External Auditing Exam 3
In general, which of the following parties would have the lowest burden of proof in bringing suit against an auditor?
A third-party investor under the Securities Act.
Trace a sample of voucher debits to general and subsidiary ledger accounts. Test a sample of cash disbursement voucher documents for accurate mathematics.
Accuracy
The control activity "credit sales approved by credit department" is directed toward which transaction assertion?
Accuracy.
Error: Goods shipped to a bad credit risk customer
Assertion: Accuracy
Receivables that have been sold should not remain as a(n) _____ on the company's books.
asset
The primary defense for auditors against a claim of ordinary negligence is to offer evidence that the
audit was conducted in accordance with GAAS.
Confirmations do not necessarily mitigate the risk of _________.
bad debt
A voucher typically does not have attached to it a copy of which of the following documents?
check register.
To be recognized, revenues must also be realized or realizable and:
earned.
The review phase of the transaction flow in the acquisition and expenditure cycle does not include
substantive procedures.
Auditors need to test ______from construction in progress to property.
transfers
It is necessary to ______ the client's cutoff of cash transactions.
verify
A reason to believe fraud occurred.
Predication
Which of the following is a third party that is known by name to the auditor and for whose purpose the audit is conducted?
Primary beneficiary.
A habitual criminal.
Psychotic motive
Which of the following accounts is not normally part of the revenue and collection cycle?
Purchases Returns and Allowances.
Which of the following would the auditor NOT be testing for by examining lease agreements?
estimates
In the audit of accounts receivable, the most important emphasis should be on the:
existence assertion.
Purchasing and cash disbursements can provide lots of opportunity for ______ by employees.
fraud
Purchasing and cash disbursements can provide opportunity for ______ by employees.
fraud
Management may have fraudulently overstated revenue by making __________ journal entries.
inappropriate
To test collectibility of receivables, auditors may consider credit ratings for debtors of _____receivables.
large
Vouchers should be stamped PAID to
prevent duplicate payment.
An important step of testing controls is comparing quantity and _______ in the invoice, purchase order, and receiving report.
price
With respect to auditing product warranty accruals, auditors should be alerted to changes in the client's _______ sold.
products
When testing controls around inventory, auditors are considering the ________transaction cycle.
purchasing
To gain overall assurance as to the reasonableness of accounts payable, the auditor may consider ________.
ratios
In what way can audit procedures be modified to address assessed fraud risks?
All of the choices are valid modifications.
Embezzlement is a type of fraud that involves
An employee misappropriating an employer's money or property entrusted to the employee's control in the employee's normal job.
Auditors need to compare the percentage of claims accrued to current year ______.
sales
Under the 1934 Act, third parties must prove ________.
scienter
Since the Ernst & Ernst v. Hochfelder court decision, plaintiffs suing for damages under Rule 10b-5 must prove
scienter on the part of auditors.
The 1934 Act protects any person buying or _______the security.
selling
Auditors need to consider _____terms for determining ownership and whether a liability should be recorded.
shipping
Auditors need to confirm that the ______ ledgers agree in total to the general ledger.
subsidiary
Levels of authority in the manufacturing process need to be clearly __________.
communicated
When testing other accrued liabilities, auditors may independently calculate the amount and ______ it to management's estimate.
compare
An auditor is planning the testing of the accounts payable balance. The auditor's main concerns should be
completeness and cutoff.
The auditor traces items from the receiving reports to the accounts payable journal in order to satisfy the
completeness assertion.
Accounts payable _______ can be mailed to vendors from whom substantial purchases have been made.
confirmations
Auditors test effectiveness of controls to ensure they can justify their planned levels of ______ risk.
control
Testing the reconciliation for accounts receivable to the general ledger ensures that the software is programmed _________.
correctly
The 1933 and 1934 acts include provisions for civil and _____ charges against CPAs.
criminal
Inventories are often a large _____ asset of a company's balance sheet.
current
Overstatement may occur when sales for the next period are recorded in the _______ period.
current
It is important to verify ______ of both cash receipts and cash disbursements.
cutoff
The auditors' information source for vouching the bank reconciliation items is the
cutoff bank statement.
One way to avoid misstatement of revenue is to ensure the client has proper ________.
cutoff policies
Under section 11 of the Securities Act of 1933, a plaintiff suing for damages must prove
damages or loss from the purchase of securities.
As repairs on warranty items take place, the accrual account is ________.
debited
Tax guidelines do not allow the ______ of the accrual for warranty claims.
deduction
Auditors must confirm that the ____________ of Property, Plant, and Equipment agree with the general ledger.
detail ledgers
______ communication with debtors is the most conclusive step in verifying accounts receivable.
direct
The determination of the value of ending inventory ____ affects net income.
directly
When all of a company's products are sold with warranties, the balance in the accrual account should move ____ the balance in sales.
directly with
After auditing cash, it is important to evaluate proper financial statement presentation and __________ of cash.
disclosure
Tests used to help identify the _____of controls help to evaluate the client's internal control structure.
effectiveness
The characteristics of people who commit the largest frauds would not include
employees that hold positions with little or no authority
The document that generates recording of a sale is the:
invoice.
The assertion that auditors will probably emphasize in the revenue and collection cycle is:
occurrence.
An auditor most likely would extend substantive tests of payroll when
overpayments are discovered in performing tests of controls.
Auditors are often concerned with the _______of cash, as this is where most misstatements occur.
overstatement
AR confirmations can be sent electronically or via ________.
paper form
The transactions typically classified in the acquisition and expenditure cycle flow do not include
placing the sales order.
The assertions by management regarding the cash accounts in the financial statements include all of the following except
proper internal control activities exist for all cash accounts.
The Private Securities Litigation Reform Act adopted the doctrine of
proportionate liability.
Cash analyses need to be _______ to the general ledger.
reconciled
Audit procedures for consignment inventory could include a comparison of the physical inventory with the client's _________.
records
Federal and state governments do not specify the exact _____to be maintained, but do specify the amounts to be withheld.
records
A change in habits.
red flag
Cash reconciliations can be tested via __________.
reperformance
A summary analysis of the property accounts indicates additions and _________.
retirements
Many instances of misstatement are based on the inappropriate recognition of ______.
revenue
Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern?
"These goods were returned for credit on November 15."
The ______ requires registration of an initial stock sale.
1933 Act
Fraud risk factors are events or conditions that indicate which of the following?
All of the choices are correct.
Which of the following is least indicative of fraudulent activity?
Bank reconciliation has no outstanding checks or deposits older than 15 days.
Which of the following would not be included in the supporting documents for a voucher?
Blank check
Cash confirmations need to be mailed under the control of the __________.
auditor
The "relevance" of evidence.
Chain of custody
Trace debits arising from accounts payable transactions for proper account.
Classification
________ needs to be assured in order to recognize revenue.
Collectibility
Are sales invoice blanks prenumbered? Are prenumbered bills of lading prepared in the shipping department?
Completeness
Select a sample of receiving reports and trace to inventory record posting of additions. Scan a sample of vouchers for missing numbers.
Completeness
Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what assertion?
Completeness.
In the revenue and collection cycle, the order of the activities in the cycle are best illustrated by:
Customer ordering, credit granting, delivering goods, billing customers.
Does the accounting manual contain instructions to date sales invoices on the shipment date?
Cutoff
The need for money.
Economic motive
Drives people to steal to achieve more personal prestige.
Egocentric motive
In the audit of accounts receivable, the most important emphasis should be on the:
Existence assertion.
Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the:
Existence of the balances confirmed.
Confirmations of accounts receivable provide the most evidence for which of the following assertions?
Existence.
During an audit of cash, the auditor is most concerned with the management assertion of
Existence.
Net worth analysis.
Extended procedure
Retirements may also be tested for ________ and supporting work orders.
authorization
An audit plan for accounts payable would not include which of the following procedures?
Reviewing cash receipts for period after year-end.
The _______approach includes responsibility toward any foreseeable users of the financial statements.
Rosenblum
Which of the following accounts does not appear in the acquisition and expenditure cycle?
Sales Returns
Sales are normally recorded on the date of the:
Sales invoice.
Revenues are normally considered to have been earned when:
The company has substantially accomplished what it must to be entitled to the benefits.
The _____ approach requires auditors to be responsible to known financial statement users.
Ultramares
The ______approach assigns responsibility by the auditor to the narrowest category of financial statement users.
Ultramares
The landmark case that stated criteria for auditors' liability to third parties for gross negligence or fraud, but not ordinary negligence, was
Ultramares Corp. v. Touche.
Revenues are deemed to be earned when the company has ______ what it must do to fulfill its obligation.
accomplished
Specific balance assertions typical of accounts payable would not include
accounts payable are not pledged as collateral.
Cutoff bank statements include activity for the period _______the period being audited.
after
The positive form of confirmation is best used when
Account balances are relatively large.
A client's purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes auditors' primary concern with respect to liabilities resulting from the purchasing system?
Accounts payable are not materially understated.
When auditing the revenue and collection cycle, auditors normally select balances to confirm from the:
Accounts receivable listing.
Are all credit sales approved by the credit department prior to shipment? Are invoice quantities compared to shipped quantities? Are summary journal entries approved before posting? Are sales prices and terms based on approved standards? Are periodic sales data reported directly to general ledger accounting independent of accounts receivable accounting?
Accuracy
Application of accounting and auditing skills to the law and criminal cases.
Forensic accounting
A proactive approach to detect financial fraud.
Fraud auditing
Which question would be inappropriate when asking questions of personnel during a regular audit?
In your department, exactly who has the potential for committing fraud?
Helping attorneys document cases.
Litigation support
Which of the following fraud detection steps could not be performed by CAATs?
Look for photocopies in invoice files.
Is access to sales invoice blanks restricted? Are returned sales credits supported by documentation?
Occurence
Vouch a sample of receiving reports to related purchase orders. Select a sample of open accounts payable and vouch to supporting documents of purchase.
Occurence
The Securities and Exchange Commission document that governs reporting of all business, analytical, and supplementary disclosures in reports required to be filed with the SEC is
Regulation S-K.
The internal control questionnaire for receipt of purchases completeness objective would not include which of the following questions?
Are competitive bids received and reviewed for certain items?
Error: Sales billed at the wrong price or wrong quantity
Assertion: Accuracy
Error: Product line A sales recorded as Product line B
Assertion: Classification
Error: Failure to post charges to customers for sales
Assertion: Completeness
Error: Goods shipped, sales not recorded
Assertion: Completeness
Error: January sales recorded in December
Assertion: Cutoff
Error: Sales recorded, goods not shipped
Assertion: Occurance
Inventories with a high risk of ______may be warranted as a signficant risk.
obsolescence
When searching for unrecorded liabilities, the auditors consider transactions recorded _____ year-end.
after
_____considering information about the client and its environment, the auditors must assess the risks of material misstatement related to assertions about inventory.
after
Side _________ can substantially alter the terms of a sale.
agreements
Computer controls that might be found in an advanced on-line acquisition and expenditure system would not include
all vendor invoices are prenumbered and the numbers accounted for.
Property tax payments are typically ______in number.
few
The Restatement approach requires responsibility towards ______ users of the financial statements.
foreseen
The inherent risk that accounts payable may be omitted or otherwise understated typically is
high.
When an employee embezzles company funds from an electric utility company for the purpose of paying expenses of an anti-nuclear protest organization, the fraudster's motive is said to be:
ideological.
It is important for the auditor to verify that the controls described by the employees during the auditor's survey of controls over property, plant, and equipment have actually been _____.
implemented
If purchasing employees are _______, they may negotiate bad purchases or purchase terms for the company.
incompetent
After obtaining an understanding of the client and its environment, auditors must identify the ______risks related to the accounts.
inherent
If purchasing agents accept _______, the entire purchasing cycle is compromised.
kickbacks
Analyzing bank transfers at the end of the period being audited and the beginning of the next period helps detect ____________.
kiting
Confirmations are more persuasive than subsequent cash receipts as they help mitigate the risk of _______.
lapping
Auditors may conclude that depreciation charges are too small by noting
large and frequent losses on assets retired.
Income taxes withheld from employees but not yet submitted to the government are considered to be a(n) _______.
liability
The third party user approach revolves around auditor ________.
liability
When testing customer deposits, auditors typically review a(n) ______of the individual deposits.
list
A commitment to competence with respect to plant personnel is important to ensure that the ______ process is both effective and efficient.
manufacturing
Under generally accepted auditing standards, auditors are responsible for detecting
material misstatements of financial statements.
When auditors find unrecorded liabilities, before adjusting they must consider_______.
materiality
Which of the following would not typically be a specific relevant assertion about fixed asset accounts?
net carrying book values in the accounts are reflected at current market values.
Plaintiffs bringing action under common law need not prove that
they have a "reliance letter" from auditors.
The 1933 Act requires ________ to prove a loss and misleading financial statements.
third parties
Inventories are often a large _____ asset of a company's balance sheet.
valuation
Auditors may _______ the beginning balance of plant assets by reference to the prior year audit.
verify