Audit Exam 2
Analytical procedures are most likely to detect: (1) weakness of a material nature in internal control (2) unusual transactions (3) noncompliance with prescribed control activities (4) improper separation of accounting and other financial duties
(2) unusual transactions
Which of the following is most likely to be an overall response to fraud risks identified in an audit? (1) supervise members of the audit team less closely and rely more upon judgment (2) use less predictable audit procedures (3) use only certified public accountants on the engagement (4) place increased emphasis on the audit of objective transactions rather than subjective transactions
(2) use less predictable audit procedures
The increased presence of user operated computers in the workplace has resulted in an increasing number of persons having access to the system. A control that is often used to prevent unauthorized access to sensitive programs is: (1) back copies of data on diskettes (2) user identification passwords (3) input validation checks (4) record counts of the number of input transactions in a batch being processed
(2) user identification passwords
In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for misappropriation of assets? (1) generous performance-based compensation systems (2) management preoccupation with increased financial performance (3) an unreliable accounting system (4) strained relationships between management and the auditors
(3) an unreliable accounting system
The auditors would be least likely to use software to: (1) access client data files (2) prepare spreadsheets (3) assess computer control risk (4) construct parallel simulations
(3) assess computer control risk
Which of the following is not a primary approach to auditing an accounting estimate? (1) review and test management's process for developing the estimate (2) review subsequent transactions (3) confirm amounts (4) develop an independent estimate
(3) confirm amounts
An auditor will use the computer test data method in order to gain assurance with respect to the: (1) security of data in a system (2) IT system capacity (3) controls contained within a program (4) degree of data entry accuracy for batch input data
(3) controls contained within a program
You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to: (1) count the cash in advance of the balance sheet in order to disclose any kiting operations at year-end (2) coordinate the count of cash with the cutoff of accounts payable (3) coordinate the count of cash with the count of marketable securities and other negotiable assets (4) count the cash immediately upon the return of the confirmation letters from the financial institution
(3) coordinate the count of cash with the count of marketable securities and other negotiable assets
Of the following, which is the least reliable type of audit evidence? (1) confirmations mailed by outsiders to the auditors (2) correspondence between the auditors and suppliers (3) copies of sales invoices inspected by the auditors (4) canceled check returned in the year-end bank statement directly to the client
(3) copies of sales invoices inspected by the auditors
Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? (1) adequate disclosure (2) quality control (3) materiality and audit risk (4) client acceptance
(3) materiality and audit risk
End user computing is most likely to occur on which of the following types of computers? (1) mainframe (2) decision support systems (3) personal computers (4) personal reference assistants
(3) personal computers
Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions. (1) incentive or pressure (2) opportunity (3) supervisory postion (4) attitude
(3) supervisory postion
Which of the following business characteristics is not indicative of high inherent risk? (1) operating results that are highly sensitive to economic factors (2) large likely misstatements detected in prior audits (3) substantial turnover of management (4) a large amount of assets
(4) a large amount of assets
Which of the following should not normally be included in the engagement letter for an audit? (1) a description of the responsibilities of client personnel to provide assistance (2) an indication of the amount of the audit fee (3) a description of the limitations of an audit (4) a list of the client' s branch offices selected for testing
(4) a list of the client' s branch offices selected for testing
*EXAM QUESTION The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as (1) business risk (2) engagement risk (3) control risk (4) detection risk
(4) detection risk
Which of the following is not a financial statement assertion made by management? (1) existence of recorded assets and liabilities (2) completeness of recorded assets and liabilities (3) valuation of assets and liabilities (4) effectiveness of internal control
(4) effectiveness of internal control
In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: (1) reviews the monthly bank reconciliation (2) returns the checks to accounts payable (3) is denied access to the supporting documents (4) is responsible for mailing the checks
(4) is responsible for mailing the checks
Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? (1) restrictions placed on sales by laws and regulations (2) decline in sales due to economic declines (3) decline in sales due to product obsolescence (4) over-recorded sales due to lack of control over the sales entry function
(4) over-recorded sales due to lack of control over the sales entry function
As one step in testing sales transactions, a CPA traces random sample of sales journal entries to debits in the AR subsidiary ledger. This test provides evidence as to whether: (1) each recorded sale represents a bona fide transaction (2) all sales have been recorded in the sales journal (3) all debit entries in the AR subsidiary ledger are properly supported by sales journal entries (4) recorded sales have been properly posted to customer accounts
(4) recorded sales have been properly posted to customer accounts
Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? (1) inaccurate billing due to lack of controls (2) lapping of accounts receivable (3) misbilling a client due to a data input error (4) recording sales when the customer is likely to return the goods
(4) recording sales when the customer is likely to return the goods
In order to guard against the misappropriation of company-owned marketable securities, which of the following is the best course of action that can be taken by a company with a large portfolio of marketable securities? (1) require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept (2) require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access (3) require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis (4) require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent
(4) require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent
Management of Warren Company has decided to respond to a particular risk by hedging the risk with future contracts. This is an example of: (1) avoidance (2) acceptance (3) reduction (4) sharing
(4) sharing
A primary purpose of the audit working papers is to: (1) aid the auditors by providing a list of required procedures (2) provide a point of reference for future audit engagements (3) support the underlying concepts included in the preparation of the basic financial statements (4) support the auditor's opinion
(4) support the auditor's opinion
Which of the following is an example of misappropriation of assets relating to sales? (1) accidentally recording cash that represents a liability as revenue (2) holding the sales journal open to record next year's sales as having occurred in the current year (3) intentionally recording cash received from a new debt agreement as revenue (4) theft of cash register sales
(4) theft of cash register sales
Which of the following symbols indicates that a file has been consulted? (1) rectangle --> trapezoid (2) rectangle squiggle --> triangle (3) <--diamond--> (4) trapezoid --> triangle
(4) trapezoid --> triangle
Reconciliation of the bank account should not be performed by an individual who also: (1) processes cash disbursements (2) has custody of securities (3) prepares the cash budget (4) reviews inventory reports
(1) processes cash disbursements
LAN is the abbreviation for: (1) Large Area Network (2) Local Area Network (3) Longitudinal Analogue Network (4) Low Analytical Nets
(2) Local Area Network
Which of the following best describes what is meant by the term "fraud risk factor"? (1) factors that, when present, indicate that risk exists (2) factors often observed in circumstances where frauds have occurred (3) factors that, when present, require modification of planned audit procedures (4) weakness in internal control identified during an audit
(2) factors often observed in circumstances where frauds have occurred
In what section of the audit working papers would a long-term lease agreement be filed? (1) current working paper file (2) permanent working paper file (3) lead schedule file (4) corroborating documents file
(2) permanent working paper file
Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employee (1) a bank lockbox system (2) prenumbered remittance activities (3) monthly bank reconciliations (4) daily deposit of cash receipts
(1) a bank lockbox system
There is a presumption that auditors will confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low. (1) and accounts receivable are immaterial, or the use of confirmation would be ineffective (2) and accounts receivable are composed of large accounts (3) and the effectiveness of confirmations is absolutely determined (4) or accounts receivable are from extremely reputable customers
(1) and accounts receivable are immaterial, or the use of confirmation would be ineffective
Which of the following is not a function of audit working papers? (1) assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles (2) assist audit team members responsible for supervision in reviewing the work (3) assist auditors in planning future engagements (4) assist peer reviewers and inspectors in performing their roles
(1) assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles
When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing and extent of the CPA's procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should: (1) consider the organizational level to which the internal auditors report the results of their work (2) review the internal auditors' work (3) consider the qualifications of the internal audit staff (4) review the training program in effect for the internal audit staff
(1) consider the organizational level to which the internal auditors report the results of their work
When erroneous data are detected by computer program controls, data may be excluded from processing and printed on an exception report. The exception report should probably be reviewed and followed up by the: (1) data control group (2) system analyst (3) supervisor of IT operations (4) computer programmer
(1) data control group
The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare the: (1) details of bank deposits slips with details of credits to customer accounts (2) daily cash summaries with the sums of the cash receipts journal entries (3) individual bank deposit slips with the details of the monthly bank statements (4) dates uncollectible accounts are authorized to be written off within the dates the write offs are actually recorded
(1) details of bank deposits slips with details of credits to customer accounts
To have an adequate basis to issue a management report on internal control under Section 404(a) of the Sarbanes-Oxley Act, management must do all of the following, except: (1) establish internal control with no material weakness (2) accept responsibility for the effectiveness of internal control (3) evaluate the effectiveness of internal control using suitable control criteria (4) support the evaluation with sufficient evidence
(1) establish internal control with no material weakness
A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with: (1) knowledge necessary to determine the nature, timing, and extent of further audit procedures (2) audit evidence to use in reducing detection risk (3) a basis for modifying tests of controls (4) an evaluation of the consistency of application of management policies
(1) knowledge necessary to determine the nature, timing, and extent of further audit procedures
Which of the following procedures would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? (1) observe the consistency of the employees' use of cash registers and tapes (2) inquire about employees' access to recorded but undeposited cash (3) trace deposits in the cash receipts journal to the cash balance in the general ledger (4) compare the cash balance in the general ledger with the bank confirmation request
(1) observe the consistency of the employees' use of cash registers and tapes
Cooper, CPA is auditing the financial statements of a small rural municipality. The receivable balances is represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely: (1) send positive confirmation requests (2) send negative confirmation requests (3) examine evidence of subsequent cash receipts (4) inspect the internal records, such as copies of the tax invoices that were mailed to the residents
(1) send positive confirmation requests
*EXAM QUESTION To determine that all sales have been recorded, the auditors would select a sample of transactions from the: (1) shipping documents file (2) sales journal (3) accounts receivable subsidiary ledger (4) remittance advices
(1) shipping documents file
As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter? (1) to increase the efficiency of the audit by eliminating the need for other audit procedures (2) to remind the client's management of its primary responsibility for the financial statements (3) to document in the audit working papers the client's responses to certain verbal inquiries made by the auditors during the engagement (4) to provide evidence in those areas dependent upon management's future intensions
(1) to increase the efficiency of the audit by eliminating the need for other audit procedures
An accounts payable program posted a payable to a vendor not included in the online vendor master file. A control which would prevent this error is a: (1) validity check (2) range check (3) limit test (4) control test
(1) validity check
Identify the control that is most likely to prevent concealment of a cash shortage resulting from the improper write-off of a trade account receivable: (1) write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence (2) write-offs must be approved by the accounts receivable department (3) write-offs must be approved by the shipping department (4) write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off
(1) write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence
In using the work of a specialist, the auditors referred to the specialist's findings in their report. This would be an appropriate reporting practice if the: (1) client is not familiar with the professional certification, personal reputation, or particular competence of the specialist (2) auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements (3) client understands the auditors' corroborative use of the specialist's findings in relation to the representations in the financial statements (4) auditors, as a result of the specialist's findings, decide to indicate a division of responsibility with the specialist
(2) auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements
*EXAM QUESTION Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? (1) existence or occurrence (2) completeness (3) rights and obligations (4) presentation and disclosure
(2) completeness
Which of the following is not among the criteria that ordinarily exist for revenue to be recognized? (1) collectibility is reasonably assured (2) delivery has occurred or is schedule to occur in the near future (3) persuasive evidence of an arrangement exists (4) the seller's price to the buyer is fixed or determinable
(2) delivery has occurred or is schedule to occur in the near future
Which of the following would be least likely to be considered an objective of internal control? (1) checking the accuracy and reliability of accounting data (2) detecting management fraud (3) encouraging adherence to managerial policies (4) safeguarding assets
(2) detecting management fraud
Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by: (1) employment of temporary personnel to aid in the separation of duties (2) direct participation by the owner in key record keeping and control activities of the business (3) engaging a CPA to perform monthly write-up work (4) delegation of full, clear-cut responsibility for a separate major transaction cycle to each employee
(2) direct participation by the owner in key record keeping and control activities of the business
Which of the following is least likely to be considered by the auditors considering engagement of an information technology specialist on an audit? (1) complexity of the client's systems and IT controls (2) number of financial institutions at which the client has accounts (3) client's use of emerging technologies (4) extent of the client's participation in electronic commerce
(2) number of financial institutions at which the client has accounts
To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is: (1) supported by a vendor's invoice (2) stamped "paid" by the check signer (3) prenumbered and accounted for (4) approved for authorized purchases
(2) stamped "paid" by the check signer
Which of the following statements best describes why auditors investigate related party transactions? (1) related party transactions generally are illegal acts (2) the substance of related party may differ from their form (3) all related party transactions must be eliminated as a step in preparing consolidated financial statements (4) related party transactions are a form of management fraud
(2) the substance of related party may differ from their form
Which of the following is an advantage of generalized audit software packages? (1) they are all written in one identical computer language (2) they can be used for audits of clients that use differing computing equipment and file formats (3) they have reduced the need for the auditor to study input controls for computer-related procedures (4) their use can be substituted for a relatively large part of the required tests of controls
(2) they can be used for audits of clients that use differing computing equipment and file formats
Auditors often make use of computer programs that perform routine processing functions such as sorting and merging. These programs are made available by IT companies and others and are referred to as: (1) complier programs (2) utility programs (3) user programs (4) supervisory programs
(2) utility programs
*EXAM QUESTION The best way to verify the amounts of dividend revenue received during the year is: (1) re-computation (2) verification by reference to dividend record books (3) confirmation with dividend-paying companies (4) examination of cash disbursements records
(2) verification by reference to dividend record books
The auditors would most likely be concerned with which of the following controls in a distributed data processing system? (1) hardware controls (2) systems documentation controls (3) access controls (4) disaster recovery controls
(3) access controls
To test existence assertion for recorded receivables, the auditors would select a sample from the: (1) sales orders file (2) customer purchase orders (3) accounts receivable subsidiary ledger (4) shipping documents (bills lading) file
(3) accounts receivable subsidiary ledger
The auditors who physically examine securities should insist that a client representative be present in order to: (1) detect fraudulent securities (2) lend authority to the auditors' directives (3) acknowledge the receipt of securities returned (4) coordinate the return of securities to the proper location
(3) acknowledge the receipt of securities returned
The primary objective of tests of details of transactions performed as substantive procedures is to: (1) comply with generally accepted auditing standards (2) attain assurance about the reliability of the accounting system (3) detect material misstatements in the financial statements (4) evaluate whether management's policies and procedures are operating effectively
(3) detect material misstatements in the financial statements
Which of the following is not an advantage of establishing an enterprise risk management system within an organization? (1) reduces operational surprises (2) provides integrated responses to multiple risks (3) eliminates all risks (4) identifies opportunities
(3) eliminates all risks
When an online real-time IT processing system is in use, internal control can be strengthened by: (1) providing for the separations of duties between data input and error handling operations (2) attaching plastic file protections rings to reels of magnetic tape before new data can be entered on the file (3) making a validity check of an identification number before a user can obtain access to the computer files (4) preparing batch totals to provide assurance that file updates are made for the entire imput
(3) making a validity check of an identification number before a user can obtain access to the computer files
Controls over financial reporting are often classified as preventative, detective or corrective. Which of the following is an example of a detective control? (1) segregation of duties over cash disbursements (2) requiring approval of purchase transactions (3) preparing bank reconciliations (4) maintaining back up copies of key transactions
(3) preparing bank reconciliations
*EXAM QUESTION Which portion of an audit is least likely to be completed before the balance sheet date? (1) test of controls (2) issuance of an engagement letter (3) substantive procedures (4) assessment of control risk
(3) substantive procedures
An auditor may compensate for a weakness in internal control by increasing the extent of: (1) tests of controls (2) detection risk (3) substantive tests of details (4) inherent risk
(3) substantive tests of details
When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they should: (1) modify their report for any significant deficiencies identified (2) use a "bottom-up" approach to identify controls to test (3) test controls for all significant accounts (4) perform a separate assessment of controls over operations
(3) test controls for all significant accounts
Which of the following would provide the most assurance concerning the valuation of accounts receivable? (1) trace amounts in the accounts receivable subsidiary ledger to details on shipping documents (2) compare receivable turnover ratios to industry statistics for reasonableness (3) inquire about receivables pledged under loan agreements (4) assess the allowance for uncollectible accounts for reasonableness
(4) assess the allowance for uncollectible accounts for reasonableness
A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The work papers would probably: (1) remain silent on the matter since it is an internal matter of the auditing firm (2) note that the assistant auditor is completely disassociated from responsibility for the auditor's opinion (3) document the additional work required, since all disagreements of this type will require expanded substantive procedures (4) document the assistant auditor's position and how the difference of opinion was resolved
(4) document the assistant auditor's position and how the difference of opinion was resolved
Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement? (1) analysis of balance sheet accounts (2) analysis of income statement accounts (3) all matters of continuing accounting significance (4) facts that might bear on the integrity of management
(4) facts that might bear on the integrity of management
To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: (1) cutoff bank statement (2) year-end bank statement (3) bank confirmation (4) general ledger
(4) general ledger
Which of the following would most likely be detected by an auditor's review of the client's sales cutoff? (1) excessive goods returned for credit (2) unrecorded sales discounts (3) lapping of year-end accounts receivable (4) inflated sales for the year
(4) inflated sales for the year
An entity's ongoing monitoring activities often include: (1) periodic audits by internal auditors (2) the audit of the annual financial statements (3) approval of cash disbursements (4) management review of weekly performance reports
(4) management review of weekly performance reports
The audit committee of a company must be made up of: (1) representatives from the client's management, investors, suppliers and customers (2) the audit partner, the chief financial officer, the legal counsel and at least one outsider (3) representatives of the major equity interests, such as preferred and common stockholders (4) members of the board of directors who are not officers or employees
(4) members of the board of directors who are not officers or employees
Hall Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The best person or persons to make periodic reviews of the investment activity would be: (1) An investment committee of the board of directors (2) The chief operating officer (3) The corporate controller (4) The treasurer
(1) An investment committee of the board of directors
