Chapter 7,10,11

Which of the following cash transfers is most likely to result in a misstatement of cash at December 31, 20X7? Bank Transfer Schedule Disbursement / Receipt Recorded / Paid by bank / Recorded / Received in books in books by bank A) 12/31/X7 1/4/X8 12/31/X7 12/31/X7 B) 1/4/X8 1/5/X8 12/31/X7 1/4/X8 C) 12/31/X7 1/5/X8 12/31/X7 1/4/X8 D) 1/4/X8 1/11/X8 1/4/X8 1/4/X8

B) 1/4/X8 1/5/X8 12/31/X7 1/4/X8

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 the 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.

B. A second payment of an account payable which had already been paid in full two months earlier.

What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales? A. Accounts receivable are understated at December 31, 20X0. B. Accounts receivable are overstated 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.

B. Accounts receivable are overstated at December 31, 20X0.

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.

B. Aging of accounts receivable.

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 must be reported to the audit committee in writing. C. All such matters must be communicated to the audit committee and regulatory agencies. D. All control deficiencies are also significant deficiencies.

B. All material weaknesses in internal control must be reported to the audit committee in writing.

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 credit. C. Reporting on the effectiveness of operating segments. D. Investigating potential merger candidates.

B. Approving credit.

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.

B. Be directly responsible for the appointment, compensation, and oversight of the work of the CPA firm.

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.

B. Billed sales were shipped.

Which of the following procedures in the cash disbursements 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.

B. Canceling supporting documentation after payment.

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.

B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

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.

B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

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.

B. Closing the sales journal prior to year-end.

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.

B. Committee of Sponsoring Organizations.

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.

B. Comparing customer remittance advices with recorded disbursements in the cash disbursements journal.

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.

B. Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank.

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of A. Presentation. B. Completeness. C. Rights. D. Existence.

B. Completeness.

To establish the existence and ownership of a large long-term investment in the common stock of a publicly traded company, the auditors ordinarily perform a security count or: A. Rely on the client's internal controls if the auditors have reasonable assurance that the control procedures are being applied as prescribed. B. Confirm the number of shares owned that are held by an independent custodian. C. Determine the market price per share at the balance sheet date from published quotations. D. Confirm the number of shares owned with the issuing company.

B. Confirm the number of shares owned that are held by an independent custodian.

Which of the following procedures would probably be most effective in identifying duplicate billing of customers during the year? A. Analytical procedures. B. Confirmation of accounts at year end. C. Data analytics applied to sales transactions. D. Review of contracts.

B. Confirmation of accounts at year end.

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.

B. Confirmation requests should be signed by the auditors.

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

B. Confirmations of accounts receivable.

If a company failed to record goods returned by customers near year end, the auditors would most likely discover this issue by: A. Reviewing records of sales returns. B. Confirming accounts receivable. C. Examining sales orders. D. Reviewing the accounts receivable subsidiary ledger.

B. Confirming accounts receivable.

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. Confirming accounts receivable. C. Tracing the total sales in the sales journal to the general ledger. D. Observation of the physical inventory count at year-end.

B. Confirming accounts receivable.

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.

B. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant.

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.

B. Design further audit procedures.

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

B. Detection risk.

Applying a data analytical approach to tests of controls is least likely to result in which of the following? A. Testing a number of control simultaneously electronically. B. Documenting the engagement through an electronic representation letter obtained monthly. C. Testing all incidents of operation of a control during the year. D. Following up sample results with an analysis of the entire population.

B. Documenting the engagement through an electronic representation letter obtained monthly.

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.

B. Equal the preliminary assessed level of control risk.

The individual looking for guidance on revenue recognition is most likely to appropriately review: A. APB 99. B. FASB ASC 606. C. ASR 44. D. B1 Document.

B. FASB ASC 606.

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.

B. Fraud will be eliminated.

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.

B. Human judgment in the decision making process.

A computer software firm allows its sales team to make material modifications to standard software contracts. What should be the auditors' primary concern in this situation? A. Increased risk of misstatement of commissions expense. B. Increased risk of misstatement of revenue. C. Increased risk of uncollectible accounts. D. Increased risk of loss of software copyright.

B. Increased risk of misstatement of revenue.

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.

B. Inspecting the notes is sufficient evidence of existence of the notes.

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 confirmation requests are to be used. D. There is a simultaneous examination of cash and accounts receivable.

B. Internal control over receivables is good.

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.

B. Inversely.

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 a 'process' effected by individuals. 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.

B. It is a 'process' effected by individuals.

Which of the following is correct relating to kiting? A. It is ordinarily used to understate cash. B. It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment. C. It is a lapping approach performed using receivable accounts. D. It is seldom, if ever, used.

B. It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment.

Anderson embezzled $20,000 from her company's account in Bank X. At year-end, she hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. She has not recorded the transaction on the books. This is an example of: A. Lapping. B. Kiting. C. Effective cash management. D. Related party transactions.

B. Kiting.

Which of the following does not meet the definition of an external confirmation in the context of accounts receivable? A. Fax responses. B. Oral responses obtained by the auditor through a telephone call. C. Written responses to negative confirmation requests. D. Written response to confirmations sent out without balances due.

B. Oral responses obtained by the auditor through a telephone call.

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.

B. Performance of analytical procedures.

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

B. Physical controls.

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

B. Physically examine items sold.

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 account balance information with financial institutions.

B. Receive a cutoff statement directly from the client's bank.

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 plan.

B. Reduce substantive procedures in areas where the internal control was found to be effective.

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.

B. Review accounts which have been written off as uncollectible prior to year-end.

Which of the following is not a component of the control environment? A. Integrity and ethical values. B. Risk assessment. C. Commitment to attracting, developing, and retaining competent employees. D. Organizational structure.

B. Risk assessment.

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.

B. SEC registrants.

In November, two 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 interest revenue. The most effective method for detecting this type of error is: A. Foot the cash receipts journal for November. 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.

B. Send a bank confirmation as of year-end.

Which of the following is intended to detect deviations from prescribed controls? A. Substantive procedures specified by a standardized audit plan. 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.

B. Tests of controls designed specifically for the client.

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.

B. Tests of controls.

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.

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.

Tests of controls are most likely to be performed when: A. Controls seem weak and must be properly documented. B. The auditor plans to rely on the controls. C. The auditor wishes to assess control risk at the maximum. D. The client's control environment appears weak.

B. The auditor plans to rely on the controls.

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.

B. The cash receipts journal was held open after year-end.

Well-designed internal control that is functioning effectively is most likely to detect a 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.

B. The fraudulent action of an individual employee.

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.

B. The information system.

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.

B. The positive form used for large balances and the negative form for the small balances.

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.

B. The principal amount paid on a direct liability.

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.

B. The rate of technological change is moderate in the industry.

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.

B. There was an improper cutoff of sales at the end of the year.

The external 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 external 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.

B. They are employees whose work might affect the external auditors' work.

Which of the following is not a control that generally is established over cash receipts? A. To prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel. B. To ensure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks. C. To ensure 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.

B. To ensure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks.

Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests? A. Examine sales invoices. B. Trace the balances from accounts receivable ledger to the billing statements. C. Examine correspondence. D. Examine any subsequent cash receipts.

B. Trace the balances from accounts receivable ledger to the billing statements.

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.

B. Treasurer.

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.

B. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: A. Verify the cash balance reported on the bank confirmation inquiry form. B. Verify reconciling items on the client's bank reconciliation. C. Detect lapping. D. Detect kiting.

B. Verify reconciling items on the client's bank reconciliation.

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.

B. Whether it has been implemented (placed in operation).

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

B. Yes No

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. A low exception rate is expected. D. The auditors believe that recipients of the requests are unlikely to give them consideration.

C. A low exception rate is expected.

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

C. Accounts receivable subsidiary ledger.

The provision of the Foreign Corrupt Practices Act that require implementing an internal control system apply to: A. All U.S. corporations. B. All U.S. corporations that engage in foreign operations. C. All corporations under the jurisdiction of the SEC. D. All U.S. partnerships and corporations.

C. All corporations under the jurisdiction of the SEC.

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 personally by the auditors at a post office. D. All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client.

C. All requests for confirmation should be mailed personally by the auditors at a post office.

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.

C. Audit committee.

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.

C. Audit committee.

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.

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

Anderson embezzled $20,000 from her company's account in Bank X. At year-end, she hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. She 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 journals. C. Comparison of bank cutoff statement to the cash receipts and disbursements records. D. Receivable confirmation.

C. Comparison of bank cutoff statement to the cash receipts and disbursements records.

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 than others not so kept. C. Confirmation of cash should only be performed as of the balance statement 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.

C. Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date.

Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts? 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.

C. Confirming current (0-30 day) year-end accounts receivable.

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.

C. Count of investment securities.

In which of the following areas are the auditors least likely to use the work of a specialist? A. Determining the value of complex financial instruments. B. Assessing control risk for clients using complex derivatives for hedging. C. Determination of the existence of a complex financial instrument. D. Valuing an equity investment that must be valued using a complex valuation model.

C. Determination of the existence of a complex financial instrument.

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.

C. Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse.

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.

C. Don't write off uncollectible receivables-sales returns, sales discounts.

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.

C. Estimate credit losses.

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.

C. Evidence of a lack of objectivity by those responsible for accounting decisions.

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide evidence concerning the A. Collectability of the balances confirmed. B. Ownership of the balances confirmed. C. Existence of the balances confirmed. D. Internal control over balances confirmed.

C. Existence of the balances confirmed.

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.

C. Internal auditing.

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.

C. Internal control over financial reporting.

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.

C. Inventory.

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.

C. It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures.

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.

C. It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures.

In the consideration of internal control, the auditor is basically concerned that it provides reasonable assurance that: A. Management cannot 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.

C. Misstatements have been prevented or detected.

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

C. No Yes

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.

C. Observation of the counting of inventory.

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.

C. Occurrence of sales transactions.

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

C. Organizational status within the company.

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.

C. Performance of substantive procedures.

Which of the following is one of the better auditing techniques that might be used by an auditor 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 reconciliations.

C. Prepare a schedule of bank transfers.

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.

C. Reasonable possibility.

When a client uses a service organization to process certain transactions (e.g., its employee benefit plan), the auditor is least likely to obtain an understanding relating to these transactions by A. Contacting the service organization to obtain specific information. B. Visiting the service organization and performing procedures. C. Sending a confirmation request to the service organization. D. Obtaining and reading a Type 1 or Type 2 report from the service organization.

C. Sending a confirmation request to the service organization.

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.

C. Signing payroll checks.

Which of the following audit tests would be regarded as a test of 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.

C. Tests of the signatures on canceled checks to board of director's authorizations.

A report on internal control performed in accordance with PCAOB Standard No. 5 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.

C. The "as-of date."

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.

C. The auditors must have a sufficient understanding to assess the risks of material misstatement.

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.

C. The auditors must obtain an understanding of the steps in processing major types of transactions.

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.

C. The billing department accounts for all shipping documents.

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.

C. The cashier posts the receipts to the accounts receivable subsidiary ledger.

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.

C. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.

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.

C. The request was mailed by the assistant treasurer.

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.

C. The write-off of receivables by personnel who receive cash permits the misappropriation of cash.

An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific procedures 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 tests 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 the occurrence of reported sales. D. Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.

C. Tracing sales invoices to shipping documents to test the occurrence of reported sales.

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.

A. A bank lockbox system.

The Parmalat fraud case involved: A. A fraudulent cash confirmation. B. Kiting of funds between banks in India and banks in Pakistan. C. A bank reconciliation performed by the client that systematically understated cash. D. Major unrecorded disbursements for equipment.

A. A fraudulent cash confirmation.

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.

A. An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.

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.

A. An unrecorded deposit made at the bank at the end of the month.

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.

A. Check Clearing for the 21st Century Act.

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.

A. Collectibility is certain.

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.

A. Collection of receivables.

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.

A. Comparison of postings of cash receipts to accounts with the details of cash deposits.

If the external auditors decide that the work performed by the internal auditors may be used, they should consider the internal auditors': A. Competence, objectivity, and approach. B. Efficiency and experience. C. Independence and review skills. D. Training and supervisory skills.

A. Competence, objectivity, and approach.

The definition of internal control developed by the Committee of Sponsoring Organizations (COSO) includes controls related to the reliability of internal and external 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.

A. Compliance with applicable laws and regulations.

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.

A. Control deficiency.

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.

A. Controls are operating effectively.

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.

A. Counting marketable securities at year-end.

When obtaining an understanding of internal control relevant to planning of a financial statement audit, the auditor should obtain adequate knowledge about the _____. A. Design of controls. B. Controls related to audit engagement assessment. C. Operating effectiveness of all controls. D. Safeguards over realization transactions.

A. Design of controls.

A service auditor's report on a service center should include a(n) A. Detailed description of the service center's internal control. B. Statement that the user of the report may assess control risk at the minimum level. C. Indication that no assurance is provided. D. Opinion on the operating effectiveness of the service center's internal control.

A. Detailed description of the service center's internal control.

Which of the following has made it difficult to engage in kiting in recent years? A. Electronic processing of checks. B. The use of machine readable account numbers on checks. C. The consolidation of financial institutions. D. The use of payroll processers.

A. Electronic processing of checks.

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

A. Enhancing profitability.

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.

A. Examine cash receipts received after year-end.

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.

A. Examining subsequent receipts of year-end accounts receivable.

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.

A. Fictitious revenues.

Complex sales contracts are most likely to result in higher risks regarding all of the following except: A. Identifying the contracting parties. B. Determining performance obligations. C. Determining when performance obligations are met. D. Allocating the transaction price to performance obligations.

A. Identifying the contracting parties.

In assessing the competence of a client's internal auditor, an external 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.

A. Internal auditor's compliance with professional internal auditing standards.

For purposes of an audit of financial statements, electronic confirmation of cash balances: A. Is acceptable when properly controlled. B. Is acceptable, but only when combined with a non-electronic approach. C. Is only acceptable for immaterial accounts. D. Is not acceptable.

A. Is acceptable when properly controlled.

A primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with _____. A. Knowledge necessary to assess the risks of material misstatements. B. Evidence to use to assess inherent risk. C. A basis for modifying tests of controls. D. An evaluation of the consistency of application of management's policies.

A. Knowledge necessary to assess the risks of material misstatements.

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.

A. Minimizes the possibility of employing persons with dubious records in positions of trust.

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.

A. No reply to a positive confirmation request is received. The confirmation process may be performed using a(n):

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.

A. Questionnaires highlight weaknesses in the system.

When a client engages in transactions involving derivatives, the auditor should: A. Review agreements underlying the 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.

A. Review agreements underlying the derivative.

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.

A. Salaried sales personnel.

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.

A. Sales department.

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.

A. Separate recordkeeping from accounting for cash to the extent possible.

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.

A. Significant deficiencies and material weaknesses.

A CPA examines a sample of credit memoranda to ensure they were signed by an officer of the company. This is an example of a: A. Test of a control. B. Substantive test. C. Cutoff test. D. Statistical test.

A. Test of a control.

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.

A. Tests of the additions to property by physical inspection.

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.

A. The account balances as of year-end will generally be confirmed.

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

A. The confirmation requests are sent on the client's letterhead.

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.

A. Trace a sample of the bills of lading to sales invoices.

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.

A. Understatement of outstanding checks.

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.

A. Verify that the controls have been implemented (placed in operation).

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

A. Yes Yes

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

A. Yes Yes

The confirmation process may be performed using a(n): Paper form / Electronic form A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes

The report of a service auditor may provide assurance on whether: Controls are implemented / Operating effectiveness of controls A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes

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

A. Yes Yes

Which of the following would indicate the need to use positive accounts receivable confirmation requests? 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.

D. A large number of accounts receivable are in dispute.

If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the A. Cash receipts journal to the sales journal. B. Sales journal to the cash receipts journal. C. Source documents to the accounting records. D. Accounting records to the source documents.

D. Accounting records to the source documents.

The auditors should insist that a representative of the client be present during the physical examination of 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.

D. Acknowledge the receipt of securities returned.

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

D. Analytical procedures.

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.

D. At least every third audit.

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.

D. Collection of receipts on account and maintaining accounts receivable records.

Garcia was engaged to audit the financial statements of Delta Corporation for the year ended September 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.

D. Comparing recorded dividends with a standard financial reporting service's record of dividends.

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.

D. Confirmation.

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 ensure all fraud will be eliminated.

D. Control activities ensure all fraud will be eliminated.

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. Custody of securities is maintained by a stockbroker or bank.

D. Custody of securities is maintained by a stockbroker or bank.

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.

D. Determine the expected day of collection of each of the receivables.

The program flowcharting symbol representing a decision is a: A. Triangle. B. Circle. C. Rectangle. D. Diamond.

D. Diamond.

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.

D. Emphasize the need to remain neutral, rather than to exercise professional skepticism.

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.

D. Examination of paid checks issued in payment of securities purchased.

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.

D. Expand tests of collectibility.

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.

D. General ledger.

Which of the following could not be more efficiently performed with data analytics? A. Identification of possible duplicate payments. B. Identification of unusual expense reimbursements. C. Identification of cash recorded from an unusual accounting source. D. Identification of an unrecorded cash deposit.

D. Identification of an unrecorded cash deposit.

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.

D. Is less severe than a material weakness.

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. It may increase but not falsify cash position.

D. It may increase but not falsify cash position.

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 understates expenses.

D. It understates expenses.

When there are a large number of relatively small account receivable balances, negative confirmation requests may be appropriate 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.

D. Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.

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.

D. Material.

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.

D. Maximum

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.

D. Net income is overstated.

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

D. No No

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.

D. No discrepancies exist between the data on the checks and the data in the journal.

Which of the following statements regarding auditor documentation of the client's internal control is correct? A. Documentation must include flowcharts. B. Documentation must include procedural write-ups. C. No documentation is necessary, although it is desirable. D. No one particular form of documentation is necessary, and the extent of documentation may vary.

D. No one particular form of documentation is necessary, and the extent of documentation may vary.

Which of the following is a likely approach for testing the segregation of duties? A. Personal inquiry and confirmation. B. Counting variations of performance. C. Analytical procedures. D. Observing employee performance of processes.

D. Observing employee performance of processes.

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.

D. Obtaining a receipt for every disbursement.

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

D. Presentation and Disclosure.

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.

D. Record and conceal fraudulent transactions in the normal course of assigned tasks.

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.

D. Sales.

Which of the following is not confirmed on the standard confirmation 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.

D. Securities held for the client by the financial institution.

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.

D. Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.

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.

D. Sign checks, and also cancel supporting documents.

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.

D. Significant deficiency.

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.

D. The cost effectiveness of the way a control was applied.

Which of the following is the best argument against the use of negative accounts receivable confirmation requests? 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.

D. The inference drawn from receiving no reply may not be correct.

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.

D. The operating effectiveness of certain controls was found to be less than expected, although no material misstatements were identified.

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.

D. The shipping clerk's file of duplicate copies of bills of lading.

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.

D. They must assess control risk at the maximum level for those assertions.

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 a control relating to payroll. C. Take test counts of the year-end inventory. D. Trace a transaction through the information system relevant to financial reporting.

D. Trace a transaction through the information system relevant to financial reporting.

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.

D. Use larger sample sizes for substantive procedures.

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

False

True or False? Internal control is a process that provides reasonable assurance concerning reliability of financial information.

True