor will generally be able to detect: A. An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation. B. A cash sale which was not recorded on the books and was stolen by a bookkeeper. C. An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank. D. A credit sale which has been recorded twice in the sales journal.

For effective internal control, the billing function should not be performed by the: A. Sales department B. Accounting department C. Finance department D. Information processing department

If the independent auditors decide that the work performed by the internal auditors may have a bearing on their own procedures, they should consider the internal auditors': A. Competence and objectivity. B. Efficiency and experience. C. Independence and review skills. D. Training and supervisory skills.

In assessing the competence of a client's internal auditor, an independent auditor most likely would consider the A. Internal auditor's compliance with professional internal auditing standards. B. Client's policies that limit the internal auditor's access to management salary data. C. Evidence supporting a further reduction in the assessed level of control risk. D. Results of ratio analysis that may identify unusual transactions and events.

In your review of ABC Company's financials, you note that Receivables have increased approximately 200% from the previous year, while Cash has declined. Further investigation reveals that 70% of ABC's receivables were booked within 7 days of the end of the quarter. If financial statement fraud is involved, which type is most likely? A. Fictitious revenues B. Timing differences C. Improper asset valuations D. Improper disclosures

Individuals who commit fraud are ordinarily able to rationalize the act and also have an: Incentive/Opportunity A. Yes/Yes B. Yes/No C. No/Yes D. No/No

It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations the best alternative procedure the auditors might resort to would be: A. Examining subsequent receipts of year-end accounts receivable. B. Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a subsequent date. C. Requesting that management increase the allowance for uncollectible accounts by an amount equal to some percentage of the balance in those accounts that cannot be confirmed. D. Applying analytical procedures to accounts receivable and sales on a year-to-year basis.

Tests for unrecorded assets typically involve tracing from: A. Source documents to recorded journal entries. B. Source documents to observations. C. Recorded journal entries to documents. D. Recorded journal entries to observations.

The auditor faces a risk that the audit will not detect material misstatements in the financial statements. In regard to minimizing this risk, the auditor primarily relies on: A. Substantive procedures. B. Tests of controls. C. Internal control. D. Statistical analysis.

The definition of internal control developed by the Committee of Sponsoring Organizations (COSO) includes controls related to the reliability of financial reporting, the effectiveness and efficiency of operations, and: A. Compliance with applicable laws and regulations. B. Effectiveness of prevention of fraudulent occurrences. C. Safeguarding of entity equity. D. Incorporation of ethical business practice standards.

The use of fidelity bonds protects a company from embezzlement loses and also: A. Minimizes the possibility of employing persons with dubious records in positions of trust. B. Reduces the company's need to obtain expensive business interruption insurance. C. Allows the company to substitute the fidelity bonds for various parts of internal control. D. Protects employees who made unintentional errors from possible monetary damages resulting from such errors.

To best test existence, an auditor would sample from the: A. General ledger to source documents B. General ledger to the financial statements C. Source documents to general ledger D. Source documents to journals

To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors: A. Trace a sample of the bills of lading to sales invoices B. Confirm a sample of accounts payable C. Review the aging of accounts receivable D. Trace a sample of recorded sales to shipping documents

Tracing from source documents forward to ledgers is most likely to address which assertion related to posted entries: A. Completeness. B. Existence. C. Rights. D. Valuation.

What type of error is the CPA must likely to discover when he/she examines all shipping reports date in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 credit sales? A. Accounts receivable are overstated at December 31, 20X0 B. Accounts receivable are understated at December 31, 20X0 C. Operating expenses are overstated for the 12 months ended December 31, 20X0 D. Sales returns and allowance are overstated at December 31, 20X0

When a client engages in transactions involving derivatives, the auditor should A. Develop an understanding of the economic substance of each derivative. B. Confirm with the client's broker whether the derivatives are for trading purposes. C. Notify the audit committee about the risks involved in derivative transactions. D. Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative.

When a company has changed auditors, according to the Professional Standards: A. The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management. B. The predecessor must respond fully to all inquiries made by the successor auditor. C. The successor must discuss with the predecessor matters bearing on the engagement prior to accepting the engagement. D. The successor may choose not to attempt any communication with the predecessor auditor.

When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables? A. The account balances as of year-end will generally be confirmed. B. The auditors will in general use blank rather than positive confirmation requests. C. The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year end. D. Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports.

When performing an audit of internal control under PCAOB requirements, auditors evaluate control: Design Effectiveness/Operating Effectiveness A. Yes/Yes B. Yes/No C. No/Yes D. No/No

Which measure of materiality (or both) considers quantitative considerations? Planning/Evaluation A. Yes/Yes B. Yes/No C. No/Yes D. No/No

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? A. A bank lockbox system. B. Approval of all disbursements by an individual independent of cash receipts. C. Monthly bank cutoff statements. D. Prenumbered remittance advices

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts? A. Examine cash receipts received after year-end. B. Confirm receivables. C. Examine dates of purchase orders. D. Foot the receivables lead schedule.

Which of the following is an advantage of describing internal control through the use of a standardized questionnaire? A. Questionnaires highlight weaknesses in the system. B. Questionnaires are more flexible than other methods of describing internal control. C. Questionnaires usually identify situations in which internal control weaknesses are compensated for by other strengths in the system. D. Questionnaires provide a clearer and more specific portrayal of a client's system than other methods of describing internal control.

Which of the following is an example of fraudulent financial reporting? A. Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold. B. An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses. C. An employee steals inventor and the "shrinkage" is recorded in cost of goods sold. D. An employee "borrows" tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

Which of the following is correct concerning requirements about auditor communications about fraud? A. Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved. B. All fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. C. Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor through use of an "emphasis of a matter" paragraph added to the audit report. D. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.

Which of the following is least likely to be considered a financial statement audit risk factor? A. Management operating and financing decisions are dominated by top management. B. A new client with no prior audit history. C. Rate of change in the entity's industry is rapid. D. Profitability of the entity relative to its industry is inconsistent.

Which of the following is least likely to be considered a risk assessment procedure relating to internal control? A. Counting marketable securities at year-end. B. Inquiries of client personnel. C. Inspecting documents and reports. D. Observing the application of specific controls.

Which of the following is least likely to be included in an auditor's inquiry of management while obtaining information to identify the risks of material misstatement due to fraud? A. Are all financial reporting operations at one location? B. Does it have knowledge of fraud or suspect fraud? C. Does it have programs to mitigate fraud risks? D. Has it reported to the audit committee the nature of the company's internal control?

Which of the following is not a universal rule for achieving internal control over cash? A. Separate recordkeeping from accounting for cash to the extent possible. B. Deposit each day's cash receipts intact. C. Separate cash handling from recordkeeping. D. Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks

Which of the following is not one of the assertions made by management about an account balance? A. Relevance. B. Existence. C. Valuation. D. Rights and obligations.

Which of the following is not one of the criteria for revenue recognition? A. Collectibility is certain. B. Delivery has occurred or services have been rendered. C. Evidence of an arrangement exists and is persuasive. D. A fixed or determinable price to buyer exists.

Which of the following is not ordinarily considered a factor indicative of increased financial reporting risk when an auditor is considering a client's risk assessment policies? A. Salaried sales personnel. B. Implementation of a new information system. C. Rapid growth of the organization. D. Corporate restructuring.

If the auditors' assessment of the design of internal control reveals that it cannot be relied upon, the auditors are NOT required to prepare any documentation of internal control for their working papers

False

In a financial statement audit, CPAs are required to assess the operating effectiveness of most significant accounting oriented controls

False

Internal auditors should preferably report to the chief accounting officer of the company

False

Lapping of accounts receivable by an employee is not possible when there is adequate segregation of duties with respect to cash disbursements

False

A practical and effective audit procedure for the detection of lapping is: A. Preparing an interbank transfer schedule. B. Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank. C. Tracing recorded cash receipts to postings in customers' ledger cards. D. Preparing a proof of cash.

A successor auditor has accepted an engagement that was previously performed by a predecessor auditor and, prior to accepting the engagement, has communicated with the predecessor. When the successor believes that the predecessor has performed satisfactory previous audits, which of the following is correct? A. A second communication is required and must include details of previous audits. B. Ordinarily the successor auditors may be able to accept the opening balances of the current year with a minimum of verification work. C. Absent ongoing litigation, a predecessor must provide all working papers requested by the predecessor. D. The client should be informed of the need to perform a detailed audit of all opening balances.

After considering the client's internal control the auditors have concluded that it is well designed and is functioning as anticipated. Under these circumstances the auditors would most likely: A. Cease to perform further substantive procedures. B. Reduce substantive procedures in areas where the internal control was found to be effective. C. Increase the extent of anticipated analytical procedures. D. Perform all tests of controls to the extent outlined in the preplanned audit program.

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that A. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. B. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. C. The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. D. Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that A. Obsolete inventory has not yet been reduced to fair market value. B. There was an improper cutoff of sales at the end of the year. C. An unusually large receivable was written off near the end of the year. D. The aging of accounts receivable was improperly performed in both years.

An auditor may obtain information on the December 31 month end balance per bank in which of the following? December 31 Bank Statement Schedule of Bank (Cash Transfers) A. Yes Yes B. Yes No C. No Yes D. No No

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of: A. Accuracy. B. Completeness. C. Control. D. Existence.

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity, should: A. Engage financial experts familiar with the nature of the business entity. B. Obtain a knowledge of matters that relate to the nature of the entity's business. C. Refer a substantial portion of the audit to another CPA who will act as the principal auditor. D. First inform management that an unqualified opinion cannot be issued.

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use? A. The positive form for small balances, and the negative form for large balances. B. The positive form used for large balances and the negative form for the small balances. C. The positive form used for trade receivables and the negative form for other receivables. D. The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory.

Auditors must assess fraud risk on every audit and respond to the risks that are identified. Which of the following is not a procedure required to further address the fraud risk of management override of internal control? A. Reviewing accounting estimates for biases. B. Examining physical controls over assets. C. Evaluating the business rationale for significant unusual transactions. D. Examining journal entries and other adjustments for evidence of fraud.

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally not be able to detect: A. An unrecorded deposit made at the bank at the end of month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An unrecorded check cashed during that month. D. A bank charge during the month not recorded on the books

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: A. Board of Directors. B. Treasurer. C. Controller. D. Executive Committee.

Controls are not designed to provide assurance that: A. Transactions are executed in accordance with management's authorization. B. Fraud will be eliminated. C. Access to assets is permitted only in accordance with management's authorization. D. The recorded accountability for assets is compared with the existing assets at reasonable intervals.

During financial statement audits, the auditors' consideration of their clients' internal control is integral to both assess the risk of material misstatement and to: A. Assess inherent risk. B. Design further audit procedures. C. Assess compliance with the Foreign Corrupt Practices Act. D. Provide a reasonable basis for an opinion on compliance with applicable laws.

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts? A. Purchase returns and allowances. B. Allowance for doubtful accounts. C. Common stock. D. Noncontrolling interest of a subsidiary purchased during the year.

In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to miscellaneous revenue. Select the most effective method for detecting this type of error. A. Foot the cash receipts journal for October. B. Send a bank confirmation as of year-end. C. Prepare a bank reconciliation as of year-end. D. Prepare a bank transfer schedule as of year-end.

In the consideration of internal control, the operating effectiveness of controls is tested by: A. Flowcharts verification. B. Tests of controls. C. Substantive procedures. D. Decision tables.

Kiting would least likely be detected by: A. Analyzing details of large cash deposits around year end. B. Comparing customer remittance advices with recorded disbursements in the cash disbursements journal. C. Preparing a four-column bank reconciliation for all major cash accounts. D. Preparing a schedule of interbank transfers by using the client's records and bank statements around year end.

On financial statement audits, it is required that the auditors obtain an understanding of internal control, including: A. Its operating effectiveness. B. Whether it has been implemented (placed in operation). C. Performing tests of controls for all material controls. D. Its ability to provide reasonable assurance.

On receiving the bank cutoff statement, the auditor should trace: A. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. B. Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation. C. Deposits listed on the cutoff statement to deposits in the cash receipts journal. D. Checks dated subsequent to year end to the outstanding checks listed on the year-end bank reconciliation.

Preliminary arrangements agreed to by the auditors and the client should be reduced to writing by the auditors. The best place to set forth these arrangements is in: A. A memorandum to be placed in the permanent section of the auditing working papers. B. An engagement letter. C. A client representation letter. D. A confirmation letter attached to the constructive services letter.

Tests of controls are most likely to be performed when: A. Controls seem weak and must be properly documented. B. Inadequate substantive procedures exist to restrict audit risk to an acceptable level. C. The auditor wishes to assess control risk at the maximum. D. The client's control environment appears weak.

The Sarbanes-Oxley Act of 2002 requires that the audit committee: A. Annually reassess control risk using information from the CPA firm. B. Be directly responsible for the appointment, compensation and oversight of the work of the CPA firm. C. Require that the company's CPA firm rotate the partner in charge of the audit. D. Review the level of management compensation.

The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except: A. Date due of a direct liability. B. The principal amount paid on a direct liability. C. Description of collateral for a direct liability. D. The interest rate of a direct liability.

The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes is: A. The auditors' preliminary estimate of the largest amount of misstatement that would be material to any one of the client's financial statements. B. The auditors' preliminary estimate of the smallest amount of misstatement that would be material to any one of the client's financial statements. C. The auditors' preliminary estimate of the amount of misstatement that would be material to the client's balance sheet. D. An amount that cannot be quantitatively stated since it depends on the nature of the item.

The auditors use a bank cutoff statement to compare: A. Deposits in transit on the year-end cash general ledger account to deposits in the cash receipts journal. B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. C. Deposits listed on the cutoff statement to disbursements in the cash disbursements journal. D. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank statement.

The auditors' understanding established with a client should be established through a (an): A. Oral communication with the client. B. Written communication with the client. C. Written or oral communication with the client. D. Completely detailed audit plan.

The confirmation of accounts receivable is most closely associated with: A. Business risk B. Detection risk C. Inherent risk D. Relative risk

The effectiveness of controls is not generally tested by: A. Inspection of documents and reports. B. Performance of analytical procedures. C. Observation of the application of accounting policies and procedures. D. Inquiries of appropriate client personnel.

The first standard of field work recognizes that early appointment of the independent auditors has many advantages to the auditors and the client. Which of the following advantages is least likely to occur as a result of early appointment of the auditors? A. The auditors will be able to plan the audit work so that it may be done expeditiously. B. The auditors will be able to complete substantive procedures prior to year-end. C. The auditors will be able to better plan for the observation of the physical inventories. D. The auditors will be able to perform the examination more efficiently and will be finished at an early date after the year-end.

The independent auditors might consider the procedures performed by the internal auditors because: A. They are employees whose work must be reviewed during substantive testing. B. They are employees whose work might affect the independent auditors' work. C. Their work impacts upon the cost/benefit tradeoff in evaluating inherent limitations. D. Their degree of independence may be inferred by the nature of their work.

The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United States: A. All companies. B. SEC registrants. C. Only those companies included in the Fortune 500. D. All nonpublic companies.

The scope of substantive procedures as compared to the scope of tests of controls generally vary: A. In a parallel manner. B. Inversely. C. Directly. D. Equally.

This organization developed a set of criteria that provide management with a basis to evaluate controls not only over financial reporting, but also over the effectiveness and efficiency of operations and compliance with laws and regulations: A. Foreign Corrupt Practices Corporation. B. Committee of Sponsoring Organizations. C. Cohen Commission. D. Financial Accounting Standards Board.

Tracing copies of sales invoices to shipping documents will provide evidence that all A. Shipments to customers were recorded as receivables. B. Billed sales were shipped. C. Debits to the subsidiary accounts receivable ledger are for sales shipped. D. Shipments to customers were billed.

Tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading) provides evidence about the: A. Completeness of recording of sales transactions. B. Occurrence of sales transactions. C. Billing of all sales transactions. D. Presentation of payables.

Well-designed internal control that is functioning effectively is most likely to detect an fraud arising from: A. The fraudulent action of several employees. B. The fraudulent action of an individual employee. C. Informal deviations from the official organization chart. D. Management fraud.

When planning an audit, an auditor should: A. Consider whether the extent of substantive procedures may be reduced based on the results of the internal control questionnaire. B. Make preliminary judgments about materiality levels for audit purposes. C. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them. D. Prepare a preliminary draft of the management representation letter.

When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if: A. Subsequent collections are to be reviewed. B. Internal control over receivables is good. C. Negative confirmations are to be used. D. There is a simultaneous examination of cash and accounts receivable.

When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed level of control risk will: A. Be less than the preliminary assessed level of control risk B. Equal the preliminary assessed level of control risk C. Equal the actual control risk D. Be less than the actual control risk

Which of the following comes closest to outlining the auditors' responsibility for considering internal control in all financial statement audits? A. An understanding of the control environment, information and communication, risk assessment and monitoring is necessary; an understanding of control activities is only necessary for areas in which the auditor is performing tests of controls. B. The auditor must obtain an understanding of each of the five internal control components sufficient to assess the risks of material misstatement for the audit. C. When tests of controls have been performed, control risk must be assessed at a level less than the maximum. D. An understanding of the control environment is necessary, but no understanding of the other components is necessary unless control risk is to be assessed at a level less than the maximum.

Which of the following factors would most likely be considered an inherent limitation to an entity's internal control? A. The complexity of the information processing system. B. Human judgment in the decision making process. C. The ineffectiveness of the board of directors. D. The lack of management incentives to improve the control environment.

Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement? A. Lack of understanding of the potential client's internal auditors' computer-assisted audit techniques. B. Management's disregard for internal control. C. The existence of related party transactions. D. Management's attempt to meet earnings per share growth rate goals.

Which of the following is correct with respect to control deficiencies discovered during an audit? A. Auditors must communicate and recommend corrections relating to all material weaknesses in internal control to management. B. All material weaknesses in internal control should be reported to the audit committee. C. All such matters must be communicated to the audit committee and regulatory agencies. D. All control deficiencies are also significant deficiencies.

Which of the following is intended to detect deviations from prescribed controls? A. Substantive procedures specified by a standardized audit program. B. Tests of controls designed specifically for the client. C. Analytical procedures as set forth in an industry audit guide. D. Computerized analytical procedures tailored for the configuration of the computer equipment in use.

Which of the following is least likely to be a factor that might indicate to an auditor that an identified risk of misstatement requires special audit consideration? A. Complex calculations are involved. B. The rate of technological change is moderate in the industry. C. The potential for fraud seems high. D. Various subjective methods of application of a key accounting policy exist.

Which of the following is least likely to be evidence of operating effectiveness of controls? A. Cancelled support documents B. Confirmations of accounts receivable C. Records of document usage of computer programs D. Signatures on authorization forms

Which of the following is least likely to be required on an audit? A. Evaluate the business rationale for significant, unusual transactions. B. Make a legal determination of whether fraud has occurred. C. Review accounting estimates for biases. D. Test appropriateness of journal entries and adjustments.

Which of the following is least likely to be typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmations? A. Examine bills of lading B. Physically examine items sold C. Examine correspondence D. Examine subsequent cash receipts

Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting? A. Low turnover of senior management. B. Extreme degree of competition within the industry. C. Capital structure including various operating subsidiaries. D. Sales goals in excess of any of the preceding three years.

Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts? A. Accounts receivable divided by cost of goods sold. B. Aging of accounts receivable. C. Cash Sales divided by Accounts receivable D. Year 2 accounts receivable compared to year one accounts receivable.

Which of the following is not a component of the control environment? A. Integrity and ethical values. B. Risk assessment. C. Commitment to competence. D. Organizational structure.

Which of the following is not a control that generally is established over cash receipts? A. To prevent abstraction of cash, a control listing should be prepared by mailroom personnel. B. To insure accurate posting the accounts receivable clerk should post the customers' receipts from the customers' checks C. To insure accuracy of the accounts receivable records, the records should be reconciled monthly to the accounts receivable controlling account. D. To prevent theft of cash, receipts should be deposited daily.

Which of the following is not a factor that is considered a part of the client's overall control environment? A. The organizational structure. B. The information system. C. Management philosophy and operating style. D. Board of directors.

Which of the following is not a responsibility that should be assigned to a company's internal audit department? A. Evaluating internal control. B. Approving disbursements. C. Reporting on the effectiveness of operating segments. D. Investigating potential merger candidates.

Which of the following is not an example of a likely adjustment in the auditors' overall audit approach when significant risk is found to exist? A. Apply increased professional skepticism about material transactions. B. Increase the assessed level of detection risk. C. Assign personnel with particular skill to areas of high risk. D. Obtain increased evidence about the appropriateness of management's selection of accounting principles.

Which of the following is not considered one of the five major components of internal control? A. Risk assessment. B. Segregation of duties. C. Control activities. D. Monitoring.

Which of the following is not true about the auditors' verification of notes receivable? A. The interest revenue on notes receivable is usually audited by independent computation. B. Inspecting the notes is sufficient evidence of existence of the notes. C. The auditors may evaluate the collectibility of notes by inspecting credit files. D. Confirmation of notes payable to banks may be accomplished in conjunction with the confirmation of cash balances.

Which of the following is not true about the confirmation of accounts receivable? A. Confirmation requests should bear the auditors' return address. B. Confirmation requests should be signed by the auditors. C. Confirmation requests should be mailed directly by the auditors. D. Confirmation requests should include a return envelope addressed to the office of the auditors.

Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmations? A, Examine sales invoices. B. Inclusion of the information in the engagement letter. C. Examine correspondence D. Examine any subsequent cash receipts

Which of the following manipulations would understate receivables on the financial statements? A. Understatement of cash sales. B. Closing the sales journal prior to year-end. C. Closing the cash receipts journal prior to year-end. D. Underestimating the allowance for doubtful accounts.

Which of the following procedures in the cash disbursement cycle should not be performed by the accounts payable department? A. Comparing the vendor's invoice with the receiving report. B. Canceling supporting documentation after payment. C. Verifying the mathematical accuracy of the vendor's invoice. D. Preparing the check for signature by an authorized person.

Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts? A. Investigate confirmation exceptions for indication of amounts in dispute. B. Review accounts which have been written off as uncollectible prior to year-end. C. Investigate credit ratings for large accounts receivable. D. Discuss with the credit manager the current status of doubtful accounts.

Which of the following statements is accurate about "fraud risk factors" considered when conducting an audit? A. Factors whose presence indicates that fraud exists. B. Factors whose presence often have been observed in circumstances where frauds have occurred. C. Factors whose presence will require modification to planned audit procedures. D. Factors obtained during the audit which lead to required communications with the audit committee.

Which of the following statements is correct regarding the auditor's determination of materiality? A. The planning level of materiality should normally be the larger of the amount considered for the balance sheet versus the income statement. B. The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts. C. Auditors may use various rules of thumb to arrive at an evaluation level of materiality, but not for determining the planning level of materiality. D. The amount used for the planning should equal that used for evaluation.

Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation? A. Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal. B. Receive a cutoff statement directly from the client's bank. C. Prepare a four column bank reconciliation using the year-end bank statement. D. Confirm the year-end balance using the standard form to confirm bank account balance information with financial institutions.

Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice? A. Footing the sales journal. B. Sending accounts receivable confirmations. C. Tracing the total sales in the sales journal to the general ledger. D. Observation of the physical inventory count at year-end.

Which statement is correct concerning the definition of internal control developed by the Committee of Sponsoring Organizations (COSO)? A. Its applicability is largely limited to internal auditing applications. B. It is recognized in the Statements on Auditing Standards. C. It emphasizes the effectiveness and efficiency of operations over the reliability of financial reporting. D. It suggests that it is important to view internal control as an end product as contrasted to a process or means to obtain an end

Which statement is correct concerning the relevance of various types of controls to a financial statement audit? A. An auditor may ordinarily ignore the consideration of controls when a substantive audit approach is used. B. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant. C. Controls over safeguarding assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant. D. All controls are ordinarily relevant to an audit.

Which statement is correct relating to a potential successor auditor's responsibility for communicating with the predecessor auditors in connection with a prospective new audit client? A. The successor auditors have no responsibility to contact the predecessor auditors. B. The successor auditors should obtain permission from the prospective client to contact the predecessor auditors. C. The successor auditors should contact the predecessors regardless of whether the prospective client authorizes contact. D. The successor auditors need not contact the predecessors if the successors are aware of all available relevant facts.

You were surprised to note that approximately 95% of returned positive accounts receivable confirmation requests indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that: A. The cash receipts journal was closed before year-end B. The cash receipts journal was held open after year-end C. There are many unrecorded liabilities D. The sales journal was held open after year-end

A report on internal control performed in accordance with PCAOB Standard No. 2 includes an opinion on internal control for: A. The entire year. B. The prior quarter. C. The "as of date." D. The end of each quarter.

After obtaining an understanding of internal control and arriving at a preliminary assessed level of control risk, an auditor decided to perform tests of controls. The auditor most likely decided that: A. Additional evidence to support a reduction in the assessed level of control risk is not available B. An increase in the assessed level of control risk is justified for certain financial statement assertions C. It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures D. There were many internal control deficiencies that would allow misstatements to enter the accounting system.

After the CPAs have selected particular accounts receivable for confirmation: A. As a control measure, the CPAs should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail. B. It is important that every account selected that has a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow-up through alternative procedures. C. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm. D. All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client.

An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific program steps to apply to the accounts and transactions. In a particular case, s/he might do this by: A. Tracing sales invoices to shipping documents to test the completeness of reported sales B. Tracing shipping documents to sales invoices to test the occurrence of reported sales C. Tracing sales invoices to shipping documents to test occurrence of reported sales D. Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable

An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses financial statements and: A. Compliance with laws. B. Internal control over asset safeguarding. C. Internal control over financial reporting. D. Suitable criteria.

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor? A. A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year. B. Internal control activities over the recording of cash receipts have been improved since the end of the prior year. C. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet. D. The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.

As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a confirmation request for a bank account that had been closed during the year. After the client's treasurer has signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure? A. The confirmation request was signed by the treasurer. B. Sending the request was meaningless because the account was closed before the year end. C. The request was mailed by the assistant treasurer. D. The CPA did not sign the confirmation request before it was mailed.

At least what level of probability of a material misstatement is required for a control deficiency to be considered a material weakness? A. More than remote. B. Probable. C. Reasonable possibility. D. Sufficient.

Determining that receivables are presented at net-realizable value is most directly related to which management assertion? A. Existence.B. Rights.C. Valuation.D. Presentation and disclosure.

For effective internal control, which of the following functions should not be assigned to the company's accounting department? A. Reconciling accounting records with existing assets. B. Recording financial transactions. C. Signing payroll checks. D. Preparing financial reports.

In assessing the objectivity of a client's internal auditors, the CPA would be most likely to consider internal auditor A. Education levels B. Experience C. Organizational status within the company D. Training and supervisory skills

In the consideration of internal control, the auditor is basically concerned that it provides reasonable assurance that: A. Management can not override the system. B. Operational efficiency has been achieved in accordance with management plans. C. Misstatements have been prevented or detected. D. Controls have not been circumvented by collusion.

In using the information on the statement of cash flows while obtaining an understanding of a profitable, growing company, which of the following would ordinarily be least surprising to an auditor? A. Decreases in accounts payable. B. Decreases in accounts receivable. C. Negative cash flows from investing. D. Negative operating cash flows.

Johnson is engaged in the audit of a utility which supplies power to a residential community. All accounts receivable balances are small and internal control is effective. Customers are billed bi-monthly. In order to determine the validity of the accounts receivable balances at the balance sheet date, Johnson would most likely: A. Examine evidence of subsequent cash receipts instead of sending confirmation requests. B. Send positive confirmation requests. C. Send negative confirmation requests. D. Use statistical sampling instead of sending confirmation requests.

Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. Which of the following is most likely to be effective in detecting this fraud? A. Bank confirmation B. Bank transfer schedule prepared using only the cash receipts and cash disbursements journal. C. Comparison of bank cutoff statement to the cash receipts and disbursements records. D. Receivable confirmation

The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditors to: A. Consider internal control over credit sales. B. Test the accuracy of recorded charge sales. C. Estimate credit losses. D. Verify the validity of the recorded receivables.

The auditors are planning an audit engagement for a new client in a business that is unfamiliar to the auditors. Which of the following would be the most useful source of information for the auditors during the preliminary planning stage when they are trying to obtain a general understanding of audit problems that might be encountered? A. Client manuals of accounts and charts of accounts. B. AICPA Industry Audit Guides. C. Prior-year working papers of the predecessor auditors. D. Latest annual and interim financial statements issued by the client.

The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful? A. A substantial number of accounts are in disputes. B. The combination of inherent risk and control risk is high. C. Client records include a large number of relatively small balances. D. The auditors believe that recipients of the requests are unlikely to give them consideration.

The auditors who become aware of an internal control significant deficiency are required to communicate this to the: A. Client's legal counsel. B. Compensation committee. C. Audit committee. D. Internal auditors.

The auditors' count of the client's cash should be coordinated to coincide with the: A. Consideration of the internal controls with respect to cash. B. Close of business on the balance sheet date. C. Count of investment securities. D. Count of inventories.

The major components of internal control include all of the following, except: A. Risk assessment B. The control environment C. Internal auditing D. Control activities

The provisions of the Foreign Corrupt Practices Act apply to: A. All U.S. corporations. B. All U.S. corporations that engage in foreign operations. C. All corporations that must file under the Securities Exchange Act of 1934. D. All U.S. partnerships and corporations.

The risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as: A. Account risk. B. Control risk. C. Detection risk. D. Inherent risk.

To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to the: A. Financial vice-president. B. Corporate controller. C. Audit committee. D. Corporate stockholders.

To test for unsupported entries in the journals, the direction of audit testing should be to the: A. Ledger entries. B. Journal entries. C. Original source documents. D. Financial statements.

To test the existence assertion for recorded receivables, an auditor would select a sample from the: A. Sales order file B. Customer purchase orders C. Accounts receivable subsidiary ledger D. Shipping documents (bills of lading) file.

Tracing recorded sales transactions to the bills of lading provides evidence about the: A. Completeness of sales transactions. B. Collectibility of sales transactions. C. Occurrence of sales transactions. D. Billing of all sales transactions.

When performing an internal control audit under PCAOB requirements, one or more material weaknesses in internal control that exist at year-end may result in what type of report(s): Qualified/Adverse A. Yes/Yes B. Yes/No C. No/Yes D. No/No

Which of the following audit tests would be regarded as a test of a control? A. Tests of the specific items making up the balance in a given general ledger account. B. Tests confirming receivables. C. Tests of the signatures on canceled checks to board of director's authorizations. D. Tests of the additions to property, plant, and equipment by physical inspection.

Which of the following conditions identified during the audit increases the risk of employee fraud? A. Large amounts of cash in the bank. B. Existence of a mandatory vacation policy for employees performing key functions. C. Inventory items of small size, but high value. D. Presence of reconciling items on a client prepared year-end proof of cash.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle? A. Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables. B. Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in other customers' accounts permitting a misappropriation of cash. C. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. D. The failure to prepare shipping documents may lead to an understatement of inventory balances.

A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end? A. Cash receipts. B. Payroll. C. Purchases. D. Sales.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? A. Merchandise received is not promptly reconciled to the outstanding purchase order file. B. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value. C. The write-off of receivables by personnel who receive cash permits the misappropriation of cash. D. Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.

Which of the following generally provides the least evidence regarding the valuation of accounts receivable? A. Reviewing an aging of accounts receivable. B. Examination of cash receipts subsequent to the balance sheet date. C. Confirming current (0-30 day) year-end accounts receivable. D. Reviewing credit files for selected account.

Which of the following is consistent with effective internal control over sales transactions? A. The accounting department prepares a shipping report authorizing the shipment of goods. B. The accounting department accounts for all receiving reports C. The billing department accounts for all shipping documents. D. The accounts payable department annually approves the extension of credit to customers.

Which of the following is least likely to be considered a risk assessment procedure? A. Analytical procedures. B. Inspection of documents. C. Observation of the counting of inventory. D. Observation of the performance of certain accounting procedures.

Which of the following is not a control over cash disbursements? A. Disbursements should be made by check. B. A check protecting machine should be used. C. Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse. D. Voided checks should be defaced and filed with paid checks

Which of the following is not a general objective for the audit of asset accounts? A. Establishing existence of assets. B. Establishing proper valuation of assets. C. Establishing proper liabilities relating to assets. D. Establishing the completeness of assets.

Which of the following is not a primary procedure auditors use to obtain sufficient knowledge about the design of the relevant controls and to determine whether they have been implemented (placed in operation)? A. Previous experience with the entity. B. Inquiries of appropriate management personnel. C. Performance of substantive procedures. D. Inspection of document and records.

Which of the following is not a required source of information for the auditors' assessment of fraud risk? A. Discussion among audit team members. B. Fraud risk factors. C. Results of tests of controls. D. Inquiry of management and others.

Which of the following is not an assertion that is made in the financial statements by management concerning each major account balance? A. Completeness. B. Rights and obligations. C. Legality. D. Valuation.

Which of the following is one of the better auditing techniques that might be used to detect kiting? A. Review composition of authenticated deposit slips. B. Review subsequent bank statements and canceled checks received directly from the banks. C. Prepare a schedule of bank transfers. D. Prepare year-end bank reconciliation

Which of the following is true about the auditors' consideration of internal control in a financial statement audit? A. The auditors must assess control risk at a level lower than the maximum. B. The auditors must prepare a flowchart description of internal control for their working papers. C. The auditors must obtain an understanding of the steps in processing major types of transactions. D. The auditors must perform tests of controls.

Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee? A. Management's failure to renegotiate unfavorable long-term purchase commitments B. Recurring operating losses that may indicate going concern problems C. Evidence of a lack of objectivity by those responsible for accounting decisions D. Management's current plans to reduce its ownership equity in the entity

Which of the following procedures is not performed as a part of planning an audit engagement? A. Reviewing the working papers of the prior year. B. Performing analytical procedures. C. Confirmation of all major accounts. D. Designing an audit program.

Which of the following revenue related transactions is not linked to the accounts indicated? A. Recognize revenues too early--accounts receivable and revenue. B. Understate allowance for doubtful accounts--Bad debt expense, allowance for doubtful accounts. C. Don't write off uncollectible receivables--sales returns, sales discounts. D. Don't record discounts given to customers--Cash, sales discounts, accounts receivable.

Which of the following statements is correct concerning the understanding of internal control needed by auditors? A. The auditors must understand the information system, not the accounting system. B. The auditors must understand monitoring and all preliminary accounting controls. C. The auditors must have a sufficient understanding to assess the risks of material misstatement. D. The auditors must understand the control environment, risk assessment, and all control activities.

Which of the following statements is not correct? A. Cash is important to the audit process because of its vulnerability to misappropriation, despite the fact that the balance at the balance sheet date may be immaterial. B. Payroll cash account balances kept on an imprest basis are more easily controlled that others not kept so. C. Confirmation of cash should only be performed as of the balance sheet date because the auditor expresses an opinion as of that date. D. Reviewing interbank transfers is important to the auditor because of the possibility that the client may be engaged in kiting.

Which of the following would be least likely to be considered an audit planning procedure? A. Use an engagement letter. B. Develop the overall audit strategy C. Perform the risk assessment. D. Develop the audit plan.

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? A. The cashier prepares the daily deposit. B. The cashier makes the daily deposit at a local bank. C. The cashier posts the receipts to the accounts receivable subsidiary ledger. D. The cashier endorses the checks.

While assessing the risks of material misstatement auditors identify risks, relate risk to what could go wrong, consider the magnitude of risks and: A. Assess the risk of misstatements due to illegal acts B. Consider the complexity of the transactions involved C. Consider the likelihood that the risks could result in material misstatements. D. Determine materiality levels

Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated relating to the year XX financial statements? A) Sales. B) Cash. C) Inventory. D) Accounts receivable.

A client's internal control appears strong, but the CPA has elected not to perform any tests of controls. The planned assessed level of control risk is at what level? A. Zero. B. Low. C. Moderate. D. Maximum.

Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily

False

An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of: A. Tests of transactions and balances. B. An assessment of internal control. C. Specialized audit programs. D. Analytical procedures.

An auditor's analytical procedures have revealed that the accounts receivable of a client have doubled since the end of the prior year. However, the allowance for doubtful accounts, as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor? A. Credit standards were liberalized in the current year. B. Twice as many accounts receivable were written off in the prior year as compared to this year. C. A greater percentage of accounts were currently listed in the "more than 90 days overdue" category than in the prior year. D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the best evidence on operating effectiveness? A. Select and examine receiving reports and test whether the related canceled checks are dated no earlier than the receiving reports. B. Select and examine receiving reports and test whether the related canceled checks are dated no later than the receiving reports. C. Select and examine canceled checks and test whether the related receiving reports are dated no earlier than the checks. D. Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's: A. Awareness of the consistency in the application of generally accepted accounting principles between accounting periods B. Evaluation of all matters of continuing accounting significance C. Opinion of any subsequent events occurring since the predecessor's audit report was issued D. Understanding as to the reasons for the change of auditors

Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the: A. Adequacy of the preplanned audit program. B. Ability to establish consistency in application of accounting principles between years. C. Apparent scope limitation. D. Integrity of management.

If the auditors do not perform tests of controls for certain assertions: A. They have performed a substandard audit. B. They are not required to communicate significant deficiencies relating to those accounts to management and the board of directors. C. They must issue a qualified opinion. D. They must assess control risk at the maximum level for those assertions.

In a financial statement audit performed following AICPA Professional Standards, how frequently must an auditor test operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely upon in the current year? A. Monthly B. Each audit C. At least every second audit D. At least every third audit

In a manufacturing company, which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date? A. Confirmation from the broker. B. Inspection of year-end brokers' statements. C. Vouching all changes during the year to brokers' advises and statements. D. Examination of paid checks issued in payment of securities purchased.

Internal control over marketable securities is enhanced when: A. Securities are held by the cashier. B. Securities are registered in the name of the custodian. C. Detailed records of securities are maintained by the custodian of the securities. D. Securities are held under joint control of two or more officials.

Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? A. Tracing recorded dividend income to cash receipts records and validated deposit slips. B. Utilizing analytical techniques and statistical sampling. C. Comparing recorded dividends with amounts appearing on federal information form 1099s. D. Comparing recorded dividends with a standard financial reporting service's record of dividends.

Of the following statements about internal control, which one is not valid? A. No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. B. Transactions must be properly authorized before such transactions are processed. C. Because of the cost/benefit relationship, a client may apply control procedures on a test basis. D. Control activities reasonably insure that collusion among employees can not occur.

Preliminary arrangements with clients should be set forth in the management letter

False

Once a CPA has determined that accounts receivable have increased due to slow collections in a "tight money" environment, the CPA would be likely to: A. Increase the balance in the allowance for bad debts accounts. B. Review the going concern ramifications. C. Review the credit and collection policy. D. Expand tests of collectibility.

Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both A. Journalize cash receipts and disbursements and prepare the financial statements. B. Monitor internal controls and evaluate whether the controls are operating as intended. C. Adopt new accounting pronouncements and authorize the recording of transactions. D. Record and conceal fraudulent transactions in the normal course of assigned tasks.

Properly designed internal control will permit the same employee to: A. Receive and deposit checks, and also approve write-offs of customer accounts. B. Approve vouchers for payment, and also receive and deposit cash. C. Reconcile the bank statements, and also receive and deposit cash. D. Sign checks, and also cancel supporting documents.

Recognizing a loan received as revenue instead of as a liability has a positive effect on the reported financial statements for all of the following except: A. It understates liabilities. B. It overstates revenues C. It overstates net income. D. It overstates assets.

Tests of controls do not ordinarily address: A. By whom a control was applied. B. How a control was applied. C. The consistency with which a control was applied. D. The cost effectiveness of the way a control was applied.

The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that: A. Recorded cash disbursement transactions are properly authorized. B. Proper cash purchase discounts have been recorded. C. Cash disbursements are for goods and services actually received. D. No discrepancies exist between the data on the checks and the data in the journal.

The auditors should insist that a representative of the client be present during the physical examination of the securities in order to: A. Lend authority of the auditor's directives. B. Detect forged securities. C. Coordinate the return of all securities to proper locations. D. Acknowledge the receipt of securities returned

The auditors will not ordinarily initiate discussion with the audit committee concerning the: A. Extent to which the work of internal auditors will influence the scope of the examination. B. Extent to which change in the company's organization will influence the scope of the examination. C. Details of potential problems which the auditors believe might cause a qualified opinion. D. Details of the procedures which the auditors intend to apply.

The predecessor auditor is required to attempt to initiate communication with the successor auditor: Prior to the Successor's Acceptance of the Engagement/Subsequent to the Successor's Acceptance of the Engagement A. Yes/Yes B. Yes/No C. No/Yes D. No/No

The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as: A. Account risk. B. Control risk. C. Detection risk. D. Inherent risk.

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except A. Cutoff bank statement. B. Year-end bank statement. C. Bank confirmation. D. General ledger.

To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from: A. The sales journal B. The billing clerk's file of sales orders C. Duplicate copies of sales invoices D. The shipping clerk's file of duplicate copies of bills of lading

Under which circumstance is it likely that the extent of substantive procedures will be expanded beyond that anticipated in the audit plan? A. The auditors have determined that controls have been implemented (placed in operation) but, in accordance with the audit plan, have performed no tests of controls. B. Certain controls do not leave a trail of documentary evidence. C. Deviation rates were greater than zero and approached anticipated levels. D. The operating effectiveness of certain controls was found to be less than expected, although no material misstatements were identified.

When there are a large number of relatively small account balances, negative confirmation of accounts receivable is feasible if the combination of inherent risk and control risk is: A. Low, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. B. High, and the individuals receiving the confirmation requests are likely to give them adequate consideration. C. High, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. D. Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.

Which is most likely when the assessed level of control risk increases? A. Change from performing substantive procedures at year-end to an interim date. B. Perform substantive procedures directed inside the entity rather than tests directed toward parties outside the entity. C. Use the maximum number of dual purpose tests. D. Use larger sample sizes for substantive procedures.

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting? A. Several members of management have recently purchased additional shares of the entity's stock. B. Several members of the board of directors have recently sold shares of the entity's stock. C. The entity distributes financial forecasts to financial analysts that predict conservative operating results. D. Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

Which of the following factors most likely would cause a CPA to not accept a new audit engagement? A. The prospective client has fired its prior auditor. B. The CPA lacks a thorough understanding of the prospective client's operations and industry. C. The CPA is unable to review the predecessor auditor's working papers. D. The prospective client is unwilling to make financial records available to the CPA.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? A. Large amounts of liquid assets that are easily convertible into cash. B. Low growth and profitability as compared to other entity's in the same industry. C. Financial management's participation in the initial selection of accounting principles. D. An overly complex organizational structure involving unusual lines of authority.

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted? A. There are significant related party transactions that management claims occurred in the ordinary course of business. B. Internal control activities requiring the segregation of duties are subject to management override. C. Management continues to employ an inefficient system of information technology to record financial transactions. D. It is unlikely that sufficient evidence is available to support an opinion on the financial statements.

Which of the following is correct concerning "window dressing" for cash? A. A segregation of duties within the cash function effectively eliminates its occurrence. B. It generally involves manipulation of inventory. C. It is illegal, and an audit is designed to provide reasonable assurance of its detection. D. Many forms of it require no action by the auditors.

Which of the following is least likely to be considered an appropriate response relating to risks the auditors identify at the financial statement level? A. Assign more experienced staff. B. Incorporate additional elements of unpredictability in the selection of audit procedures. C. Increase the scope of auditor procedures. D. Emphasize the need to remain neutral, rather than to exercise professional skepticism.

Which of the following is least likely to render material a quantitatively small misstatement material? A. Affects the registrant's compliance with regulatory requirements. B. Masks a change in earnings or other trends. C. Arises from an item not capable of precise measurement. D. The Transaction involves a related party.

Which of the following is most likely to be an overall response to fraud risks identified in an audit? A. Only use certified public accountants on the engagement. B. Place increased emphasis on the audit of objective transactions rather than subjective transactions. C. Supervise members of the audit team less closely and rely more upon judgment. D. Use less predictable audit procedures.

Which of the following is most likely to be considered a risk assessment procedure relating to internal control? A. Confirm accounts receivable. B. Perform a test of controls relating to payroll. C. Take test counts of the year-end inventory. D. Trace a transaction through the information system relevant to financial reporting.

Which of the following is not a control that generally is established over cash transactions? A. Separating cash handling from recordkeeping. B. Centralizing the receipt of cash. C. Depositing each day's receipts intact. D. Obtaining a receipt for every disbursement.

Which of the following is not a primary objective of the auditors in the examination of accounts receivable? A. Determine the approximate realizable value. B. Consider the adequacy of internal control. C. Establish the existence of receivables. D. Determine the expected day of collection of each of the receivables.

Which of the following is not confirmed on the standard form used for cash balances at financial institutions? A. Cash checking account balances. B. Cash savings account balances. C. Loans payable. D. Securities held for the client by the financial institution.

Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? A. Checklist. B. Flowchart. C. Questionnaire. D. Confirmation.

Which of the following is not used by auditors to establish the completeness of recorded assets? A. Assessing control risk. B. Tracing from source documents to entries in the accounting records. C. Performing analytical procedures. D. Vouching transactions.

Which of the following is the best argument against the use of negative accounts receivable confirmations? A. The cost-per-response is excessively high. B. There is no way of knowing if the intended recipients received them. C. Recipients are likely to feel that in reality the confirmation is a subtle request for payment. D. The inference drawn from receiving no reply may not be correct.

Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control? A. Preparation of monthly statements to customers and maintenance of the accounts payable subsidiary ledger. B. Posting to the general ledger and approval of additions and terminations relating to the payroll. C. Custody of unmailed signed checks and maintenance of expense subsidiary ledger. D. Collection of receipts on account and maintaining accounts receivable records.

Which of the following situations would most likely require special audit planning by the auditors? A. Some items of factory and office equipment do not bear identification numbers. B. Depreciation methods used on the client's tax return differ from those used on the books. C. Assets costing less than $500 are expensed even though the expected life exceeds one year. D. Inventory is comprised of precious stones.

Which of the following would be least likely to be included in an auditor's tests of controls? A. Inspection. B. Observation. C. Inquiry. D. Analytical procedures.

Which of the following would indicate the need to use positive accounts receivable confirmations? A. A large population consisting of small balances. B. Good internal control over accounts receivable. C. Most accounts are with large reputable companies. D. A large number of accounts receivable are in dispute.

With respect to the auditor's planning of a year-end audit, which of the following statements is always true? A. An engagement should not be accepted after the fiscal year-end. B. An inventory count must be observed at the balance sheet date. C. The client's audit committee should not be told of any specific audit procedures which will be performed. D. It is an acceptable practice to carry out parts of the examination at interim dates.

Your client left the cash receipts journal open after year-end for an extra day and included January 1 cash receipts in the 12/31/XX totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the year XX financial statements? A. Sales are understated. B. Accounts receivable are understated. C. Inventory is overstated. D. Net income is overstated.

Signed checks should be returned to the cash disbursements clerk for mailing

False

Analytical procedures are seldom used for planning an audit engagement because they are substantive procedures

False

Audit committees should be made up of the most qualified directors regardless of whether they are part of management of the company

False

CPAs use negative accounts receivable confirmation requests more frequently than positive accounts receivable confirmation requests.

False

Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address

False

Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end

False

A compensating balance agreement generally requires that cash be reclassified as a noncurrent asset

False

A proof of cash is an audit procedure that is performed on almost every engagement

False

Accounts receivable that are written off should not be turned over to a collection agency

False

An audit plan includes a detailed listing of the audit procedures to be performed in the verification of items in the financial statements.

False

An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts.

True

Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts

True

At least a portion of the auditors' consideration of internal control usually is performed at an interim date rather than at the balance sheet date.

True

CPA firms may use written narratives to describe internal control in their audit working papers

True

Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable.

True

Confirmation of accounts receivable provides some assurance that no lapping or other manipulation affecting accounts receivable is being carried on

True

Control over the receipt of cash sales is best achieved when two or more employees participate in each transaction

True

Incompatible duties exist when an employee is in a position to perpetrate and conceal errors or fraud.

True

Internal control is concerned with the reliability of financial information

True

Material accounts receivable from related parties should be stated separately from other receivables.

True

The completeness of recording of assets is generally verified by tracing from the source documents to the recorded entry.

True

The substantive approach to an audit is appropriate for many small businesses.

True

Verification of cash and other liquid assets on the same date may prevent substitution of one form of asset for another

True

Vouching the acquisition of assets is an audit procedure that is often performed to establish the valuation of the assets.

True

When it is impossible to confirm accounts receivable, the auditors may be able to satisfy themselves as to the existence of accounts receivable by alternative procedures.

Auditing Exam 2

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