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Audit Exam 2

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A ________ is a document for communicating the description, quantity, and related information for goods ordered by a customer. A) sales order B) customer order C) vendor invoice D) sales invoice

A ________ is a list prepared when cash is received by someone who has no responsibility for recording sales, accounts receivable, or cash, and who has no access to the accounting records. A) prelisting of cash receipts. B) sales invoice. C) packing ticket. D) vendor invoice.

A control that relates to all parts of the IT system is called a(n) A) general control. B) systems control. C) universal control. D) applications control.

A database management system A) allows clients to create databases that include information that can be shared across multiple applications. B) stores data on different files for different purposes, but always knows where they are and how to retrieve them. C) allows quick retrieval of data, but at a cost of inefficient use of file space. D) allows quick retrieval of data, but it needs to update files continually.

A type of positive confirmation in which an individual invoice is confirmed, rather than the customer's entire accounts receivable balance is the ________ confirmation. A) invoice B) specific C) balance D) voucher

A type of positive confirmation known as a blank confirmation A) requests the recipient to fill in the amount of the balance. B) is considered less reliable than the regular positive confirmation. C) generates as high a response rate as the regular positive confirmation form. D) is used when the auditor is confirming several small balances.

An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as A) collusion. B) a material weakness. C) a control deficiency. D) a significant deficiency.

An auditor is performing a credit analysis of customers with balances over 60 days due. She is most likely obtaining evidence for which audit related objective? A) realizable value B) existence C) completeness D) occurrence

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.

Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally A) reduce the extent of tests of details of balances. B) reduce the extent of tests of controls. C) reduce the tests of transactions. D) reduce all of the other tests.

As part of designing and performing procedures to address management override of controls, auditors must perform which of the following procedures? A) Examine journal entries for evidence of possible misstatements due to fraud Review accounting estimates for biases Yes Yes B) Examine journal entries for evidence of possible misstatements due to fraud Review accounting estimates for biases No No C) Examine journal entries for evidence of possible misstatements due to fraud Review accounting estimates for biases Yes No D) Examine journal entries for evidence of possible misstatements due to fraud Review accounting estimates for biases No Yes

As part of the brainstorming sessions, auditors are directed to emphasize A) How management could perpetrate and conceal fraudulent financial reporting The audit team's response to potential fraud risks Yes Yes B) How management could perpetrate and conceal fraudulent financial reporting The audit team's response to potential fraud risks No No C) How management could perpetrate and conceal fraudulent financial reporting The audit team's response to potential fraud risks Yes No D) How management could perpetrate and conceal fraudulent financial reporting The audit team's response to potential fraud risks No Yes

Auditing by testing automated internal controls and account balances electronically, generally because effective general controls exist, is known as A) auditing through the computer. B) auditing around the computer. C) embedded audit module approach. D) parallel simulation testing.

Auditors may identify conditions during fieldwork that change or support a judgment about the initial assessment of fraud risks. Which of the following is not a condition which should alert an auditor that the initial assessment should be changed? A) The subsidiary ledger agrees with the general ledger. B) discrepancies in the accounting records C) unusual relationships between the auditor and management D) missing or conflicting evidence

Before making the final assessment of internal control at the end of an audit, the auditor must A) Test controls Perform substantive tests Yes Yes B) Test controls Perform substantive tests No No C) Test controls Perform substantive tests Yes No D) Test controls Perform substantive tests No Yes

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this fraud and be least likely to be detected by an auditor? A) understating the sales journal by not recording the sale B) overstating the accounts receivable control account by intentionally misstating prices charged for goods sold C) overstating the accounts receivable subsidiary ledger by not recording payments made by customers D) understating the cash receipts journal by purposely recording incorrect amounts

Controls which are designed to assure that the information entered into the computer is authorized, complete, and accurate are called A) input controls. B) processing controls. C) output controls. D) general controls.

Cutoff misstatements can occur for A) Sales Sales returns and allowances Yes Yes B) Sales Sales returns and allowances No No C) Sales Sales returns and allowances Yes No D) Sales Sales returns and allowances No Yes

Cutoff misstatements occur A) either by error or fraud. B) by error only. C) by fraud only. D) randomly without causes related to errors or fraud.

For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be recorded on which of the following documents? A) sales order B) sales invoice C) customer order D) remittance advice

For financial statement audits, auditors need to understand controls that are relevant to the audit in order to A) identify and assess the risks of material misstatements. B) perform preliminary analytical procedures. C) detect fraud. D) assess inherent risk.

For sales, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives for Accounts Receivable? A) existence B) completeness C) rights D) detail tie-in

Fraud is more prevalent in smaller businesses and not-for-profit organizations because it is more difficult for them to maintain A) adequate separation of duties. B) adequate compensation. C) adequate financial reporting standards. D) adequate supervisory boards.

How might the auditor determine whether a client has limited rights to accounts receivable? A) Review minutes from board of directors meetings Inquiries of the client Yes Yes B) Review minutes from board of directors meetings Inquiries of the client No No C) Review minutes from board of directors meetings Inquiries of the client Yes No D) Review minutes from board of directors meetings Inquiries of the client No Yes

If the client's internal control for recording sales returns and allowances is evaluated as ineffective, A) a larger sample may be needed to verify cutoff. B) sampling is not appropriate. C) all sales returns must be traced to supporting documentation. D) all sales returns must be confirmed with the customer.

In performing the audit of internal control over financial reporting, the auditor emphasizes internal control over classes of transactions because A) the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing. B) the class of transaction is where most fraud schemes occur. C) account balances are less important to the auditor then the changes in the account balances. D) classes of transactions tests are the most efficient manner to compensate for inherent risk.

Internal controls are not designed to provide reasonable assurance that A) all frauds will be detected. B) transactions are executed in accordance with management's authorization. C) the company's resources are used efficiently and effectively. D) company personnel comply with applicable rules and regulations.

Management is responsible for A) Identifying and measuring fraud risks Taking steps to mitigate identified risks Yes Yes B) Identifying and measuring fraud risks Taking steps to mitigate identified risks No No C) Identifying and measuring fraud risks Taking steps to mitigate identified risks Yes No D) Identifying and measuring fraud risks Taking steps to mitigate identified risks No Yes

Once auditors determine that entity level controls are designed and placed in the operation, they A) make a preliminary assessment for each transaction-related audit objective for each major type of transaction. B) make a preliminary assessment of control risk. C) obtain an understanding of the design and implementation of internal control. D) prepare audit documentation in order to express their opinion on the company's internal control system.

Output controls need to be designed for which of the following data integrity objectives? A) detecting errors after the processing is completed B) preventing errors before the processing is completed C) detecting errors in the general ledger adjustment process D) preventing errors in separation of duties for IT personnel

Prenumbered documents are intended to help A) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales Yes Yes B) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales No No C) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales Yes No D) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales No Yes

Reasonable assurance allows for A) low likelihood that material misstatements will not be prevented or detected by internal controls. B) no likelihood that material misstatements will not be prevented or detected by internal control. C) moderate likelihood that material misstatements will not be prevented or detected by internal control. D) high likelihood that material misstatements will not be prevented or detected by internal control.

Research indicates that the most effective way to prevent and deter fraud is to A) implement programs and controls that are based on core values embraced by the company. B) hire highly ethical employees. C) communicate expectations to all employees on an annual basis. D) terminate employees who are suspected of committing fraud.

Sarbanes-Oxley requires management to issue an internal control report that includes two specific items. Which of the following is one of these two requirements? A) a statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting B) a statement that management and the board of directors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting C) a statement that management, the board of directors, and the external auditors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting D) a statement that the external auditors are solely responsible for establishing and maintaining an adequate system of internal control

Testing the information on the aged trial balance for detail tie-in is a necessary audit procedure, which would normally include A) Test-footing the total column and the columns depicting the aging Comparing the total of the aged trial balance with the general ledger accounts receivable account Yes Yes B) Test-footing the total column and the columns depicting the aging Comparing the total of the aged trial balance with the general ledger accounts receivable account No No C) Test-footing the total column and the columns depicting the aging Comparing the total of the aged trial balance with the general ledger accounts receivable account Yes No D) Test-footing the total column and the columns depicting the aging Comparing the total of the aged trial balance with the general ledger accounts receivable account No Yes

Tests of controls A) are the procedures used to test the effectiveness of controls in support of a reduced assessed control risk. B) are used to support the ending balances in the balance sheet and income statement accounts. C) are performed at the end of the audit. D) are designed to detect fraud.

The Sarbanes-Oxley Act requires A) all public companies to issue reports on internal controls. B) all public companies to define adequate internal controls. C) the auditor of public companies to design effective internal controls. D) the auditor of public companies to withdraw from an engagement if internal controls are weak.

The accurate recording of sales transactions concerns all of the following except for A) proper credit authorization. B) shipping the amount of goods ordered. C) accurately billing for the amount of goods shipped. D) accurately recording the amount billed in the accounting records.

The audit procedure that provides the auditor with the most appropriate evidence when performing test of details of balances for accounts receivable is A) confirmations. B) recalculation of the aged receivables and uncollectible accounts. C) tracing credit memos for returned merchandise to receiving room reports. D) tracing from shipping documents to journals to the accounts receivable ledger.

The auditor should identify and include only ________ controls since they will be sufficient to achieve the transaction-related audit objectives and will also provide audit efficiency. A) key B) significant C) material D) compensating

The auditor's objective in determining whether the client's computer program correctly processes valid and invalid transactions is accomplished through the A) test data approach. B) generalized audit software approach. C) microcomputer-aided auditing approach. D) generally accepted auditing standards.

The auditor's objectives for the sales and cash collections activities when the client is primarily an e-commerce business as compared to a "brick and mortar" business are A) unchanged. B) expanded. C) mitigated. D) decreased.

The document used to indicate to the customer the amount of a sale and payment due date is the A) sales invoice. B) bill of lading. C) purchase order. D) sales order.

The employee in charge of authorizing credit to the company's customers does not fully understand the concept of credit risk. This lack of knowledge would A) constitute a deficiency in operation of internal controls. B) constitute a deficiency in design of internal controls. C) constitute a deficiency of management. D) not constitute a deficiency.

The most reliable evidence from confirmations is obtained when they are sent A) as close to the balance sheet date as possible. B) at various times throughout the year to different segments of the sample, so that the entire sample is representative of account balances scattered throughout the year. C) several months before the year-end, so the auditor will have adequate time to perform alternate procedures if they are required. D) at various times throughout the year to the same group in the sample, so that the sample will not have a time bias.

The net realizable value of accounts receivable is equal to: A) gross accounts receivable less allowance for uncollectible accounts. B) gross accounts receivable less bad debt expense. C) gross accounts receivable less returns and allowances. D) gross accounts receivable less sales discounts.

The primary emphasis by auditors is on controls over A) classes of transactions. B) account balances. C) both A and B, because they are equally important. D) both A and B, because they vary from client to client.

To determine if significant internal control deficiencies are material weaknesses, they must be evaluated on their A) Likelihood Significance Yes Yes B) Likelihood Significance No No C) Likelihood Significance Yes No D) Likelihood Significance No Yes

To obtain an understanding of an entity's control environment, an auditor should concentrate on the substance of management's policies and procedures rather than their form because A) management may establish appropriate policies and procedures but not act on them. B) the board of directors may not be aware of management's attitude toward the control environment. C) the auditor may believe that the policies and procedures are inappropriate for that particular entity. D) the policies and procedures may be so weak that no reliance is contemplated by the auditor.

Two of the most useful warning signals that can indicate that revenue fraud is occurring are A) analytical procedures and documentary discrepancies. B) analytical procedures and misappropriation of assets. C) documentary discrepancies and vague responses to inquiries. D) missing audit evidence and vague responses to inquiries.

What tools do companies use to limit access to sensitive company data? A) Encryption techniques Digital signatures Firewall Yes Yes Yes B) Encryption techniques Digital signatures Firewall Yes No No C) Encryption techniques Digital signatures Firewall No Yes Yes D) Encryption techniques Digital signatures Firewall Yes Yes No

When a compensating control exists, the absence of a key control A) is no longer a concern because there is no longer a significant deficiency or material weakness. B) is still a major concern to the auditor. C) could cause a material loss, so it must be tested using substantive procedures. D) is magnified and must be removed from the sampling process and examined in its entirety.

When assessing whether the financial statements are auditable, the auditor must consider A) that the integrity of management and the adequacy of accounting records are the two primary factors determining auditability. B) that the integrity of management and the adequacy of risk management are the two primary factors determining auditability. C) that if all of the transaction information is available only in electronic form without a visible audit trail, the company cannot be audited. D) the control risk before determining if the entity is auditable.

When auditing a client who uses a database management system, the auditor is principally aware of elevated risk due to the fact that A) multiple users can access and update data files. B) the accounting information is only in one place. C) the database administrator may lack appropriate accounting knowledge. D) multiple users could all access the data simultaneously causing a system shutdown.

When dealing with the processing and recording of cash receipts, A) the most important concern is the theft of cash. B) theft can only occur before the receipts are entered into the records. C) cash receipts should be deposited at least monthly. D) the monthly statement is used to prepare the cash receipts journal.

When making the sampling decisions for accounts receivable confirmations, A) it is important to sample some items for every material segment of the population. B) if management refuses to allow the auditor to send confirmation requests to certain customers, the auditor must withdraw from the engagement. C) inherent risk does not impact the sample size. D) stratification of the sample is discouraged under current auditing standards.

When positive confirmations are used, auditing standards require alternative procedures for confirmations not returned by the customer. Which of the following would not be considered an alternative procedure? A) Send a second confirmation request. B) Examine subsequent cash receipts to determine if the receivable has been paid. C) Examine shipping documents to verify that the merchandise was shipped. D) Examine sales invoice to verify the actual issuance of a sales invoice and the actual date of the billing.

When sales invoices are automatically calculated and posted by a computer, the auditor may be able to reduce substantive tests of transactions for which, if any, assertion? A) accuracy B) existence C) completeness D) none of the above

When the auditor identifies risk at the assertion level, A) the auditor may need to obtain audit evidence that is more reliable and relevant. B) the auditor may choose to conduct substantive testing during interim periods rather than at the end of the period. C) the auditor may decrease the sample size. D) both a and b

When the auditor is obtaining an understanding of the independent computer service center's internal controls, the auditor should A) use the same criteria used to evaluate the client's internal controls. B) use different criteria because the service center resides outside the company. C) use the same criteria used to evaluate the client's internal controls but omit tests of transactions. D) use different criteria for the service center by including substantive tests of balances.

When using the test data approach, A) test data should include data that the client's system should accept or reject. B) application programs tested by the auditor's test data must be different from those used by the client throughout the year. C) select data may remain in the client system after testing. D) None of the above statements is correct.

Which document or record is used in the write-off of uncollectible accounts classes of transactions? A) general journal B) remittance advice C) sales transaction file D) sales order

Which of the following are elements of the fraud triangle? A) Attitudes/rationalization Risk Factors Opportunities Yes No Yes B) Attitudes/rationalization Risk Factors Opportunities No Yes Yes C) Attitudes/rationalization Risk Factors Opportunities Yes No No D) Attitudes/rationalization Risk Factors Opportunities No Yes No

Which of the following best describes the test data approach? A) Auditors process their own test data using the client's computer system and application program. B) Auditors process their own test data using their own computers that simulate the client's computer system. C) Auditors use auditor-controlled software to do the same operations that the client's software does, using the same data files. D) Auditors use client-controlled software to do the same operations that the client's software does, using auditor created data files.

Which of the following components of the control environment define the existing lines of responsibility and authority? A) organizational structure B) management philosophy and operating style C) human resource policies and practices D) management integrity and ethical values

Which of the following factors may increase risks to an organization? A) Geographic dispersion of company operations Presence of new information technologies Yes Yes B) Geographic dispersion of company operations Presence of new information technologies No No C) Geographic dispersion of company operations Presence of new information technologies Yes No D) Geographic dispersion of company operations Presence of new information technologies No Yes

Which of the following is a category of fraud? A) Fraudulent financial reporting Misappropriation of assets Yes Yes B) Fraudulent financial reporting Misappropriation of assets No No C) Fraudulent financial reporting Misappropriation of assets Yes No D) Fraudulent financial reporting Misappropriation of assets No Yes

Which of the following is a correct statement? A) The auditor uses the control risk assessment and results of tests of controls to determine planned detection risk. B) The auditor links the inherent risk assessments to the balance-related audit objectives. C) The audit risk model is used determine the level of audit risk. D) All of the above are correct statements.

Which of the following is an accurate statement regarding assets and fraud risk? A) Companies will often capitalize repairs as fixed assets. B) Since fixed assets are often large, there is little theft of fixed assets. C) Intangible assets are recorded at cost and valuation issues therefore are not a fraud risk. D) Since companies have few fixed assets, there is no need for them to be periodically inventoried.

Which of the following is an accurate statement regarding the auditor's responsibility for understanding internal control? A) Transaction-related audit objectives typically have no impact on the rights and obligations objectives. B) Transaction-related audit objectives typically have a significant impact on the balance-related audit objective of realizable value. C) Auditors generally emphasize internal control over account balances rather than classes of transactions. D) Auditors and management are both equally concerned about controls that affect the efficiency and effectiveness of company operations.

Which of the following is most correct regarding the requirements under Section 404 of the Sarbanes-Oxley Act? A) The audits of internal control and the financial statements provide reasonable assurance as to misstatements. B) The audit of internal control provides absolute assurance of misstatement. C) The audit of financial statements provides absolute assurance of misstatement. D) The audits of internal control and the financial statements provide absolute assurance as to misstatements.

Which of the following is not a general control? A) Computer performed validation tests of input accuracy. B) Equipment failure causes error messages on monitor. C) There is a separation of duties between programmer and operators. D) There are adequate program run instructions for operating the computer.

Which of the following is not a key control for sales and cash receipts? A) active board of directors B) adequate separation of duties C) internal verification procedures D) adequate documents and records

Which of the following is not an example of an applications control? A) Back-up of data is made to a remote site for data security. B) There is a preprocessing authorization of the sales transactions. C) There are reasonableness tests for the unit selling price of a sale. D) After processing, all sales transactions are reviewed by the sales department.

Which of the following is not one of the elements to prevent, deter, and detect fraud according to the AICPA? A) performing analytical procedures B) culture of honesty and high ethics C) management's responsibility to evaluate risks of fraud D) audit committee oversight

Which of the following is the appropriate point at which the auditor deems authorization to be critical? A) Credit granting Price authorization Shipment of goods Yes Yes Yes B) Credit granting Price authorization Shipment of goods Yes No Yes C) Credit granting Price authorization Shipment of goods No Yes No D) Credit granting Price authorization Shipment of goods Yes No No

Which of the following is the best reason for management to emphasize fraud prevention and deterrence? A) It is often more effective and economical for companies to focus on fraud prevention and deterrence rather than on fraud detection. B) Collusion is impossible to detect. C) The AICPA requires management to implement a fraud prevention program. D) All of the above are equally valid reasons.

Which of the following is the correct definition of "control deficiency"? A) A control deficiency exists if the design or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis. B) A control deficiency exists if one or more deficiencies exist that adversely affect a company's ability to prepare external financial statements reliably. C) A control deficiency exists if the design or operation of controls results in a more than remote likelihood that controls will not prevent or detect misstatements. D) A control deficiency exists if the design or operation of controls results in a more than probable likelihood that controls will prevent or detect misstatements.

Which of the following is true regarding the auditor's opinion on the effectiveness of internal control? A) The auditor is attesting to the effectiveness of internal controls as of the end of the fiscal year. B) If the client remedies a material weakness before the end of the fiscal year, the auditor must still issue a qualified opinion or a disclaimer of opinion. C) A scope limitation requires the auditor to issues an adverse opinion. D) Section 404 requires that the auditor design the audit to detect all deficiencies in internal control.

Which of the following is true statement regarding professional skepticism? A) Auditors reject most potential clients perceived as lacking honesty and integrity. B) If the auditor has past experience with a client, they can assume the client is honest. C) Material frauds occur in most of the audits of financial statements. D) Professional skepticism is required only during the planning phase.

Which of the following parties provides an assessment of the effectiveness of internal control over financial reporting for public companies? A) Management Financial statement auditors Yes Yes B) Management Financial statement auditors No No C) Management Financial statement auditors Yes No D) Management Financial statement auditors No Yes

Which of the following would the auditor be most concerned about regarding a heightened risk of intentional misstatement? A) Senior management emphasizes that it is very important to beat analyst estimates of earnings every reporting period. B) Senior management emphasizes that budgeted amounts for expenses are to be achieved for each reporting period or explained in the variance analysis report. C) Senior management emphasizes that job rotation is a worthwhile corporate objective. D) Senior management emphasizes that job evaluations are based on performance.

Which one of the following statements is true? In deciding on substantive tests of transactions A) some procedures are commonly employed on every audit regardless of the circumstances. B) all procedures are dependent on the adequacy of the controls and the results of the tests of controls. C) results obtained in the prior year's audit will not affect the procedures used this year. D) the materiality of the item will not influence the choice of procedures used.

Which one the following procedures performed for the billing function provides evidence for the completeness assertion? A) making sure that all shipments have been billed B) making sure that no shipment has been billed more than twice C) making sure that each shipment is billed at the correct amount D) making sure that each shipment is billed to the proper customer

Who is responsible for establishing a private company's internal control? A) senior management B) internal auditors C) FASB D) audit committee

Who is responsible for setting the "tone at the top"? A) management B) PCAOB C) audit committee D) SEC

________ tests are for omitted transactions, while ________ tests are for nonexistent transactions. A) Tracing; vouching B) Vouching; tracing C) Verifying; tracking D) Tracking; verifying

A document sent to each customer showing his or her beginning accounts receivable balance and the amount and date of each sale, cash payment received, any debit or credit memo issued, and the ending balance is the A) accounts receivable subsidiary ledger. B) monthly statement. C) remittance advice. D) sales invoice.

A listing of the balances in the accounts receivable master file at the balance sheet date, including individual customer balances outstanding and a breakdown of each balance by the time passed between the date of the sale and the balance sheet date, is the A) customer list. B) aged trial balance. C) accounts receivable ledger. D) schedule of accounts receivable.

A(n) ________ total represents the summary total of codes from all records in a batch that do not represent a meaningful total. A) record B) hash C) output D) financial

According to the Association of Certified Fraud Examiners, the average company loses ________ percent of its revenues to fraud. A) one B) five C) ten D) fifteen

An audit procedure that compares the name, amount, and dates shown on remittance advices with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting A) kiting. B) lapping. C) unauthorized write-offs of customers as uncollectible accounts. D) sales without proper credit authorization.

An effective procedure to test for unfilled shipments is to trace from the A) sales journal to the shipping documents. B) shipping documents to the sales journal. C) sales journal to the accounts receivable ledger. D) sales journal to the general ledger sales account.

Analytical procedures A) are only done during the planning of the audit and when performing detailed tests. B) performed during the detailed testing phase are done before tests of details of balances. C) performed during the detailed testing phase are done before the balance sheet date. D) are performed only on accounts receivable, not on the entire sales and collection cycle.

Authorizations can be either general or specific. Which of the following is not an example of a general authorization? A) automatic reorder points for raw materials inventory B) a sales manager's authorization for a sales return C) credit limits for various classes of customers D) a sales price list for merchandise

Companies may intentionally understate earnings when income is high to create ________ that may be used in future years to increase earnings. A) income smoothing B) cookie jar reserves C) cash D) sales

For cash receipts, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives for Accounts Receivable? A) existence B) completeness C) rights D) detail tie-in

If a control total were to be computed on each of the following data items, which would best be identified as a hash total for a payroll IT application? A) gross wages earned B) employee numbers C) total hours worked D) total debit amounts and total credit amounts

If the results of tests of controls support the design and operations of controls as expected, the auditor uses ________ control risk as the preliminary assessment. A) a lower B) the same C) a higher D) either a lower or higher

In many audits of sales transactions substantive tests of transactions can be reduced in determining the completeness objective because A) understatements of assets and income are a greater concern than overstatements. B) overstatements of assets and income are a greater concern than understatements. C) it doesn't matter if income is understated because the savings on income tax offsets the reduced revenue and net income is correct. D) the unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two financial statements will not be misleading.

Internal controls A) are implemented by and are the responsibility of the auditors. B) consist of policies and procedures designed to provide reasonable assurance that the company achieves its objectives and goals. C) guarantee that the company complies with all laws and regulations. D) only apply to SEC companies.

It is important for the CPA to consider the competence of the clients' personnel because their competence has a direct impact upon the A) cost/benefit relationship of the system of internal control. B) achievement of the objectives of internal control. C) comparison of recorded accountability with assets. D) timing of the tests to be performed.

Misappropriation of assets is normally perpetrated by A) members of the board of directors. B) employees at lower levels of the organization. C) management of the company. D) the internal auditors.

Most cases of fraudulent reporting involve A) inadequate disclosures. B) an overstatement of income. C) an overstatement of liabilities. D) an overstatement of expenses.

Most tests of accounts receivable are based on what schedule, file, or listing? A) sales master file B) aged accounts receivable trial balance C) accounts receivable master file D) accounts receivable general ledger account

Narratives, flowcharts, and internal control questionnaires are three common methods of A) testing the internal controls. B) documenting the auditor's understanding of internal controls. C) designing the audit manual and procedures. D) documenting the auditor's understanding of a client's organizational structure.

One type of shipping document is the ________, which is a written contract between the carrier and the seller of the receipt and shipment of goods. A) sales order B) bill of lading C) sales invoice D) customer order

Prenumbered documents will only be useful for control purposes if A) a different numerical sequence is used for each company. B) the sequence is accounted for periodically. C) employees are allowed to use documents out of numerical sequence. D) the same numerical sequence is used each accounting period.

Proper segregation of functional responsibilities calls for separation of A) authorization, execution, and payment. B) authorization, recording, and custody. C) custody, execution, and reporting. D) authorization, payment, and recording.

Rather than maintain an internal IT center, many companies outsource their basic IT functions such as payroll to an A) external general service provider. B) independent computer service center. C) internal control service provider. D) internal auditor.

Smith Manufacturing Company's accounts receivable clerk has a friend who is also a customer of Smith Manufacturing. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to A) prenumber and account for all credit memorandums. B) require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved. C) have independent sales and accounts receivable departments. D) mail monthly statements to customers.

The auditor designs and performs a combination of tests of controls and substantive procedures to obtain reasonable assurance that the financial statements are fairly stated when control risk A) is assessed above the maximum. B) is assessed below the maximum. C) cannot be assessed. D) none of the above

The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the A) existence objective. B) completeness objective. C) ownership objective. D) valuation objective.

The auditor's primary concern in performing audit procedures of the write-off of uncollectible accounts relates to the risk that the client writes off customer accounts that have already been collected. The primary control for preventing this fraud is A) examining authorized credit memos. B) examining the uncollectible account authorization form. C) examining debit memos. D) examining the vouchers payable register.

The auditors primary purpose in auditing the client's system of internal control over financial reporting is A) to prevent fraudulent financial statements from being issued to the public. B) to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements. C) to report to management that the internal controls are effective in preventing misstatements from appearing on the financial statements. D) to efficiently conduct the Audit of Financial Statements.

The document that accompanies the customer's payment is the A) credit memo. B) remittance advice. C) vendor invoice. D) monthly statement.

The most important aspect of evaluating the client's method of obtaining a reliable cutoff is to A) perform extensive detailed testing of cutoff. B) evaluate the client's control procedures around cutoff. C) confirm a sample of transactions near period end with customers. D) confirm transaction with customers.

The most important output control is A) distribution control, which assures that only authorized personnel receive the reports generated by the system. B) review of data for reasonableness by someone who knows what the output should look like. C) control totals, which are used to verify that the computer's results are correct. D) logic tests, which verify that no mistakes were made in processing.

The two primary classes of transactions in the sales and collection cycle are A) sales and sales discounts. B) sales and cash receipts. C) sales and sales returns. D) sales and accounts receivable.

To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with A) the original invoices. B) an approved master price list. C) the amounts recorded in the sales journal for that transaction. D) the amounts posted to the customer's account in the accounts receivable master file.

To test for recorded sales for which there were no actual shipments, the auditor vouches from the A) bill of lading to the sales journal. B) sales journal to the shipping documents. C) sales journal to the accounts receivable subsidiary ledger. D) bill of lading to the supporting customer order and sales order.

What critical event must take place before goods can be shipped in order to assure payment can be reasonably expected? A) determination of correct delivery address B) credit approval C) matching of shipping document with sales invoice D) receipt of sales order from the customer

When a client uses a service center for processing transactions, A) the auditor can assume that the controls are adequate because it is an independent enterprise. B) auditing standards require the auditor to test the service center's controls if the service center application involves processing significant financial data. C) and the user auditor decides to rely on the service auditor's report, the user audit must make reference to the report of the service auditor in the opinion on the user organization's financial statements. D) none of the above

When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger purposefully enters cash received into the wrong customer's account that employee may be suspected of A) kiting. B) lapping. C) floating. D) shorting.

When assessing fraud risk, A) fraud risk is assessed only at the overall financial statement level. B) the auditor's assessment of fraud risk should be ongoing throughout the audit. C) if the auditor concludes that there is a risk of material misstatement due to fraud, auditing standards require that the risks be treated as pervasive. D) auditing standards require that the auditor presume there is a risk of fraud in the inventory account.

When assessing risk control, the auditor must do all of the following except A) assess control risk for each objective by evaluating the controls and deficiencies for each objective. B) perform the detailed test of balances. C) identify the key internal controls and deficiencies. D) associate the key controls and deficiencies with the objectives.

When assessing the risk for fraud, the auditor must be cognizant of the fact that A) the existence of fraud risk factors means fraud exists. B) analytical procedures must be performed on revenue accounts. C) horizontal analysis is not useful in helping to determine unusual financial statement relationships. D) the auditor cannot make inquiries about fraud to company personnel who have no financial statement responsibilities.

When considering internal controls, A) auditors can ignore controls affecting internal management information. B) auditors are concerned with the client's internal controls over the safeguarding of assets if they affect the financial statements. C) management is responsible for understanding and testing internal control over financial reporting. D) companies must use the COSO framework to establish internal controls.

When dealing with the documentation of internal control, A) in a narrative, most questions simply require a "yes" or "no" response. B) questionnaires offer useful checklists to remind the auditor of the many different types of internal controls that should exist. C) questionnaires and flowcharts should not be used together. D) flowcharts fail to show the segregation of duties in the company.

When designing tests of controls and substantive tests of transactions for cash receipts, it is important to remember that A) the test of controls are designed to test for monetary misstatements. B) auditors use the same methodology for designing tests of controls and substantive tests of transactions for cash receipts as they use for sales. C) the tests of controls are not dependent on the controls the auditor identifies. D) the tests of controls is not dependent on whether the company being audited is publicly traded.

When designing tests of details of balances, an important point to remember is A) auditors emphasize income statement accounts. B) the audit procedures selected depends heavily on whether planned evidence for a given objective is low, medium, or high. C) if accounts receivable are overstated, then sales will be understated. D) sales cutoff is the most important test of details of accounts receivable.

When do most companies record sales returns and allowances? A) during the month in which the sale occurs B) during the accounting period in which the return occurs C) whenever the customer contacts the company regarding the credit D) during the month after the sale occurs

When making a preliminary assessment of control risk, the starting point for most auditors is A) IT assessment controls. B) assessment of entity level controls. C) transaction-related controls. D) fraud controls.

When using the test data approach, A) auditors process test data supplied by the client. B) auditors often obtain assistance from a computer audit specialist. C) the tests must be performed at the end of the year. D) the test data must remain in the client's records.

Which audit procedure would be used to test for the existence balance-related audit objective? A) Trace ten accounts from the aged trial balance to the accounts receivable master file. B) Confirm accounts receivable. C) Review large sales returns and allowances before and after the balance sheet date. D) Trace ten accounts from the trial balance to the accounts on the master file.

Which of the following activities would be least likely to strengthen a company's internal control? A) separating accounting from other financial operations B) maintaining insurance for fire and theft C) fixing responsibility for the performance of employee duties D) carefully selecting and training employees

Which of the following audit procedures would normally be included in the audit plan when auditing the allowance for doubtful accounts? A) Send positive confirmations. B) Inquire of the client's credit manager. C) Send negative confirmations. D) Examine sales invoices.

Which of the following best defines fraud in a financial statement auditing context? A) Fraud is an unintentional misstatement of the financial statements. B) Fraud is an intentional misstatement of the financial statements. C) Fraud is either an intentional or unintentional misstatement of the financial statements, depending on materiality. D) Fraud is either an intentional or unintentional misstatement of the financial statements, depending on consistency.

Which of the following best explains the relationship between general controls and application controls? A) Application controls are effective even if general controls are extremely weak. B) Application controls are likely to be effective only when general controls are effective. C) General controls have no impact on application controls. D) None of the above

Which of the following deals with ongoing or periodic assessment of the quality of internal control by management? A) verifying activities B) monitoring activities C) oversight activities D) management activities

Which of the following is a correct statement regarding analytical procedures? A) If an auditor identifies a possible misstatement in sales using analytical procedures, accounts payable will be the likely offsetting misstatement. B) Auditors should also compare the results of their analytical procedures to budgets and industry trends. C) If sales are overstated, the income statement will be incorrect, but the balance sheet will be correct. D) If an analytical procedure uncovers an unusual fluctuation, the auditor must assume fraud is involved.

Which of the following is a correct statement regarding the misappropriation of receipts involving revenue? A) One of the easiest frauds to detect is when a sale is not recorded and the cash from the sale is stolen. B) If a customer's payment is stolen, regular billing of unpaid accounts can uncover the fraud unless the fraud perpetrator does something to hide the theft. C) Misappropriation of cash receipts is generally as material as fraudulent reporting of revenues. D) Analytical procedures can detect relatively small thefts of sales and related cash receipts.

Which of the following is a correct statement regarding the shipment of goods? A) The shipping document must be in paper form. B) The shipping document is used to update the perpetual inventory records. C) Only one copy of the shipping document is needed. D) All of the above are correct statements.

Which of the following is a factor that relates to incentives or pressures to commit fraudulent financial reporting? A) significant accounting estimates involving subjective judgments B) excessive pressure for management to meet debt repayment requirements C) management's practice of making overly aggressive forecasts D) high turnover of accounting, internal audit, and information technology staff

Which of the following is a factor that relates to incentives/pressures to misappropriate assets? A) weak internal controls B) significant personal financial obligations C) management's practice of making overly aggressive forecasts D) anger and fear

Which of the following is an accurate statement regarding the misappropriation of assets? A) In most cases, the amounts involved are material to the financial statements. B) Misappropriation of assets can easily increase in size over time and can lead to significant reputational harm. C) Management should not be concerned about minor misappropriations. D) Asset misappropriation schemes are less common than fraudulent financial statement schemes.

Which of the following is an accurate statement relating to the extent of procedures? A) If an auditor wants a lower assessed control risk than the preliminary assessed control risk, the number of controls tested increases while the extent of the tests for each control decrease. B) The extent of testing depends on the frequency of the operation of the controls. C) All controls must be tested only at year-end. D) The frequency of testing is the same for both manual and computer controls.

Which of the following is likely to be determined first when performing tests of details for accounts receivable? A) Recorded accounts receivable exist. B) Accounts receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger. C) The client has a right to the accounts receivable. D) Existing accounts receivable are included.

Which of the following is most correct for audits of non-public companies? A) An audit of internal control is required. B) An audit of internal control is not required. C) An audit of the design of internal controls is required. D) An audit of the operational effectiveness of internal controls is required.

Which of the following is not an underlying principle related to risk assessment? A) The organization should have clear objectives in order to be able to identify and assess the risks relating to the objectives. B) The auditors should determine how the company's risks should be managed. C) The organization should consider the potential for fraudulent behavior. D) The organization should monitor changes that could impact internal controls.

Which of the following is not seen as an advantage to using generalized audit software (GAS)? A) Auditors can learn the software in a short period of time. B) It can be applied to a variety of clients after detailed customization. C) It can be applied to a variety of clients with minimal adjustments to the software. D) It greatly accelerates audit testing over manual procedures.

Which of the following most likely would be detected by a review of a client's sales cutoff? A) excessive sales discounts B) unrecorded sales for the year C) unauthorized goods returned for credit D) lapping of year-end accounts receivable

Which of the following statements is most correct with respect to separation of duties? A) A person who has temporary or permanent custody of an asset should account for that asset. B) Employees who authorize transactions should not have custody of related assets. C) Employees who open cash receipts should record the amounts in the subsidiary ledgers. D) Employees who authorize transactions should have recording responsibility for these transactions.

Which of the following test of controls is useful to test the completeness objective for cash receipts? A) Compare shipping documents with sales records. B) Observe endorsement of incoming checks. C) Examine evidence that the receivable master file is reconciled to the general ledger. D) Observe if the client reconciles the bank account.

Which party has the primary responsibility to oversee an organization's financial reporting and internal control process? A) the board of directors B) the audit committee C) management of the company D) the financial statement auditors

With which of management's assertions with respect to implementing internal controls is the auditor primarily concerned? A) efficiency of operations B) reliability of financial reporting C) effectiveness of operations D) compliance with applicable laws and regulations

You are performing the audit of internal control for Clifton Company. Which of the following would represent a material weakness in internal control? A) The company's audit committee has experienced unusual turnover of members. B) The company's CFO was indicted for embezzling from the company. C) Bank reconciliations are done monthly. D) The CEO retired after twenty years of service to the company.

A ________ exists if one or more control deficiencies exist that are less severe than a material weakness, but are important enough to merit attention by those responsible for oversight of the company's financial reporting. A) potential misstatement B) significant weakness C) significant deficiency D) fraud symptom

A ________ indicates a reduction in the amount due from a customer because of returned goods or an allowance. A) bill of lading B) sales invoice C) credit memo D) monthly statement

A ________ is a document that indicates a request for merchandise by a customer. A) sales invoice B) vendor invoice C) customer order D) sales order

A ________ is responsible for controlling the use of computer programs, transaction files and other computer records and documentation and releases them to the operators only when authorized. A) software engineer B) chief computer operator C) librarian D) data control operator

A company is concerned with the theft of cash after the sale has been recorded. One way in which fraudsters conceal the theft is by a process called "lapping." Which of the following best describes lapping? A) reduce the customer's account by recording a sales return B) write off the customer's account C) apply the payment from another customer to the customer's account D) reduce the customer's account by recording a sales allowance

A(n) ________ is a computer resource deployment and procurement model that enables an organization to obtain IT resources and applications from any location via an Internet connection. A) application service provider B) firewall C) cloud computing environment D) local area network

According to a KPMG survey, most fraud perpetrators A) are over the age of 65. B) work on the assembly line. C) have worked for the company for over ten years. D) are female.

Although the financial statements of all companies are potentially subject to manipulation, the risk is greater for companies that A) are heavily regulated. B) have low amounts of debt. C) have to make significant judgments for accounting estimates. D) operate in stable economic environments.

An auditor should consider two key issues when obtaining an understanding of a client's internal controls. These issues are A) the effectiveness and efficiency of the controls. B) the frequency and effectiveness of the controls. C) the design and operating effectiveness of the controls. D) the implementation and operating effectiveness of the controls.

An auditor traces the sales prices to the authorized price list in effect at the date of the transaction. Which of the following procedures has the auditor performed? A) inquiry B) observation C) reperformance D) examination

An example of a physical control is A) a hash total. B) a parallel test. C) the matching of employee fingerprints to a database before access to the system is allowed. D) the use of backup generators to prevent data loss during power outages.

An internal control deficiency occurs when computer personnel A) participate in computer software acquisition decisions. B) design flowcharts and narratives for computerized systems. C) originate changes in customer master files. D) provide physical security over program files.

Audit procedures designed to uncover credit sales made after the client's fiscal year-end that relate to the current year being audited provide evidence for which of the following audit objectives? A) realizable value B) accuracy C) cutoff D) existence

Auditing standards require that auditors document A) specific risks of fraud identified at the financial statement level, but not at the assertion level. B) all conversations with management. C) results of the procedures performed to address the risk of management override of controls. D) all of the above.

Auditing standards specifically require auditors to identify ________ as a fraud risk in most audits. A) overstated assets B) understated liabilities C) revenue recognition D) overstated expenses

Auditors often identify less significant internal control-related issues, as well as opportunities for the client to make operational improvements in the A) adverse opinion. B) Section 404 report. C) management letter. D) Type 1 report.

Because of its central role in auditing of accounts receivable, which of the following would normally be one of the first items tested? A) accounts receivable master file B) customer file C) aged trial balance D) sales register

Before goods are shipped on account, a properly authorized person must A) prepare the sales invoice. B) approve the journal entry. C) approve the customer's credit. D) verify that the unit price is accurate.

Company management is often under pressure to increase revenue and/or net income. One approach is to use a "bill and hold" arrangement. This is an example of which of the following? A) significant accounting estimates B) fictitious revenue recorded C) premature revenue recognized D) alteration of cutoff documents

Confirmation of accounts receivable selected from the trial balance is the most common test of details of balances for the audit objective of ________ . A) presentation B) valuation C) accuracy. D) detail tie-in

Controls which are built in by the manufacturer to detect equipment failure are called A) input controls. B) data integrity controls. C) hardware controls. D) manufacturer's controls.

Cutoff misstatements occur when A) The auditor fails to obtain the end-of-year bank statement directly from the bank, obtaining instead the statement which includes the two succeeding weeks Subsequent period transactions are recorded in the current period Current period transactions are recorded in the subsequent period Yes Yes No B) The auditor fails to obtain the end-of-year bank statement directly from the bank, obtaining instead the statement which includes the two succeeding weeks Subsequent period transactions are recorded in the current period Current period transactions are recorded in the subsequent period Yes No Yes C) The auditor fails to obtain the end-of-year bank statement directly from the bank, obtaining instead the statement which includes the two succeeding weeks Subsequent period transactions are recorded in the current period Current period transactions are recorded in the subsequent period No Yes Yes D) The auditor fails to obtain the end-of-year bank statement directly from the bank, obtaining instead the statement which includes the two succeeding weeks Subsequent period transactions are recorded in the current period Current period transactions are recorded in the subsequent period No Yes No

Fictitious revenues A) increase accounts receivable turnover. B) understate the gross margin percentage. C) lower accounts receivable turnover. D) have no impact on the gross margin percentage.

For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve A) employee overtime wages. B) credit authorization to customers. C) write-offs of customer accounts. D) cash disbursements.

For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the improper cutoff of cash A) is detected and correct when cash is separately audited. B) is unlikely to have a material impact on the balance sheet or the income statement. C) affects items on the balance sheet but does not affect net income. D) rarely occurs given the control consciousness of most entities.

Fraud awareness training should be A) broad and all-encompassing. B) extensive and include details for all functional areas. C) specifically related to the employee's job responsibility. D) focused on employees understanding the importance of ethics.

Fraudulent financial reporting A) always involves inadequate disclosures. B) can be intentional or unintentional. C) can involve understating net income in order to reduce income taxes. D) all of the above

General controls include all of the following except A) systems development. B) online security. C) processing controls. D) hardware controls.

How must significant deficiencies and material weaknesses be communicated to those charged with governance? A) Either oral or written communication is acceptable. B) Oral communication is required. C) Written communication is required. D) Written communication is required for material weaknesses, but oral communication is allowed for significant deficiencies.

If a company has an effective internal audit department, A) the internal auditors can express an opinion on the fairness of the financial statements. B) their work cannot be used by the external auditors per PCAOB Standard 5. C) it can reduce external audit costs by providing direct assistance to the external auditors. D) the internal auditors must be CPAs in order for the external auditors to rely on their work.

If the auditor decides not to confirm accounts receivable that are material, the auditor should A) always use alternative procedures to audit the accounts receivable. B) include copies of customer statements in the audit files. C) document the reasons for such a decision in the audit files. D) include copies of customer sales invoices in the audit files.

In an IT system, automated equipment controls or hardware controls are designed to A) correct errors in the computer programs. B) monitor and detect errors in source documents. C) detect and control errors arising from the use of equipment. D) arrange data in a logical sequential manner for processing purposes.

In many audits, no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern. A) accuracy B) existence C) completeness D) none of the above

In the audit of a private company, the auditor will test internal controls when control risk is initially assessed at A) Low Moderate High Yes No Yes B) Low Moderate High No No Yes C) Low Moderate High Yes Yes No D) Low Moderate High No Yes No

In the fraud triangle, fraudulent financial reporting and misappropriation of assets A) share little in common. B) share most of the same risk factors. C) share the same three conditions of the fraud triangle. D) share most of the same conditions. of the fraud triangle.

Most companies recognize sales revenue when A) sales are invoiced. B) payment is received from the customer. C) goods are shipped. D) the customer's order is received.

Relating to opportunities, why do most people commit fraud? A) They need to fund an extravagant lifestyle. B) They feel a sense of superiority. C) There are weak internal controls. D) They need to meet pre-specified business targets.

Some companies have customers send payments directly to an address maintained by a bank. This is called a(n) ________ system. A) direct deposit B) funds transfer C) lockbox D) interbank transfer

The PCAOB places responsibility for the reliability of internal controls over the financial reporting process on A) the company's board of directors. B) the audit committee of the board of directors. C) management. D) the CFO and the independent auditors.

The appropriate and sufficient evidence to be obtained from tests of details must be decided on an A) efficiency basis. B) effectiveness basis. C) objective-by-objective basis. D) none of the above

The auditor will issue an unqualified opinion on internal control over financial reporting when A) there are no identified material weaknesses as of the end of the fiscal year. B) there have been no restrictions on the scope of the auditor's work. C) both a and b D) either a or b

The internal control framework used by most U.S. companies is the ________ framework. A) FASB B) PCAOB C) COSO D) SEC

The most difficult type of cash embezzlement for auditors to detect is when it occurs A) after the merchandise has been shipped. B) before the merchandise has been shipped. C) before the cash is recorded in the cash receipts journal or other cash listing. D) after the cash is recorded in the cash receipts journal or other cash listing.

The most effective audit evidence gathered for accounts receivable is the A) detail tie-in of the records. B) analysis of the allowance for doubtful accounts. C) confirmation of accounts receivable. D) examination of sales invoices.

The most significant effect of the results of the tests of controls and substantive tests of transactions in the sales and collection cycle is on A) bad debt expense. B) the analytical tests to be performed. C) the confirmation of accounts receivable. D) the impact of processing cash receipts.

The understatement of sales and accounts receivable is best uncovered by A) testing internal controls. B) testing the aged accounts receivable trial balance. C) substantive tests of transactions for shipments made but not recorded. D) substantive tests of transactions for bad debts.

Two key concepts that underlie management's design and implementation of internal control are A) costs and materiality. B) absolute assurance and costs. C) inherent limitations and reasonable assurance. D) collusion and materiality.

What type of report is issued when one or more material internal control weaknesses exist? A) unqualified opinion B) disclaimer of opinion C) adverse opinion D) qualified opinion

When analyzing accounts for fraud risk, A) companies will generally attempt to overstate accounts payable and net income. B) the inventory account is generally not susceptible to fraud since the auditor must verify the existence of the inventory. C) payroll is rarely a significant risk for fraudulent financial reporting. D) fixed assets are rarely stolen because of their large size.

When assessing control risk, A) many auditors use actuarial tables to assist in the control risk assessment process. B) each control can be used to satisfy only one audit objective. C) many auditors use a control risk matrix to assist in the control risk assessment process. D) all controls, including key controls, should be considered.

When dealing with fraudulent financial reporting risk for accounts payable, A) companies will generally tend to overstate accounts payable. B) it is difficult for the auditor to verify if all liabilities have been recorded if prenumbered receiving reports are used. C) companies have used fictitious reductions to accounts payable to overstate net income. D) accounts payable is rarely a significant risk area for fraudulent financial reporting.

When designing audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion? A) valuation B) cutoff C) completeness D) classification

When management is evaluating the design of internal control, management evaluates whether the control can do which of the following? A) Detect material misstatements Correct material misstatements Yes Yes B) Detect material misstatements Correct material misstatements No No C) Detect material misstatements Correct material misstatements Yes No D) Detect material misstatements Correct material misstatements No Yes

When one material weakness is present at the end of the year, management of a public company must conclude that internal control over financial reporting is A) insufficient. B) inadequate. C) ineffective. D) inefficient.

When posting items sold on account from the sales journal A) Details of the journal are posted to the sales account Journal totals are posted to the general ledger B) Details of the journal are posted to the sales account Journal totals are posted to the accounts receivable subsidiary ledger C) Details of the journal are posted to the accounts receivable master file Journal totals are posted to the general ledger D) Details of the journal are posted to the accounts receivable account in the general ledger Journal totals are posted to the sales account in the general ledger

When purchasing software or developing in-house software, A) cost should be the only factor. B) extensive testing of the software is generally not required. C) a team of both IT and non-IT personnel should be involved in the decision process. D) the librarian and the IT manager should be the only ones involved in the decision process.

When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be A) tracing. B) vouching. C) performing a walkthrough. D) testing controls.

Which deficiency exists if a necessary control is missing or not properly implemented? A) control B) significant C) design D) operating

Which of the following audit procedures would not likely detect a client's decision to pledge or factor accounts receivable? A) a review of the minutes of the board of directors' meetings B) discussions with the client C) confirmation of receivables D) examination of correspondence files

Which of the following best describes the purpose of control activities? A) the actions, policies and procedures that reflect the overall attitudes of management B) the identification and analysis of risks relevant to the preparation of financial statements C) the policies and procedures that help ensure that necessary actions are taken to address risks to the achievement of the entity's objectives D) activities that deal with the ongoing assessment of the quality of internal control by management

Which of the following computer-assisted auditing techniques inserts an audit module in the client's application system to identify specific types of transactions? A) parallel simulation testing B) test data approach C) embedded audit module D) generalized audit software testing

Which of the following controls prevent and detect errors while transaction data are processed? A) software B) application C) processing D) transaction

Which of the following describes the process of implementing a new system in one part of the organization, while other locations continue to use the current system? A) parallel testing B) online testing C) pilot testing D) control testing

Which of the following is a business function related to sales returns and allowances? A) processing customer orders B) writing off uncollectible accounts C) processing and recording credit memos D) granting credit

Which of the following is a component of general controls? A) processing controls B) output controls C) back-up and contingency planning D) input controls

Which of the following is a factor that relates to attitudes or rationalization to misappropriate assets? A) significant accounting estimates involving subjective judgments B) excessive pressure for management to meet debt repayment requirements C) a sense of superiority by executives D) high turnover of accounting, internal audit and information technology staff

Which of the following is a form of earnings management in which revenues and expenses are shifted between periods to reduce fluctuations in earnings? A) fraudulent financial reporting B) expense smoothing C) income smoothing D) Each of the above is correct.

Which of the following is a risk assessment principle? A) accountability B) use relevant, quality information to support the functioning of internal controls C) consider the potential for fraud D) develop general controls over technology

Which of the following is a risk factor related to opportunities and financial statement fraud? A) ineffective communication of company values B) promotions inconsistent with expectations C) significant related-party transactions D) adverse relationships between management and employees

Which of the following is not a business function within the "Sales" class of transactions? A) processing customer orders B) granting credit C) processing and recording sales returns and allowances D) shipping goods

Which of the following is not a factor that relates to opportunities to commit fraudulent financial reporting? A) lack of controls related to the calculation and approval of accounting estimates B) ineffective oversight of financial reporting by the board of directors C) management's set of ethical values D) high turnover of accounting, internal audit, and information technology staff

Which of the following is not a general control? A) separation of IT duties B) systems development C) processing controls D) hardware controls

Which of the following is not one of the subcomponents of the control environment? A) management's philosophy and operating style B) organizational structure C) adequate separation of duties D) commitment to competence

Which of the following is the principle "weakness" of using negative confirmations for the tests of details of balances for accounts receivable? A) They can only be used for large balance accounts. B) They cannot not be used when account balances "bunch" around a mean value. C) Conclusions drawn from receiving no reply may not be correct. D) Response rates are generally too low to draw any conclusions.

Which of the following may represent the biggest challenge smaller public companies and nonpublic companies face in implementing effective internal control? A) a lack of competent, trustworthy personnel B) no clear lines of authority C) no adequate separation of duties D) a lack of adequate documents and records

Which of the following parties is responsible for implementing internal controls to minimize the likelihood of fraud? A) external auditors B) audit committee members C) management D) Committee of Sponsoring Organizations

Which of the following questions is the auditor not required to ask company management when assessing fraud risk? A) Does management have knowledge of any fraud or suspected fraud within the company? B) What is the nature of the fraud risks identified by management? C) Is management using all assets effectively? D) What internal controls have been implemented to address the fraud risks?

Which of the following represents a correct statement regarding internal control testing? A) When auditors plan to use evidence about the operating effectiveness of internal control contained in prior audits, auditing standards require tests of the controls' effectiveness at least every other year. B) The greater the risk, the less audit evidence the auditor should obtain that controls are operating effectively. C) The auditor uses control risk assessment and results of tests of controls to determine planned detection risk and the related substantive tests for the financial statement audit. D) Testing of internal controls can only be performed by the auditor at the end of the fiscal year.

Which of the following tests determines that every field in a record has been completed? A) validation B) sequence C) completeness D) programming

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mail room? 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 cards. D) The cashier endorses the checks.

Which type of evidence is not used by the auditor to obtain an understanding of the design and implementation of internal control? A) inquiry B) observation C) confirmation D) inspection

Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts? A) company personnel B) temporary employees in the town where the lockbox is located C) bank employees D) company controller

Without an effective ________, the other components of the COSO framework are unlikely to result in effective internal control, regardless of their quality. A) risk assessment policy B) monitoring policy C) control environment D) system of control activities

________ is fraud that involves theft of an entity's assets. A) Fraudulent financial reporting B) A "cookie jar" reserve C) Misappropriation of assets D) Income smoothing

________ is the information technology and internal control processes an organization has in place to protect computers, networks, programs, and data from unauthorized access. A) Encryption B) A firewall C) Cybersecurity D) A processing control

________ protect(s) the security of electronic communication when information is transmitted and when it is stored. A) Firewalls B) Digital signatures C) Encryption D) A database

A customer mails and records a check to a client for payment of an unpaid account on December 30. The client receives and records the amount on January 2. The records of the two organizations will be different on December 31. This represents A) A cutoff misstatement A timing difference Yes Yes B) A cutoff misstatement A timing difference No No C) A cutoff misstatement A timing difference Yes No D) A cutoff misstatement A timing difference No Yes

A five-step approach can be used to identify deficiencies, significant deficiencies, and material weaknesses. The first step in this approach is A) identify the absence of key controls. B) consider the possibility of compensating controls. C) determine potential misstatements that could result. D) identify existing controls.

A positive confirmation is more reliable evidence than a negative confirmation because A) fewer confirmations can be sent out. B) the auditor has a document which can be used in court. C) the debtor's lack of response indicates agreement with the stated balance. D) follow-up procedures are performed if a response is not received from the debtor.

A(n) ________ control is a control elsewhere in the system that offsets the absence of a key control. A) significant B) alternate C) design D) compensating

An auditor is likely to use four types of procedures to support the operating effectiveness of internal controls. Which of the following would generally not be used? A) make inquiries of appropriate client personnel B) examine documents, records, and reports C) reperform client procedures D) inspect design documents

An auditor needs to determine whether all customers of an electric utility company are being billed. The auditor should test from the A) sales register to the accounts receivable ledger. B) sales register to the meter department records. C) accounts receivable ledger to the sales register. D) meter department records to the sales register.

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is to satisfy the audit objective of A) accuracy. B) existence. C) control. D) completeness.

An effective code of conduct should contain the company's policies regarding A) conflicts of interests. B) kickbacks. C) gifts and entertainment. D) all of the above.

Analytical procedures can be very effective in detecting inventory fraud. Which of the following analytical procedures would not be useful in detecting fraud? A) gross margin percentage B) inventory turnover C) cost of sales percentage D) accounts receivable turnover

Communication addressed to the debtor requesting him or her to confirm whether the balance as stated on the communication is correct or incorrect is a A) representation letter. B) negative confirmation. C) bank confirmation. D) positive confirmation.

Confirmation of accounts receivable provide evidence related to the ________ audit objectives. A) existence B) accuracy C) cutoff D) all if the above

Controls specific to IT include all of the following except for A) adequately designed input screens. B) pull-down menu lists. C) validation tests of input accuracy. D) separation of duties.

Controls that are designed for each software application and are intended to help a company satisfy the transaction-related audit objectives are A) user controls. B) general controls. C) audit controls. D) application controls.

External financial statement auditors must obtain evidence regarding what attributes of an internal audit (IA) department if the external auditors intend to rely on IA's work? A) integrity B) objectivity C) competence D) all of the above

Firewalls are used to protect from A) erroneous internal handling of data. B) insufficient documentation of transactions. C) illogical programming commands. D) unauthorized external users.

Hanlon Corp. maintains a large internal audit staff that reports directly to the accounting department. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. An independent auditor will probably A) eliminate tests of controls. B) increase the depth of the study and evaluation of administrative controls. C) avoid duplicating the work performed by the internal audit staff. D) place limited reliance on the work performed by the internal audit staff.

If material, all of the following are required to be separately disclosed in the financial statements except for A) accounts receivable from officers. B) accounts receivable from affiliates. C) sales and assets for different business segments. D) sales for the last ten days of the fiscal year.

In the accounts receivable master file, the length of time the account has been due can be useful to the client and the auditor in preparing the A) trial balance. B) working trial balance. C) accounts receivable trial balance. D) aged accounts receivable trial balance.

Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the A) adequacy of the computer system. B) proper implementation by management. C) ability of the internal audit staff to maintain it. D) competency and dependability of the people using it.

It is generally possible for small companies to have all of the following except for A) adequate documents and records. B) physical controls over assets. C) competent, trustworthy personnel. D) internal auditors.

Of the following statements about internal controls, which one is least likely to be correct? 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 controls on a test basis. D) Control procedures reasonably ensure that collusion among employees cannot occur.

Old and new systems operating simultaneously in all locations is a test approach known as A) pilot testing. B) horizontal testing. C) integrative testing. D) parallel testing.

Security controls should require that users enter a(n) ________ before being allowed access to software and other related data files. A) echo check B) parity check C) self-diagnosis test D) authorized password

The ________ is helpful in preventing classification errors if it accurately describes which type of transaction should be in each account. A) general ledger B) general journal C) trial balance D) chart of accounts

The most important test of details of balances to determine the existence of recorded accounts receivable is A) tracing details of sales invoices to shipping documents. B) tracing the credits in accounts receivable to bank deposits. C) tracing sales returns entries to credit memos issued and receiving room reports. D) the confirmation of customers' balances.

The total of the individual account balances in the accounts receivable master file should equal the A) total sales for the period. B) balance of the sales account in the general ledger. C) total sales less the total cash received for the period. D) balance of the accounts receivable account in the general ledger.

To promote operational efficiency, the internal audit department would ideally report to A) line management. B) the PCAOB. C) the Chief Accounting Officer. D) the audit committee.

Typical controls developed for manual systems which are still important in IT systems include A) management's authorization of transactions. B) competent personnel. C) adequate preparation of input source documents. D) all of the above.

Upon discovering information that indicates a material misstatement due to fraud may have occurred, auditors should A) acquire additional evidence as needed. B) thoroughly probe the issues. C) consult with other team members. D) all of the above

What event initiates a transaction in the sales and collection cycle? A) receipt of cash B) delivery of product to a customer C) identification of a new customer D) customer request for goods or services

When assessing planned control risk for sales, A) the key internal controls and deficiencies for sales will be the same for every company. B) the audit objectives for sales will differ from company to company. C) a flowchart is required to help assess control risk for sales. D) assessing control risk for sales is a highly subjective decision.

When dealing with revenue frauds, A) the most egregious form of revenue fraud involves premature revenue recognition. B) premature revenue recognition involves recognizing the revenue after the accounting standards requirements have been met. C) premature revenue recognition is the same as cutoff errors. D) side agreements can modify the terms of the sales transaction and should be analyzed carefully.

When dealing with the administration of the IT function and the segregation of IT duties A) in large organizations, management should assign technology issues to outside consultants. B) programmers should investigate all security breaches. C) the board of directors should not get involved in IT decisions since it is a routine function handled by middle management. D) in complex environments, management may establish IT steering committees.

When determining what type of report to issue on internal control under Section 404, A) an adverse opinion on internal control must be given if any weaknesses in a key internal control is discovered. B) a scope limitation requires the auditor to disclaim an opinion on internal controls. C) if the auditor gives a qualified opinion on the financial statements, they must give a qualified opinion on internal controls. D) a scope limitation requires the auditor to express a qualified opinion or a disclaimer of opinion on internal controls.

When identifying audit objectives and existing controls, A) audit objectives are identified for classes of transactions, account balances, and presentation and disclosure. B) the auditor identifies controls to satisfy each objective. C) it is helpful for the auditor to use the five control activities as reminders of controls. D) all of the above

When testing manual or automated controls, A) automated controls are always subject to random error or manipulation. B) automated controls cannot be altered by making a change to the software application. C) when there are effective general controls and automated application controls, the auditor will need to select a larger sample size of transactions to verify. D) the extent of testing depends on whether it is a manual or automated control.

Which accounts are involved in the sales class of transactions? A) accounts receivable and sales returns and allowances B) cash and allowance for uncollectible accounts C) sales allowances and accounts receivable D) accounts receivable and sales

Which of the following best describes an entity's accounting information and communication system? A) Monitor transactions Record and process transactions Initiate transactions Yes Yes Yes B) Monitor transactions Record and process transactions Initiate transactions No No No C) Monitor transactions Record and process transactions Initiate transactions Yes No No D) Monitor transactions Record and process transactions Initiate transactions No Yes Yes

Which of the following is an account that is not affected by the sales and collection cycle? A) cash B) accounts receivable C) allowance for doubtful accounts D) accounts payable

Which of the following is an accurate statement regarding control activities? A) As the level of complexity of IT systems increases, the separation of duties often becomes blurred. B) Segregation of duties would be violated if the same person authorizes the payment of a vendor's invoice and also approves the disbursement of funds to pay the bill. C) The most important type of protective measure for safeguarding assets and records is the use of physical precautions. D) all of the above

Which of the following is an accurate statement relating to separation of duties? A) Management should deny cash access to anyone responsible for entering sales and cash receipts transaction information into the computer. B) All disagreements on the monthly statements should be directed to a designated person who has no responsibility for handling cash or recording sales or accounts receivable. C) The credit granting function should be separate from the sales function. D) All of the above are accurate statements.

Which of the following is correct with respect to the design and use of business documents? A) The documents should be in paper format. B) Documents should be designed for a single purpose term-127to avoid confusion in their use. C) Documents should be designed to be understandable only by those who use them. D) Documents should be prenumbered consecutively to facilitate control over missing documents.

Which of the following is not a factor that relates to opportunities to misappropriate assets? A) inadequate internal controls over assets B) presence of large amounts of cash on hand C) inappropriate segregation of duties or independent checks on performance D) adverse relationships between management and employees

Which of the following is not a likely source of information to assess fraud risks? A) communications among audit team members B) inquiries of management C) analytical procedures D) consideration of fraud risks discovered during recent audits of other clients

Which of the following is not an application control? A) reprocessing authorization of sales transactions B) reasonableness test for unit selling price of sale C) post-processing review of sales transactions by the sales department D) logging in to the company's information systems via a password

Which of the following is not an important aspect of billing? A) All shipments made have been billed. B) No shipment has been billed more than once. C) Each customer is billed for the proper amount. D) Credit is approved to customers for sales on account.

Which of the following is not one of the five classes of transactions included in the sales and collection cycle? A) sales returns and allowances B) write-off of uncollectible accounts C) bad debt expense D) interest income

Which of the following is not one of the three primary objectives of effective internal control? A) reliability of financial reporting B) efficiency and effectiveness of operations C) compliance with laws and regulations D) assurance of elimination of business risk

Which of the following is true regarding the relationship between tests of controls and procedures to obtain an understanding? A) In obtaining an understanding of internal control, the procedures to obtain an understanding are applied to all controls identified during that phase. B) Tests of controls are applied only when the assessed control risk has not been satisfied by the procedures to obtain an understanding. C) Procedures to obtain an understanding are performed only on one or a few transactions. D) All of the above are correct.

Which of the following statements related to application controls is correct? A) Application controls relate to various aspects of the IT function including software acquisition and the processing of transactions. B) Application controls relate to various aspects of the IT function including physical security and the processing of transactions in various cycles. C) Application controls relate to all aspects of the IT function. D) Application controls relate to the processing of individual transactions.

Which of the following types of receivables would not deserve the special attention of the auditor? A) accounts receivables with credit balances B) accounts that have been outstanding for a long time C) receivables from related parties D) each of the above would receive special attention.

Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction? A) granting of credit B) shipment of goods C) determination of discounts D) selling of goods for cash

Which one of the following best describes the auditors responsibilities regarding appropriate authorizations in the sales/collections cycle? A) Credit must be authorized before the sale. B) Goods must be shipped after the authorization C) Prices must be authorized. D) All of the above should be of concern to the auditor.

T/F: The auditor assesses control risk for each related audit objective and supports control risk assessments with tests of controls.

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