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exam 2 atg 457, Final

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A random sample may not be representative of the population because:

1. the sample selected may not possess the same characteristics of the population 2. the physical representation of the population may differ from the actual population

During attributes sampling planning, auditors must specify the tolerable deviation rate, which is based on:

1. their planned assessed level of control risk 2. the degree of assurance desired from the audit evidence in the sample

Rank the following audit of cash steps in order from first to last step completed. 1. perform further audit procedures - test of controls 2. obtain understanding of internal control over cash 3. assess risks of material misstatement and design further audit procedures 4. perform further audit procedures - substantive procedures

2, 3, 1, 4

sales

A client's physical count of inventories was lower than the inventory quantities shown in its perpetual records. This situation could be the result of the failure to record: - sales. - sales returns. - purchases. - purchase discounts.

Disclaimer of opinion

A form of report in which the auditors state that they do not express an opinion on the financial statements

The Parmalat fraud case involved:

A fraudulent cash confirmation.

Which of the following best illustrates the concept of sampling risk?

A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest

Which of the following best illustrates the concept of sampling risk?

A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.

3. Flowchart

D. Documentation

19. An auditor may obtain information on the December 31 month end balance per bank in which of the following?

Dec. 31 bank statement/ schedule of bank (cash) transfers a. yes yes b. yes no c. no yes d. no no

A situation in which a control does not allow management or employees, in the normal course of performing their functions, to prevent or detect misstatements on a timely basis

Deficiency in internal control

Which of the following is not a control over cash disbursements?

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

Non-sampling errors

Errors due to factors not directly caused by sampling.

5. Less severe than a material weakness

H. Significant deficiency

A control that reduces the risk of misstatement by remediating control deficiencies through automated means

N/A

Judgemental or _____________ sampling is used when auditors estimate sampling risk by using professional judgment rather than statistical techniques.

Nonstatistical

What is a tolerable misstatement?

The auditor's estimate of the maximum amount of dollar misstatement that may exist in an account balance without causing the financial statements to be materially misstated.

Reliability

The complement of the risk of incorrect acceptance.

What is the best description of "tolerable misstatement" for mean-per-unit estimation?

The maximum misstatement that may exist without causing an account to be materially misstated.

There are _____ types of reports that auditors of service organizations (service auditors) can provide.

Two

With strong internal control, may an audit client's inventory count be performed during the year rather than at year end?

Yes

A. Option A B. Option B C. Option C D. Option D

An increased Tolerable Misstatement will ...

decrease the sample size.

Which of the following would be least likely to be considered an objective of internal control

detecting management fraud

The audit committee should be composed of directors who are not _______of the organization.

employees

Sample size has a(n) ______________ relationship with both sampling risk and the allowance for sampling risk.

inverse

Application control activities may be classified as either ____________ or _____________

manual programmed

nonsampling risk

the aspects of audit risk not due to sampling

reliability

the complement of the risk of incorrect acceptance

1. attributes sampling. 2. discovery sampling. 3. variables sampling. 4. probability-proportional-to-size sampling.

types of statistical sampling plans

Population size has little effect on determining sample size except for...

very small populations.

Disclosure about the material weakness should include the following:

- the nature of the material weakness - the impact on the entity's financial reporting and its ICFR - Management's current plans, if any, for remediating the material weakness

1. risk of assessing control risk too low. 2. tolerable deviation rate. 3. expected population deviation rate.

3 major factors determining sample size

As compared to manual processing, electronic processing of cash transactions generally makes kiting: a. more difficult to accomplish. b. impossible to accomplish. c. neither easier, nor more difficult to accomplish. d. easier to accomplish.

Financial investments should be registered in the name of the ____________.

Company

Inflated sales for the year

Which of the following would most likely be detected by an auditor's review of the client's sales cutoff? - Excessive goods returned for credit. - Unrecorded sales discounts. - Lapping of year-end accounts receivable. - Inflated sales for the year.

i. In which of the following circumstances is it least likely that test of controls will be performed? 1. The expected deviation rate exceeds the tolerable deviation rate 2. The planned assessed level of control risk is are a level slightly below the maximum 3. The risk of assessing control risk too low is less than the expected deviation rate 4. The tolerable deviation rate exceeds the risk of assessing control too low

1. • A test of controls is least likely to be performed when the expected deviation rate exceeds the tolerable deviation rate. If this happens and a test of controls is performed then it would show that the system is not operating, as it should be.

h. Which of the following is accurate regarding tolerable misstatement? 1. Tolerable misstatement is directly related to materiality 2. Tolerable misstatement cannot be determined until the sample results are evaluated 3. Tolerable misstatement does not affect sample size 4. Tolerable misstatement is a measure of reliability of the sample

1. • Tolerable misstatement is materiality for the audit procedure being performed for a particular account. It is equal to or less than performance materiality for the account, which is an estimate of the maximum monetary misstatement that may exist in an account that, when combined with the misstatements in other accounts, will not cause financial statements to be materially misstated.

Lock box

A post office box controlled by a company's bank at which cash remittances from customers are received. The bank picks up the remittances, immediately credits the cash to the company's bank account, and forwards the remittance advices to the company.

The auditors' primary objective in selecting a sample of items from an audit population is to obtain:

A representative sample

proof of cash

Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? - Bank reconcilliation - Evaluation of ratio of cash to current liabilities - Cash confirmation - Proof of cash

Which of the following sampling techniques is typically used for test of controls?

attribute sampling

attributes sampling is often used in conjunction with tests of the clients internal control

A. Board of Directors. B. Treasurer. C. Controller. D. Executive Committee.

A. Completeness of recording of sales transactions. B. Occurrence of sales transactions. C. Billing of all sales transactions. D. Presentation of payables.

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

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

A. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. B. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. C. The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. D. Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

A. Lapping. B. Kiting. C. Effective cash management. D. Related party transactions.

Auditors must communicate internal control significant deficiencies to: the SEC. the shareholders. the Public Company Accounting Oversight Board. the audit committee.

the audit committee.

sampling risk

the risk that the auditors' conclusion based on a sample might be different from the conclusion they would reach if the test were applied to the entire population

when the auditors estimate sampling risk using professional judgement rather than by using the laws of probability,

they are said to be using nonstatisitcal sampling

C. Corrective control

1. A control established to remedy misstatements that are discovered

B. Complementary control

2. A control that functions together with another control to achieve the same control objective

1. mean-per-unit estimate. 2. ratio estimation. 3. difference estimation.

3 variable sampling plans

Proof of cash

An audit procedure that reconciles the bank's record of cash activity with the client's accounting records for a test period. The working paper used for this is a four-column bank reconciliation.

Projected misstatement

An estimate of the most likely amount of monetary misstatement in a population.

What is projected misstatement?

An estimate of the most likely amount of monetary misstatement in a population.

6. Monitoring

C. Component of internal control

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

C. Obtaining a receipt for every disbursement.

The auditors use a bank cutoff statement to compare:

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

d. Which of the following correctly identifies a risk facing SSC that might affect its ability to continue as a going concern over the long run?

Competition from several competitors.

Which of the following is an element of sampling risk?

Concluding that no material misstatement exists in a materially misstated population.

a. Which of the following represents a correct statement concerning the risk of misappropriation of cash for SSC?

Deposit of cash into a lockbox system decreases the risk of misappropriation.

T or F: An improper bank reconciliation designed to conceal a cash shortage is more likely to overstate than understate the amount of outstanding checks.

False (outstanding checks = liability)

What is an example of the physical representation of the population?

For example, a sample of accounts payable may be selected from a computer listing (the physical representation) of recorded accounts payable.

Auditors must carefully control the risk of assessing risk too high or _____when performing test of controls.

Low

Audit effectiveness is impacted when the auditor doesn't do enough _______.

Testing

Effective Board of Directors

The extent of independence of this group is critical

The best way to verify the amounts of dividend revenue received during the year is

Verification by reference to dividend record books

Non-statistical sampling

When the auditors use professional judgment rather than statistical techniques.

projected misstatement

estimate total amount if misstatement in a population

Use the following information: Mean book value of items in sample: $32 Mean audited value of items in sample: $31 Mean book value of items in population: $33 Number of items in population: 10,000 Using mean-per-unit estimation, the projected misstatement is:

$20,000 overstatement

The auditors have sampled 50 accounts from a population of 1,000 accounts receivable. The sample items have a mean book value of $200 and a mean audited value of $203. the book value in the population is $198,000. What is the estimated total auditted value of the population using the difference method?

$201,000

two topics of management's assessment process

1. Service organizations 2. safeguarding assets

Commitment to Integrity and Ethical Values

A clearly articulated statement of ethical values

Which of the following factors does an auditor need to consider in planning a particular audit sample for a test control?

Acceptable level of risk of assessing control risk too low

Subsequent events

An event occurring after the date of the balance sheet but prior to completion of the audit and issuance of the audit report.

Management assertions

Any declaration, or set of related declarations taken as a whole, made by management. In the context of compliance attestation, it deals with the entity's compliance with specified requirements, the effectiveness for the entity's internal control over compliance, or both.

the auditors' report

Auditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of: - a postdated footnote. - the final billing for audit services rendered. - the auditors' report. - the next scheduled interim visit.

Information and processing controls is one category of control activities. What risks do these controls address?

Authorization, completeness, and accuracy of transactions

Management of Warren Company has decided to respond to a particular risk by hedging the risk with futures contracts. This is an example of :

Avoidance

The best substantive procedure to verify cutoff is to: a. make independent computations of revenue b. send confirmations to holders and counterparties c. evaluate the method of accounting for investments

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

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

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

B) Treasurer.

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

C. Count of investment securities.

Which of the following is the best audit procedure for the detection of lapping?

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

A control that reduces the risk that an existing or potential control weakness will result in a failure to meet a control objective

Compensating control

Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes?

Confirmation

After testing internal controls related to investments, it may be necessary to ______the risk of material misstatement. a. delete b. erase c. ignore d. modify e. skip

Cash reconciliations can be tested via __________. a. counting b. disclosure c. observation d. physical inventory e. reperformance

It is necessary to ______ the client's cutoff of cash transactions. a. modify b. observe c. perform d. recreate e. verify

T/F Auditors usually attempt to directly control the risk of assessing control risk too high?

Select each of the following terms with the appropriate attributes. No reply is used more than once. Creates a reasonable possibility a material misstatement will not be detected

Material weakness

Along with calculating the deviation rate and achieved upper deviation rate, auditors must also consider the _____________ aspects of a deviation such as their nature and implications for other phases of the audit.

Qualitative

Discovery sampling is particularly effective when :

The auditors are looking for critical deviations that are not expected to be frequent in number

Acknowledge the receipt of securities returned

The auditors who physically examine securities should insist that a client representative be present in order to: - Detect fraudulent securities. - Lend authority to the auditors' directives. - Acknowledge the receipt of securities returned. - Coordinate the return of securities to the proper locations.

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?

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

Bill of Lading

The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the: - Bill of lading. - Job time shipping. - Production order. - Production schedule.

The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except:

The principal amount paid on a direct liability.

Define computer user controls and explain their purpose (8-4)

They apply to processing of individual applications and are performed by users Designed to test the completeness and accuracy of IT-processed transactions, their purpose is to ensure reliability of output

What do you need to remember when listing the items for incremental allowance?

They are listed, ranked by highest projected misstatement (expect the top part to be mixed up).

To be random, every item in the population must have an equal chance of being selected for inclusion in the sample(T/F)

True

T or F: The standard financial institution confirmation request used by the auditors is a means of obtaining documentary evidence about both assets and liabilities.

True - deposits and loans

An auditor would most likely analyze inventory turnover rates to obtain evidence about which management assertion?

Valuation

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

Yes No

d. The auditors' primary objective in selecting a sample of items from an audit population is to obtain: 1. A random sample 2. A stratified sample 3. A representative sample 4. A large sample

a representative sample

The auditors' primary objective in selecting a sample of items from an audit population is to obtain...

a representative sample.

representative sample

a sample possessing essentially the same characteristics as the population from which it was drawn

probability-proportional-to-size sampling

a variables estimation procedure that uses attributes theory to express a conclusion in monetary (dollar) amounts

5. The authorized check signers reconcile bank accounts.

agree

tolerable misstatement

an estimate of materiality for the particular audit test

When tests of an audit sample result in a similar conclusion to those that would be drawn if the same procedures were applied to the entire population, the audit sample is said to be: a. low non sampling risk b. representative c. high sampling risk

An auditor may compensate for a weakness in internal control by increasing the extent of: a. Tests of controls. b. Detection risk. c. Substantive tests of details. d. Inherent risk.

c. Substantive tests of details.

loss of transaction during processing data

item counts

. 1/02 1/02 12/31 1/02

overstated

Use the following information: Mean book value of items in sample: $32 Mean audited value of items in sample: $31 Mean book value of items in population: $33 Number of items in population: 10,000 Using ratio estimation, the estimated total audited value is:

$319,688

A company's 1,000 accounts receivable have a total book value of $40,000 (Average book value = $40). An audited sample of 50 accounts resulted in the following mean values: Book value of $38.00 Audited value of $39.20 What is the estimated total audited value using ratio estimation sampling?

$41,263

Planning the audit of ICFR, consider:

- the role of risk assessment and the risk of fraud - scaling the audit - using the work of others

1. Tolerable misstatement is directly related to materiality

In mean-per-unit sampling, the allowance for sampling risk is used to control sampling risk. These factors are used to determine the planned allowance for sampling risk.

1. incorrect rejection coefficient 2. incorrect acceptance coefficient 3. tolerable misstatement

If the auditor wants to achieve a low control risk assessment, what is an appropriate tolerable deviation rate?

2%-7%

D. Deficiency in internal control

7. A situation in which a control does not allow management or employees, in the normal course of performing their functions, to prevent or detect misstatements on a timely basis

Comparative financials

A complete set of financial statements for one or more prior periods included for comparison with the financial statements of the current period.

Electronics funds transfer (EFT)

A computer system that transmits and processes funds-related cash disbursement and receipt transactions. Increasingly, companies are electronically transferring funds between bank accounts rather than issuing checks.

Dividend record book

A reference book published monthly by investment advisory services reporting detailed information concerning all listed and many unlisted securities; includes dividend dates and amounts, current prices of securities, and other condensed financial data.

Probability-proportional-to-size (PPS) sampling

A variables estimation procedure that uses attributes theory to express a conclusion in monetary (dollar) amounts. Also known as "dollar unit sampling".

What is the best description of a planned allowance for sampling risk under mean-per-unit estimation?

An amount used to calculate the"bounds" around the sample mean that we would expect the value to fall within to be correct.

Iron curtain approval

An approach to making materiality judgments that quantifies the total likely misstatements as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the year, irrespective of whether the misstatements occurred in the current year or previous years.

General risk contingency

An element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements.

whether a large recorded gain on trade of equipment is appropriate

An important consideration to the auditor in the audit of equipment is to determine: - hat the equipment is properly maintained. - that theft of the equipment is impossible. - when the client should replace the equipment. - whether a large recorded gain on a trade of equipment is appropriate.

the existence of obsolete merchandise

An inventory turnover analysis is useful to the auditor because it may detect: - inadequacies in inventory disclosures. - methods of avoiding cyclical holding costs. - the optimum automatic reorder points. - the existence of obsolete merchandise.

By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor WILL generally be able to detect:

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

Detection risk may be separated into which two components?

Analytical procedures risk and substantive test of details risk.

more difficult to accomplish

As compared to manual processing, electronic processing of cash transactions generally makes kiting: - more difficult to accomplish - easier to accomplish - neither easier, nor more difficult to accomplish - impossible to accomplish

Management of Warren Company has decided to respond to a particular risk by hedging the risk with future contracts. This is an example of:

Avoidance

Tests of controls do not address: A) How controls were applied. B) How controls were originated. C) The consistency with which controls were applied. D) By what means the controls were applied.

B) How controls were originated. Auditors are not in general concerned with how controls originated.

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

B) The principal amount paid on a direct liability.

Listed below are controls that have been developed by the management of Cirus Manufacturing Co. Management has developed and distributed a code of conduct. A. Monitoring B. Control Environment C. Control Activities D. Risk Assessment E. Accounting information

B. Control environment—integrity and ethical values.

B. Kiting.

What is block selection?

Block sample consists of all items in a selected time period, numerical sequence or alphabetical sequence. (least desirable)

Which of the following statistical sampling techniques is least desirable for use by the auditors?

Block selection

Which of the following statistical sampling techniques is least desirable for us by the auditors?

Block selection.

Which of the following statistical selection techniques is least desirable for use by an auditor?

Block selection.

1. Accounting information system

C. Component of internal control

What is the principal hardware component in an IT system?

Central processing unit which consists of 1) control unit 2) internal storage unit 3) arithmetic logic unit

A practical and effective audit procedure for the detection of lapping is

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

For each of the controls, identify the internal control component and, if applicable, the subcomponent or principle to which it relates. Control components may be selected more than once. Entry into the warehouse is strictly controlled by security personnel

Control activities. /physical controls.

A company 1,000 accounts receivable have a total book value of $40,000 (Average book value = $40). An audited sample of 50 accounts resulted in the following mean values: Book value of $38.00 Audited value of $39.20 What is the estimated total audited value using difference estimation sampling?

$41,200

An audit needs to have the correct balance of efficiency and _________.

Effectiveness

Audit _______is affected when too much substantive testing is done.

Efficiency

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

Establish internal control with no material weakness.

Cash should be deposited weekly so it can be counted several times before being sent to the bank. True False

False

Marketable equity securities should valued at cost. True or False

In difference estimation, the average difference is estimated by dividing the _______________ in the sample by the number of items in the sample.

Net misstatement

Must the auditor document all his or her test counts in the working papers.

Explain the purposes and nature of access controls

Prevent unauthorized use of IT equipment, data files, and computer programming Accomplish this- physical assess controls, logical access controls, and procedural safeguards

Reconciliation of the bank account should not be performed by an individual who also

Processes cash disbursements

Reconciliation of the bank account should not be performed by an individual who also: - Processes cash disbursements. - Has custody of securities. - Prepares the cash budget. - Reviews inventory reports.

Tests of controls ordinarily are designed to provide evidence of: (1) Balance correctness. (2) Control implementation. (3) Disclosure adequacy. (4) Operating effectiveness.

(4) Operating effectiveness. Tests of controls address operating effectiveness of controls.

Management must comply with the following requirements in order for the external auditor to compete an audit of ICFR

- Accept responsibility for the effectiveness of the entity's ICFR - Evaluate the effectiveness of the entity's ICFR using suitable control criteria - Support the evaluations with sufficient evidence, including documentation - Present a written assessment regarding the effectiveness of the entity's ICFR as of the end of the entity's most recent fiscal year

Identifying relevant assertions

-Internal controls are relevant to certain assertions. (Exp: sales- existence) - DR = AR / (IR x CR)

Auditor must assess the control environment

-management's philosophy and operating style promote effective ICFR - sound integrity and ethical values, particularly of top management, are developed and understood - the board or audit committee understands and exercises oversigth responsibility over financial reporting and internal control

Identify the 3 steps involved in quantitatively evaluating sample results (CDD)

1) calculate sample deviation rate 2) determine the upper deviation limit 3) determine the allowance for sampling risk

What are the different types of statistical sampling plans?

1. Attributes sampling (test of controls) 2. discovery sampling 3. classical variables sampling: mean-per-unit, ratio estimation, difference estimation 4. Probability-proportional-to-size sampling

If the sample results indicate the achieved upper deviation rate is more than the tolerable deviation rate:

1. auditors need to increase their assessed levels of control risk 2. the planned assessed level of control risk is not supported

g. Which of the following sampling techniques is typically used for test of controls? 1. Mean-per-unit sampling 2. Difference sampling 3. Attribute sampling 4. Probability-proportional-to-size sampling

3. Attribute sampling

k. The auditors have sampled 50 accounts from a population of 1,000 accounts receivable. The same items have a mean book value of $200 and a mean audited value of $203. The book value in the population is $198,000. What is the estimated audited value of the population using the mean-per-unit method? 1. $198,000 2. $200,000 3. $201,000 4. 203,000

4. • $203 (mean audited value) x 1000 accounts = $203,000

4. 203,000 = mean value * sample size = 203 * 1,000

E. Material weakness in internal control

5. A deficiency in internal control such that there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis

What is the upper deviation limit?

9.5 %

Which of the following correctly identifies a risk facing SSC that might adversely affect sales during the coming years? a. A general slowdown in the economy. b. Sales to many smaller customers other than Wingo Corporation. c. Increased attention to developing new products. d. A board of directors dominated by management.

______should develop a statement of ethical values.

Senior management

Mean-per-unit estimation sampling

A classical method that uses only the audited values of items in the sample (not the book values) to obtain an estimated total audited value

Lapping

A concealment of cash shortage by delaying the recording of cash receipts. It is most easily carries on when an employee who receives collections from customers is responsible for the posting of customers' accounts.

names on the company payroll are those of bonafide employees presently on the job

A surprise observation by an auditor of a client's regular distribution of paychecks is primarily designed to satisfy the auditor that: - all employees have in their possession proper employee identification. - all unclaimed payroll checks are properly returned to the cashier. - names on the company payroll are those of bona fide employees presently on the job. - the paymaster is not involved in the distribution of payroll checks.

Dual purpose test

A test designed to test a control and to substantiate the dollar amount of an account using the same sample.

When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, the must:

Test controls for all significant accounts

When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they must

Test controls for all significant accounts.

Select each of the following terms with the appropriate attributes. No reply is used more than once. Inquire, inspect, observe, reperform

Tests of controls

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

A) It is ordinarily used to understate cash.

How can non-sampling risk be reduced?

Adequate planning audit samples and supervisions of audit engagements.

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

C) Count of investment securities.

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

Canceling supporting documentation after payment.

Select each of the following terms with the appropriate attributes. No reply is used more than once. Likelihood a misstatement will not be prevented or detected

Control risk

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

D) Acknowledge the receipt of securities returned.

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

Detection Risk

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

False

T or F: Marketable equity securities should be valued at cost.

False - FV

T or F: Cash should be deposited weekly so it can be counted several times before being sent to the bank.

False - daily

Transactions that occurred during the year

For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on: - All transactions resulting in the ending balance. - Tests of controls over disposals. - Transactions that occurred during the year. - Performing analytical procedures on beginning balances of the accounts.

Tests of control do not address:

How controls were originated

Tests of controls do not address: How controls were applied. How controls were originated. The consistency with which controls were applied. By what means the controls were applied.

How controls were originated.

What is the major difference between statistical and non statistical sampling in substantive testing?

In non statistical sampling the level of risk is not formally quantified, instead auditors use their professional judgment.

While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of:

Incorrect Rejection

The auditor suspects that fictitious employees have been placed on the payroll by the entity's payroll supervisor, who has access to payroll records and to the paychecks. (Select only 1 procedure.)

P. Observe payroll check distribution on a surprise basis.

g. Reconciliation of the bank account should not be performed by an individual who also:

Processes cash disbursements.

Material weakness

Report externally, to audit committee, and to management

Which of the following is not a universal rule for achieving internal control over cash?

Separate recordkeeping from accounting for cash to the extent possible.

Test of control

Step 5, "estimate the expected population deviation rate," explain.

This is an estimate and need NOT be known to evaluate results of an attributes sample.

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

True

When evaluating the results of a variables sampling plan, the projected misstatement is calculated and compared to the tolerable misstatement. True False

True

The auditor suspects that selected employees of the entity received unauthorized raises from the entity's payroll supervisor, who has access to payroll records.

Vouch data in the payroll register to documented authorized pay rates in the human resources department's files.

Delivery has occurred or is scheduled to occur in the near future.

Which of the following is not among the criteria that ordinarily exist for revenue to be recognized? - Collectibility is reasonably assured. - Delivery has occurred or is scheduled to occur in the near future. - Persuasive evidence of an arrangement exists. - The seller's price to the buyer is fixed or determinable.

Which of the following would provide the most assurance concerning the valuation of accounts receivable? a. Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. b. Compare receivable turnover ratios to industry statistics for reasonableness. c. Inquire about receivables pledged under loan agreements. d. Assess the allowance for uncollectible accounts for reasonableness.

A. Check Clearing for the 21stCentury Act B. Public Company Accounting Oversight Board's Standard No. 2. C. Foreign Corrupt Practices Act. D. Sarbanes-Oxley Act

mean-per-unit estimation

a classical variables sampling plan enabling the auditors to estimate the average dollar value of items in a population by determining the avg value of items in a sample

low

a statement that the confidence level of a control is 0.95 is equivalent to a statement that the risk of assessing control risk too _____ 0.05.

increase

an increase in expected population deviation rate would [increase or decrease] the sample size

A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An unrecorded check cashed during that month. D. A bank charge during the month not recorded on the books.

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

false

The two broad categories of information processing controls are _____________ and application controls.

general controls

Selecting items from a population on an arbitrary basis is called:

haphazard sample selection

professional judgement

how do auditors determine the appropriate risk of assessing control risk too low and the tolerable deviation rate for a test of a control?

What are the 3 major factors that determine sample size for attributes sampling?

risk of assessing control risk too low; the tolerable deviation rate; and the expected deviation rate

increases

stratification [increases or decreases] the efficiency of sampling procedures

If certain forms are not consecutively numbered:

systematic sampling may be appropriate.

the allowance for sampling risk for a substantive procedure is determined based in part on the tolerable misstatement in the account

nonsampling risk

the aspects of audit risk not due to sampling. this risk normally relates to human rather than statistical errors

tolerable deviation rate

the maximum population rate of deviations from a prescribed control that the auditor will tolerate without modifying the planned assessment of control risk

Which of the following is accurate regarding tolerable misstatement?

tolerable misstatement is directly related to materiality

Which of the following symbols indicate that a file has been consulted

trapezoid to a triangle with a <-> in between it

When sampling from the population of accounts receivable for certain objectives, the auditor might sample only active accounts with balances.(T/F)

true

attributes sampling plans are typically used for tests of controls

whereas variables sampling plans are typically used for substantive tests

Remember, if the expected population deviation rate is higher than the tolerable deviation rate then...

you would not sample.

Advantages of using stratification in audit sampling include:

1. allowing auditors to apply different audit procedures to different strata 2. increased efficiency of sampling procedures

To calculate the incremental allowance, what are the 5 columns, left to right?

1. reliability factor (from chart) 2. increment 3. increment - 1 4. projected misstatement 5. incremental allowance (projected misstatement x (increment - 1))

a. Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees?

A bank lockbox system.

Scope limitations

A restriction that prevents the auditors from being able to apply all of the audit procedures that they consider necessary in the circumstances. They may be client imposed or may be imposed by other circumstances.

At the completion of the audit the auditors are least likely to know

Actual control risk

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

An unreliable accounting system

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

B) Canceling supporting documentation after payment.

Which of the following statistical selection techniques is least desirable for use by an auditor?

Block Selection

Inspect reports by internal auditors on their review of securities and derivatives is an example of: a. Ensure transactions are recorded and classified properly b. Ensure policies written are being followed c. Verify that internal auditors' observations are consistent with those of external auditors d. Ensure reports tie to client activity

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

C) Prepare a schedule of bank transfers.

The auditors objectives in the audit of cash and cash transactions are to: (Select all that apply) a. ascertain there are no misstatements of cash b. analyze business risks related to the company's cash c. obtain an understanding of internal control over cash d. consider inherent risks, including fraud risks, related to cash

C, D

Listed below are controls that have been developed by the management of Cirus Manufacturing Co. Budgets and forecasts are used by the production departments to control expenses. A. Monitoring B. Control Environment C. Control Activities D. Risk Assessment E. Accounting information

C. Control activities—performance reviews.

Listed below are controls that have been developed by the management of Cirus Manufacturing Co. Entry into the warehouse is strictly controlled by security personnel. A. Monitoring B. Control Environment C. Control Activities D. Risk Assessment E. Accounting information

C. Control activities—physical controls.

C. Count of investment securities. .

Under COSO, the control environment, risk assessment, the accounting information and communication system, control activities and monitoring are referred to as the ____________ of internal control.

Components

Listed below are controls that have been developed by the management of Cirus Manufacturing Co. The accounting department uses a manual of accounting policies and procedures. A. Monitoring B. Control Environment C. Control Activities D. Risk Assessment E. Accounting information

E. Accounting information and communication system.

What is ordinarily the preferable course of action when an auditor finds a higher than expected deviation rate when sampling controls?

Expand substantive procedures.

Which of the following is correct relating to kiting?

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

An entity's ongoing monitoring activities often include:

Management review of weekly performance reports

Procedures cycled periodically through the auditors' internal control deviation analysis

N/A

Testing Controls

Nature, Timing, extent

Tests of controls ordinarily are designed to provide evidence of:

Operating effectiveness

Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control?

Preparing bank reconciliations

Controls over financial reporting are often classified as preventive, detective, or corrective. Which of the following is an example of a detective control?

Preparing bank reconciliations

What are documentation controls in IT department?

Relate to documentation and records maintaining by a company to describe computer processing activities

Which of the following is not an aspect of sampling risk?

Risk of not identifying a misstatement included in a sample.

What is sampling with replacement?

Sampling with replacements means once a number is selected in a random number table, it is immediately replaced into the population of eligible items and may be selected a second time. The procedure is to include the number in the analysis as frequently as it occurs in the sample.

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

Securities held for the client by the financial institution.

In November, two months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to interest revenue. The most effective method for detecting this type of error is:

Send a bank confirmation as of year-end.

Discovery sampling is particularly effective when:

The auditors are looking for critical deviations that are not expected to be frequent in number.

The rate that provides auditors assurance that deviation rates in the sample do not exceed acceptable levels is called the upper or _______________ deviation rate.

Tolerable

Which of the following is accurate regarding tolerable misstatement?

Tolerable misstatement is directly related to materiality.

Confirmation requests should be mailed by the auditors in envelopes bearing the auditors' return address. True False

True

Discovery sampling is equivalent to an attributes sampling plan with a specified expected deviation rate of 0 percent. True False

True

The "lapping" of cash receipts is most likely to occur when one person has both responsibility for record keeping for cash receipts and custody of cash. True False

True

The mean book value of the items included in a mean-per-unit sample is not directly used in the evaluation of sample results. True False

True

8. The auditor suspects that vouchers were prepared and processed by an accounting department employee for merchandise that was neither ordered nor received by the entity. (Select only 1 procedure.)

U. Examine the supporting purchase orders and receiving reports for selected paid vouchers.

Capitalization

When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments? - Capitalization. - Financing. - Investing. - Operations.

Qualified No Unmodified with Emphasis-of-Matter Yes

When the matter is properly disclosed in the financial statements, the likely result of substantial doubt about the ability of the client to continue as a going concern is the issuance of which of the following audit opinions? Qualified Unmodified with Emphasis-of-Matter Yes Yes Yes No No Yes No No

Generally accepted auditing standards basis

Which of the following is not an acceptable financial reporting framework? - Cash basis. - Generally accepted auditing standards basis. - International accounting standards basis. - Tax basis.

A consistency modification

Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report? - A consistency modification. - An adverse opinion. - A qualified opinion. - Part of the audit has been performed by component auditors.

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: a) An investment committee of the board of directors. b) The chief operating officer. c) The corporate controller. d) The treasurer.

a) An investment committee of the board of directors.

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: a. Consider the organizational level to which the internal auditors report the results of their work. b. Review the internal auditors' work. c. Consider the qualifications of the internal audit staff. d. Review the training program in effect for the internal audit staff.

a. Consider the organizational level to which the internal auditors report the results of their work.

The risk of incorrect ____________ is the risk that the sample supports the conclusion that the balance is not misstated when it is misstated Relates more to the audit _____________ than to efficiency

acceptance, effectiveness

You are working on the Coleman audit. Assume that each of the four sections of this question are unrelated. Ashley Wilson, another staff member, has given you the following list of what she refers to as "internal control deficiencies" and has asked you to review each point and make sure that you agree that each is an internal control deficiency. 1. Voided checks are torn up and destroyed.

agree

Also referred to as precisions, this sampling item allows auditors to create an interval around the sample results in which the true population characteristic is expected to lie.

allowance for sampling risk

precision

also known as "allowance for sampling risk"

allowance for sampling risk

also referred to as precision, an interval around the sample results in which the true population characteristic is expected to lie

When the auditors have decided to use statistical rather than nonstatistical sampling, a disadvantage is that: A) Designing efficient samples is more difficult. B) The costs of training staff may be higher. C) Sampling without replacement must be used. D) Objectively evaluating results is impossible.

b. Define kiting and describe an audit procedure that might detect kiting.

b. Kiting is manipulation causing an amount of cash to be included simultaneously in the balance of two or more bank accounts. To detect kiting the auditors prepare and verify a schedule of bank transfers.

The Foreign Corrupt Practices Act of 1977 prohibits __________ to foreign officials to obtain business and requires companies to maintain an effective system of internal control.

bribes

Control over cash sales is increased if a centrally located ___________ participates in each transaction.

cashier

A ___________ is a required minimum account balance that may be required by a bank when making a loan to a customer.

compensating balance

Integrating the Audits of Internal Control and Financial Statements

composed of the audits of internal control and the financial statements. The control testing impacts the planned substantive procedures. Also, the results of the substantive procedures are considered in the evaluation of internal control.

Which of the following is an element of sample risk?

concluding that no material misstatement exists in a materially misstated population based on taking a sample that include no misstatement.

A dual purpose test simultaneously. A. Addresses two different accounts. B. Substantiates an ending balance and the transactions making up the balance. C. Functions as an analytical procedure and a substantive test. D. Functions as a substantive test and as a test of controls.

A. Cash checking account balances. B. Cash savings account balances. C. Loans payable. D. Securities held for the client by the financial institution.

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

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

Tests of controls are most likely in which of the following situations? a. The cost of tests of controls is likely to exceed the savings brought about by a resulting decrease in the scope of substantive procedures. b. Few transactions have occurred, but for very material amounts. c. When substantive procedures are being used as the only further audit procedures. d. the assessed level of the risk of misstatement includes a presumption that controls operate effectively.

d. the assessed level of the risk of misstatement includes a presumption that controls operate effectively.

The auditors who are engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: a. verify the cash balance reported on the standard financial institution confirmation form. b. detect kiting. c. detect lapping. d. verify reconciling items on the client's bank reconciliation.

d. verify reconciling items on the client's bank reconciliation

Material Weakness

deficiency or combination of deficiencies that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis

Control Deficiency

design or operation of a control does not allow management or employees in the normal course of performing their assigned function 1. a control necessary to meet the relevant control objective 2. an existing control is not properly designed

When performing substantive testing, we express measurements of misstatement as...

dollar values.

In the message acknowledgement technique, known as ________ ________, a receiving device sends a message back to the sending device that verifies a transmission

echo check

Type 2 reports address operating _______; Type 1 do not.

effectiveness

In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the:

efficiency of the audit

In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the...

efficiency of the audit.

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

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

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

Omitting an important financial statement disclosure item related to a loan agreement obtained from a nonfinancial institution.

f. Confirm terms of debt agreements using a debt confirmation request form.

Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement

facts that might bear on the integrity of management

Audit ________ is an instance where the auditor said that the F/S were fairly stated when in fact, they were not. The term generally indicated that the audit firm did not do enough audit work and didn't gather enough evidence to provide an unqualified opinion

failure

A form of insurance in which an insurance company agrees to reimburse an employer for losses attributable to employee theft is referred to as ____________.

fidelity bonds

Receiving a loan from the company's primary banking institution and not recording the entry, but placing the cash in overseas account not recorded in the company's accounting records.

g. Confirm using public accounting profession's standard form to confirm account balance information with financial institutions.

processing a traction that is unreasonable in amount

limit tests

unauthorized entry of data after business hours

locking operating switch

Given random selection without replacement, the same sample size, and the same tolerable deviation rate for the testing of two unequal populations, the risk of assessing control risk too low for the smaller population is:

lower than the risk of assessing control risk too low for the larger population.

sample

sampling risk is reduced by increasing the size of the _____

Nonsampling risk?

the risk of erroneous conclusions by the auditors based on any factor other than sampling

risk of assessing control risk too high

this risk is the possibility that the assessed level of control risk based on the sample is greater than the true operating effectiveness of the control

likelihood and magnitude

two dimensions of a control deficiency

b. 1/04 12/31 1/02 12/31

unaffected

There are many kinds of statistical estimates that an auditor may find useful, but basically every accounting estimate is either of a quantity or of an occurrence rate. The statistical terms that roughly correspond to quantities and occurrence rate, respectively, are:

variables and attributes.

What items should be included in IT documentation? (DOCD)

1) Descriptions/flowcharts 2) Operating instructions 3) Control procedures for operators & users 4) Descriptions and samples of inputs and outputs

Describe the risks of computer processing of accounting information over manual systems (FCOMM)

1) Files and records are usually in machine readable form and cannot be read without computer 2) Changes in systems are often difficult to implement and control 3) Often their is less documentary evidence of the performance of control procedures 4) Maybe vulnerable to ply. disasters, unauthorized manipulation, and machine malfunction 5) May produce a transaction trail available for audit only for a short time

A practical and effective audit procedure for the detection of lapping is:

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

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

D. General ledger.

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

D. General ledger.

You are performing an audit of Systex Corporation and evaluating various controls. Classify the following controls as being primarily preventive, detective, or corrective. Monthly reconciliation of bank accounts.

Detective

You are performing an audit of Systex Corporation and evaluating various controls. Classify the following controls as being primarily preventive (P), detective (D), or corrective (C). Explain your answers. Management review of budget/actual information.

Detective Management review of budget versus actual performance would serve to highlight potential errors and fraud after they have occurred. Therefore, it is a detective control.

What is a disadvantage of a systematic selection?

Disadvantage in that population may occur in a pattern (i.e. same technician, same vendor, etc.), which would destroy the sample randomness.

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except:

General ledger.

Which of the following best describes the distinguishing feature of statistical sampling?

It provides for mathematically measuring the degree of uncertainty that results from examining only a part of the data.

be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows

Jones, CPA, accepts a new client late in Year 5 and therefore had no opportunity to observe the physical inventory taken at December 31, Year 4. Jones found it impossible to obtain evidence by other auditing procedures as to the beginning inventories for Year 5. Jones observed the physical inventory at December 31, Year 5 and completed the audit satisfactorily. The report to be issued should: - be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows. - be unmodified. - be a disclaimer of opinion. - be qualified as to all of the statements.

The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that:

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

What is the risk of assessing the control risk too high?

The risk is the possibility that the sample results will cause the auditors to assess the control risk at a higher level than is warranted based on the actual operating effectiveness of the control. (relates to efficiency)

T or F: A 100 percent sample would have to be taken to eliminate sampling risk.

True

T or F: Attributes sampling is often used in conjunction with tests of the client's internal control.

True

Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements?

Understatement of outstanding checks.

Over-recorded sales due to economic declines

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? -Restrictions placed on sales by laws and regulations. -Decline in sales due to economic declines. -Decline in sales due to product obsolescence. -Over-recorded sales due to a lack of control over the sales entry function.

dual-purpose test

a test designed to test a control and to substantiate the dollar amount of an account using the same sample

risk of incorrect rejection

the risk that sample results will indicate that a population is materially misstated when, in fact, it is not

Type 1 subsequent event?

those providing additional evidence about facts existing *on or before* the balance sheet date; requires financial statement amounts be adjusted to reflect the changes in estimates resulting from additional evidence

Identify and explain 6 areas in which judgment may be exercised by a CPA in planning a statistical sampling test (SSDDDD)

1) Select sampling method (attributes or discovery) 2) Specify the attributes that relate to the effectiveness of the IC 3) Determine the objectives (Identify IC's interested in) 4) Define the population & sampling unit 5) Determine sample size 6) Determine sample selection method (Random # or Systematic)

Auditors verify deposits in transit as shown on the YE bank reconciliation appear as credits on the bank statement on the first business day of the new year to verify proper ___________ of cash receipts. a. cutoff b. valuation c. rights

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally NOT be able to detect:

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

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

A) Yes Yes

To determine that all sales have been recorded, the auditors would select a sample of transactions from the: A. Shipping documents file. B. Sales journal. C. Accounts receivable subsidiary ledger. D. Remittance advices

A. Shipping documents file.

the auditors' report

An auditors' opinion exception arising from a limitation on the scope of the audit should be explained in: - a note to the financial statements. - both a note to the financial statements and the auditors' report. - the mandatory adjusting entry whenever such a scope limitation occurs. - the auditors' report.

Consider the organizational level to which the internal auditors report the results of their work

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

D) Many forms of it require no action by the auditors.

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

D. Many forms of it require no action by the auditors.

T or F: The larger the standard deviation of a population, the smaller the required sample size.

False - large sample required

An investment committee of the board of directors

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: - An investment committee of the board of directors. - The chief operating officer. - The corporate controller. - The treasurer.

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: a. An investment committee of the board of directors. b. The chief operating officer. c. The corporate controller. d. The treasurer.

Moody's Category B

Material Weakness related to company-level controls such as the control environment or the financial reporting process - Moody thinks this is worse- if a company has a category B MW they should have a lower credit rating

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

Net income is overstated.

Which of the following is most likely to provide an auditor with the most assurance about the effectiveness of the operation of internal control? Recomputation of account balance amounts. Inquiry of client personnel. Observation of client personnel applying the control. Confirmation with outside parties.

Observation of client personnel applying the control.

Which of the following is least likely to be a test of controls?

Observation of confirmations. While tests of controls involve, inquiry, inspection, observation and reperformance, "observation of confirmations" doesn't have a clear meaning.

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

True

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? a. Inaccurate billing due to a lack of controls. b. Lapping of accounts receivable. c. Misbilling a client due to a data input error. d. Recording sales when the customer is likely to return the goods.

difference

_____ estimation is most appropriate when the size of misstatements does not vary significantly in comparison to book value

Type 2 subsequent event?

involves conditions that arose *after* the date of financial statements; do not require adjustments to the dollar amount shown in the financial statements; should be disclosed in the financial statement notes if the statements otherwise would be misleading

Which of the following symbols indicate that a file has been consulted?

squre - triangle

What are the advantages of statistical sampling?

1. design efficient samples 2. measure sufficiency of evidence 3. objectively evaluate sample results, i.e. mathematically measuring risk

Listed below are controls that have been developed by the management of Cirus Manufacturing Co. A. Monitoring B. Control Environment C. Control Activities D. Risk Assessment E. Accounting information

B. Control environment—effective structure, reporting lines, and authority and responsibility.

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

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

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

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

When auditors expect a very low rate of occurrence of some critical deviation, _____________ is often used.

Discovery sampling

Is responsible for mailing the checks

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: - Reviews the monthly bank reconciliation. - Returns the checks to accounts payable. - Is denied access to the supporting documents. - Is responsible for mailing the checks.

Choosing every nth item in the population following one or more random starting points is _____________.

Systematic selection

T or F: A difference between nonstatistical and statistical sampling is reflected in the methods used to interpret sample results.

True

T or F: In variables sampling, as the variability of the population increases, as measured by the standard deviation, the required sample size increases.

True

T or F: It is likely that five different random samples from the same population could produce five different estimates of the true population mean.

True

A. Option A B. Option B C. Option C D. Option D

A. Sales are understated. B. Accounts receivable are understated. C. Inventory is overstated. D. Net income is overstated.

A/R- asset how to audit for it

1. Existence - Confirmations- required by standards - Vouch from A/R trial balance to A/R invoice to BOL to customer order 2. Valuation - Get an aged A/R trial balance 3. Completeness - Trace back from the BOL (not the customer order because of revenue recognition) 4. Cutoff - Review date 5. Accuracy - Confirmations

Two entity-level controls require specific evaluation by the auditor

1. control environment 2. period-end fiancial reporting process

Statistical sampling assists auditors in:

1. designing efficient samples 2. objectively evaluating sample results 3. measuring the sufficiency of the evidence obtained

In addition to the risk factor identified in the preceding question, another risk factor relating to misstatements arising from fraudulent financial reporting is: a. Earnings this year are lower than management had hoped. b. Accounts payable are limited to commercial suppliers. c. Sales are made to residential, commercial, and governmental purchasers. d. The industry faces great technological changes in almost all of its products.

True

A salesperson who uses a cash register to record over the counter sales should, at the end of each workday, turn over to a supervisor the cash register tape and a corresponding amount of cash. True or False

What is nonstatistical sampling?

A sample is said to be nonstatistical when the auditors estimate sampling risk by using professional judgment rather than statistical techniques. Though it is not carelessly selected sampling, nonstatistical sampling provides no means of quantifying sampling risk.

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

A) Develop an understanding of the economic substance of each derivative.

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

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

Internal control over cash receipts is weakened when an employee who receives customer mail receipts also: a. prepares initial cash receipts records. b. records credits to individual accounts receivable. c. prepares bank deposit slips for all mail receipts. d. maintains a petty cash fund.

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: a. Supported by a vendor's invoice b. Stamped "paid" by the check signer c. Prenumbered and accounted for d. Approved for authorized purchases

B) Canceling supporting documentation after payment.

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

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

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

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

Which of the following cash transfers is most likely to result in a misstatement of cash at December 31, 19X7? Bank Transfer Schedule Disbursement Receipt Recorded Paid by Recorded Paid by in books bank in books bank A) 12/31/X7 1/4/X8 12/31/X7 12/31/X7 B) 1/4/X8 1/5/X8 12/31/X7 1/4/X8 C) 12/31/X7 1/5/X8 12/31/X7 1/4/X8 D) 1/4/X8 1/11/X8 1/4/X8 1/4/X8 A) Transfer A B) Transfer B C) Transfer C D) Transfer D

B) Transfer B

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

B. The principal amount paid on a direct liability.

(E) Which of following not correct? a. Cash important to audit process bc vulnerability to misappropriate b. Payroll cash account balances on impress basis are more easily controlled than others not so kept c. Confirmation of cash only performed as of BS date bc auditor express opinion as of that date

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

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

The auditor suspects that a lapping scheme exists because an accounting department employee who has access to cash receipts also maintains the accounts receivable ledger and refuses to take any vacation or sick days.

Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. & Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date.

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

e. 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:

Coordinate the count of cash with the count of marketable securities and other negotiable assets.

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: A. Details of bank deposit slips with details of credits to customer accounts. B. Daily cash summaries with the sums of the cash receipts journal entries. C. Individual bank deposit slips with the details of the monthly bank statements. D. Dates uncollectible accounts are authorized to be written off with the dates the writeoffs are actually recorded.

Details of bank deposit slips with details of credits to customer accounts.

In relation to its materiality, the audit of cash requires little audit time. True False

False

T or F: Statistical sampling techniques permit the auditors to eliminate sampling risk.

False

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

False

What is sampling without replacement?

In using a random number table, it is possible that the auditors will draw the same number more than once. If they ignore the number the second time it is selected and go on to the next number, they are sampling without replacement.

Select each of the following terms with the appropriate attributes. No reply is used more than once. Likelihood of misstatement assuming no controls

Inherent risk

Why do auditors spend large portion of audit on cash (despite small balance)?

Liabilities, revenues, and expenses flow through cash It is the most liquid asset which makes more temptation for misappropriation and is high risk

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

Sign checks, and also cancel supporting documents.

excessive recurring losses on assets retired

The auditors may conclude that depreciation charges are insufficient by noting: - continuous trade-ins of relatively new assets. - insured values greatly in excess of book values. - large amounts of fully depreciated assets. - excessive recurring losses on assets retired.

Inspection of equipment and reconciliation with accounting records

To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic: - Increase in insurance coverage. - Inspection of equipment and reconciliation with accounting records. - Verification of liens, pledges, and collateralizations. - Accounting for work orders.

T or F: The omission of an outstanding check may be indicative of either an error or fraud.

True

T or F: The practice of "kiting" as a means of overstating cash is possible only if the client maintains two or more bank accounts.

True

T or F: The risk of incorrect rejection relates more to the efficiency of a substantive procedure than to the effectiveness of the test.

True

T or F: The standard deviation is a measure of the variability of items in a population.

True

Acquisitions are to be made through and approved by the department in need of the equipment

Which of the following policies is an internal control weakness related to the acquisition of factory equipment? - Advance executive approvals are required for equipment acquisitions. - Acquisitions are to be made through and approved by the department in need of the equipment. - Depreciation policies are reviewed only once a year. - Variances between authorized equipment expenditures and actual costs are to be immediately reported to management.

Assumptions/Given: Risk of assessing control risk too low is 5 % Tolerable deviation rate is 6 % Expected Population Deviation Rate is 2.5 % How do we determine sample size? What is the answer?

You look at the chart to determine sample size. The chart is "statistical sample sizes for tests of controls at 5 percent risk of assessing control risk too low." 150

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

a. Compliance with applicable laws and regulations.

adjusted allowance for sampling risk

Confidence level?

also termed the reliability level, is the complement of the applicable sampling risk factor. If the allowable risk of of assessing control risk too low is 5%, the auditor's desired confidence level is 95%, but if the risk of incorrect rejection is 5%, then the auditor's desired confidence level is 95%

4. No checks are made payable to cash.

disagree

loss of data as it is processed internally by the computer

parity check

alteration of data by an unauthorized terminal user

passwords

Plan, perform, and evaluate samples for tests of controls using statistical and non-statiscial methods (9-5)

risking of assessing control risk too high-the auditors perform more substantive testing that is necessary in circumstance risking of assessing control risk too low- they will inappropriately reduce the extent of their substantive procedures

To be 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

stamped "paid" by the check signer

If auditors find that 10 of the 50 invoices in a test of control were not properly approved:

the deviation rate is 20%

sampling error

the difference between the actual rate or amount in the population and that of the sample.

sampling error

the difference between the actual rate or amount in the population and that of the sample. For example, if the actual (but unknown) deviation rate of 3% exists in a population, and the sample's deviation rate is 2%, then the _____ is 1%.

In which of the following circumstances is it least likely that test of controls will be performed?

the expected deviation rate exceeds the tolerable deviation rate

(E) The auditors who physically examine securities should insist that a client representative be present in order to: a. Detect fraudulent securities b. Lend authority to the auditors' directives c. Acknowledge the receipt of securities returned d. Coordinate the return of securities to the proper locations

A statement covering a specified number of business days following the end of the client's fiscal year is a a. Financial statement b. Bank reconciliation c. Cutoff bank statement d. None of the above

The auditors who physically examine securities should insist that a client representative be present in order to: A) Detect fraudulent securities. B) Lend authority to the auditors' directives. C) Acknowledge the receipt of securities returned. D) Coordinate the return of securities to the proper locations.

C) Acknowledge the receipt of securities returned. Because of the liquidity of many securities, the auditor should insist that a client representative be present in order to acknowledge the receipt of securities returned. In the event of subsequent "disappearance" of a security the auditor will not be a suspect.

Which of the following is not one of the auditors' primary objectives in an examination of investments in securities? A) To determine whether securities are the property of the client. B) To determine whether securities actually exist. C) To determine whether all securities are in proper, secure, files at year-end. D) To determine whether securities are properly classified on the balance sheet.

C) To determine whether all securities are in proper, secure, files at year-end.

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

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

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

Count of investment securities

Tests of controls ordinarily are designed to provide evidence of: A) Balance correctness. B) Control implementation. C) Disclosure adequacy. D) Operating effectiveness.

D) Operating effectiveness. Tests of controls address operating effectiveness of controls.

Which of the following would be least likely to be considered an objective of internal control?

Detecting management fraud

Effective internal control in a small company that that has an insufficient number of employees to permit proper separation of responsibilities can be improved by:

Direct participation by the owner in key record keeping and control activities of the business

T or F: Nonsampling risk may be reduced by increasing the size of the sample.

False

records credits to individual accounts receivable

Internal control over cash receipts is weakened when an employee who receives customer mail receipts also: - maintains a petty cash fund - prepares bank deposit slips for all mail receipts - records credits to individual accounts receivable - prepares initial cash receipts records

The auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low. a. And accounts receivable are immaterial, or the use of confirmations would be ineffective. b. And accounts receivable are composed of large accounts. c. And the effectiveness of confirmations is absolutely determined. d. Or accounts receivable are from extremely reputable customers.

A decision not to confirm accounts receivable

Which of the following is least likely to result in inclusion of an emphasis-of-matter paragraph in an audit report? - The company is a component of a larger business enterprise. - An unusually important significant event. - A decision not to confirm accounts receivable. - A risk or uncertainty.

Selecting items from a population on an arbitrary basis is called: a. haphazard sample selection b. block sample selection c. systematic sample selection

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees

a bank lockbox system

mean-per-unit estimate

a classical variables sampling plan enabling the auditors to estimate the average dollar value (or other variable) of items in a population by determining the average value of items in a sample

deviation rate

a defined rate of departure from prescribed controls. also referred to as occurrence rate or exception rate

A. Foot the cash receipts journal for October. B. Send a bank confirmation as of year-end. C. Prepare a bank reconciliation as of year-end. D. Prepare a bank transfer schedule as of year-end.

Before assessing control risk at a level lower than the maximum, the auditor obtains reasonable assurance that controls are in use and operating effectively. This assurance is most likely obtained in part by: a. performing substantive procedures. b. analyzing tests of trends and ratios. c. inspecting documents. d. preparing flowcharts.

c. inspecting documents.

A. Lend authority of the auditor's directives. B. Detect forged securities. C. Coordinate the return of all securities to proper locations. D. Acknowledge the receipt of securities returned.

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

d. Is less severe than a material weakness.

2. Separate sequences of prenumbered checks are used for each bank account.

disagree

Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling?

When there are few misstatements, the technique will generally result in a smaller sample size than mean-per-unit sampling.

A bank lockbox system.

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? - A bank lockbox system. - Prenumbered remittance advices. - Monthly bank reconciliations. - Daily deposit of cash receipts.

standard deviation

a measure of the variability or dispersion of item values within a population

The auditors' primary objective in selecting a sample of items from an audit population is to obtain:

a representative sample

To auditors primary objective in selecting a sample of items from an audit population is to obtain

a representative sample

Which of the following is least likely to be considered a substantive procedure relating to payroll? a. investigate fluctuations in salaries, wages and commissions b. test computations of compensation under profit sharing for bonus plans c. test commission earnings d. test whether employee time reports are approved by supervisors

How can CPAs be sure the computer programs presented to them are actually used by the client?

1) consider clients general controls 2) observe processing of data 3) request program on a surprise basis

Listed below are controls that have been developed by the management of Cirus Manufacturing Co. The human resources department investigates the educational background of prospective employees. A. Monitoring B. Control Environment C. Control Activities D. Risk Assessment E. Accounting information

B. Control environment—commitment to attract, develop and retain competent employees.

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

D. Occurrence of sales transactions.

You are performing an audit of Systex Corporation and evaluating various controls. Classify the following controls as being primarily preventive, detective, or corrective. Annual physical inventory.

Detective

Auditors should never count a cash fund with the custodian present because the custodian might be able to influence the count. True False

False

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

False

PCAOB Auditing Standards

General Standards (TIC) Technical training Independent mental attitude Care (due professional) Standards of Fieldwork (PIE) Plan the work & supervise assistants Internal Control Evidential matter (to support opinion) Standards of Reporting (GCIDO) GAAP Consistency (in principles) Informative Disclosures Opinion (or an assertion)

Which of the following is correct concerning "window dressing" for cash?

It may increase but not falsify cash position.

You are performing an audit of Systex Corporation and evaluating various controls. Classify the following controls as being primarily preventive, detective, or corrective. Dual signatures for checks

Preventive

In which of the following circumstances is least likely that tests of controls will be performed?

The expected deviation rate exceeds the tolerable deviation rate.

When is difference estimation more appropriate to use?

When the size of misstatements does not vary significantly in comparison to book value. This might be the case when errors are occurring randomly, independently of account size.

paid real estate tax bills

Which of the following is the best evidence of real estate ownership at the balance sheet date? - Paid real estate tax bills. - Original deed held in the client's safe. - Title insurance policy. - Closing statement.

attributes sampling

a sampling plan enabling the auditors to estimate the rate of deviation (occurrence) in a population

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

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

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

D. Presentation and Disclosure

T or F: In using a sequential sampling plan for tests of controls, the auditors are concerned with critical misstatements.

False

T or F: Mean-per-unit estimation is often used in tests of controls, because an estimate of the misstatement is usually desired.

False

T or F: Random sampling is another term for statistical sampling.

False

T or F: The larger the standard deviation of a population, the smaller the required sample size.

False

The auditors are using unstratified mean-per-unit sampling to audit accounts receivable as they did in the prior year. Which of the following changes in characteristics or specifications would result in a larger required sample size this year than that required in the prior year?

Larger variance in the dollar value of accounts.

The auditors have sampled 50 accounts from a population of 1,000 accounts receivable. The sample items have a mean book value of $200 and a mean audited value of $203. The book value in the population is $198,000. What is the estimated audited value of the population using the mean-per-unit method?

The estimated total audited value of the population using the mean-per-unit method is calculated as $203 (mean audited value in sample) x 1000 accounts = $203,000.

Unmodified opinion

The opinion expressed by the auditors when they conclude that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework (e.g., GAAP)

The preliminary assessments of control risks are often referred to as

The planned assessed level of control risk

The preliminary assessments of control risk are often referred to as: The assessed level of control risk. The planned assessed level of control risk. Control risk. Internal control objectives risk.

The planned assessed level of control risk.

Audit sampling

The process of selecting and evaluating a sample of items (whether statistical or non-statistical) from a population of audit relevance such that the auditors expect the sample to be representative of some characteristic of the population.

Completeness

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? - Existence or occurrence. - Completeness. - Rights and obligations. - Presentation and disclosure.

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

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

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

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

Standards of the Public Company Accounting Oversight Board (United States)

An audit report for a public client indicates that the audit was performed in accordance with: - Generally accepted auditing standards (United States). - Standards of the Public Company Accounting Oversight Board (United States). - Generally accepted accounting principles (United States). - Generally accepted accounting principles (Public Company Accounting Oversight Board).

Which of the following is a frequent control over cash disbursements? a. Checks should be signed by the controller and at least one other employee of the company. b. Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations. c. Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation. d. Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement.

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

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

Detective

Confirmation in writing from the holder of the note is considered an acceptable alternative to inspection

Which of the following statements regarding the audit of negotiable notes receivable is correct? - Notes receivable discounted without recourse are confirmed via the standard form for confirmation of deposits and loans at financial institutions used in the audit of cash. - Physical inspection of a note by the auditors provides conclusive evidence. - Notes receivable discounted with recourse need not be confirmed. - Confirmation in writing from the holder of the note is considered an acceptable alternative to inspection.

An auditor's flowchart of a client's internal control is a diagrammatic representation which depicts the auditors': a. understanding of the system. b. program for tests of controls. c. planned tests of controls. d. documentation of control risk.

a. understanding of the system.

Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by

direct participation by the owner in key record keeping control activities of the business

Random selection?

every item in the population has an equal chance of being selected for inclusion in the sample

random selection

in _____ every item in a population has an equal chance of being selected

decrease

increase in risk of incorrect acceptance will _____ sample size

T or F: When the confirmation process is not performed electronically, confirmation requests should be mailed by the auditors in envelopes bearing the auditors' return address.

True

decrease

increase in risk of incorrect rejection will _____ sample size

Techniques used for selecting random samples include:

1. random number tables 2. random number generators

Which type of sampling plan is most frequently used in testing control activities?

Attributes sampling

(E) What is the answer to question #39?

Audit firms use structured approaches to non-statistical sampling that are based on statistical methods in order to: a. quantify the level of sampling risk for the sample b. increase consistency of sampling judgments throughout the firm c. quantify the factors used in sample size calculations

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

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

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

False

T or F: Auditors should never count a cash fund with the custodian present because the custodian might be able to influence the count.

False

Which of the following is ordinarily considered a test of a control? Count and list cash on hand. Send confirmation letters to financial institutions. Examine signatures on checks. Obtain or prepare reconciliations of bank accounts as of the balance sheet date.

Examine signatures on checks.

Auditors project the misstatements found in the sample to the population when using statistical sampling, but not when using nonstatistical sampling. True False

False

Make a surprise observation of the company's regular distribution of paychecks on a test basis

Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job? - Examine human resources records for accuracy and completeness. - Examine employees' names listed on payroll tax returns for agreement with payroll accounting records. -Make a surprise observation of the company's regular distribution of paychecks on a test basis. - Visit the working areas and verify that employees exist by examining their badge or identification numbers.

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? a. Observe the consistency of the employees' use of cash registers and tapes. b. Inquire about employees' access to recorded but undeposited cash. c. Trace deposits in the cash receipts journal to the cash balance in the general ledger. d. Compare the cash balance in the general ledger with the bank confirmation request.

A. Comparison of postings of cash receipts to accounts with the details of cash deposits. B. Confirmation of the cash balance. C. Reconciliation of the cash account balances. D. Preparing a proof of cash.

This sampling method assumes a sample's average audited value will, for a certain sampling risk and allowance for sampling risk, represent the true audited value of the population. a. mean-per-unit estimation b. difference estimation c. ratio estimation

The estimated deviation rate obtained from attributes sampling is useful in satisfying the auditing standard which states:

a sufficient understanding of the internal control is to be obtained to plan the audit and determine the nature, timing, and extent of other audit tests.

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? a) A bank lockbox system. b) Prenumbered remittance advices. c) Monthly bank reconciliations. d) Daily deposit of cash receipts.

a) A bank lockbox system.

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

Discovery sampling is particularly effective when a. There are a large number of errors in the population. b. The auditors are looking for critical deviations that are not expected to be frequent in number. c. The auditors know where deviations are likely to occur. d. The population is large in size.

b. The auditors are looking for critical deviations that are not expected to be frequent in number.

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

Assume the following relating to a PPS sample: Projected Misstatement = $20,000; Basic Precision = $16,000; Incremental Allowance = $4,500; Tolerable Misstatement = $34,000. The upper limit on misstatement equals. A. $74,500. B. $20,500 C. $20,000. D. $40,500.

A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with: A) Knowledge necessary to determine the nature, timing, and extent of further audit procedures. B) Audit evidence to use in reducing detection risk. C) A basis for modifying tests of controls. D) An evaluation of the consistency of application of management policies.

A) Knowledge necessary to determine the nature, timing, and extent of further audit procedures. Because the auditors' purposes for considering internal control are to obtain the necessary knowledge to (a) assess the risks of material misstatement, and (b) to determine the nature, timing, and extent of the tests to be performed, answer (1) is correct.

T or F: The risk of assessing control risk too high relates to the effectiveness of the audit.

False

T or F: In attributes sampling, the risk of assessing control risk too high is often not controlled when using statistical sampling.

True

A. Tracing recorded dividend income to cash receipts records and validated deposit slips. B. Utilizing analytical techniques and statistical sampling. C. Comparing recorded dividends with amounts appearing on federal information form 1099s. D. Comparing recorded dividends with a standard financial reporting service's record of dividends.

A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with:

Knowledge necessary to determine the nature, timing, and extent of further audit procedures.

Select each of the following terms with the appropriate attributes. No reply is used more than once. GAAP

Suitable criteria

Which of the following should not normally be included in the engagement letter for an audit

a listing of the client's branch offices selected for testing

When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed level of control risk will: a. Be less than the preliminary assessed level of control risk. b. Equal the preliminary assessed level of control risk. c. Equal the actual control risk. d. Be less than the actual control risk.

b. Equal the preliminary assessed level of control risk.

The effectiveness of controls is not generally tested by: a. Inspection of documents and reports. b. Performance of analytical procedures. c. Observation of the application of accounting policies and procedures. d. Inquiries of appropriate client personnel.

b. Performance of analytical procedures.

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

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

A client has $100,000 on deposit at year-end and owes the bank $250,000 on a note payable. The borrowing agreement calls for the client to maintain a minimum (compensating) balance of $40,000 on deposit during the life of the bank loan. On the balance sheet, the asset cash should be stated at $60,000, the excess of the deposit over the compensating balance. True False

False

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

The principal amount paid on a direct liability

Utilization of serially numbered retirement work orders

To assure accountability for fixed asset retirements, management should implement an internal control that includes: - Continuous analysis of miscellaneous revenue to locate any cash proceeds from the sale of plant assets. - Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired. -Utilization of serially numbered retirement work orders. - Periodic observation of plant assets by the internal auditors.

A salesperson who uses a cash register to record over the counter sales should, at the end of each workday, turn over to a supervisor the cash register tape and a corresponding amount of cash. T/F

True

Increases in the number of deviations in an attributes sample results in an increase in the achieved upper deviation rate of the attributes sample. True False

True

Increases in the tolerable misstatement result in a decreased sample size when using mean-per-unit estimation. True False

True

Stratification of the population generally results in a more efficient sampling plan. True False

True

T or F: The allowance for sampling risk for a substantive procedure is determined based in part on the tolerable misstatement in the account.

True

T or F: The effect of the inclusion by chance of a very large or very small item in a random sample can be lessened by increasing the size of the sample.

True

T or F: The tolerable misstatement is an estimate of the maximum monetary misstatement that may exist in an account and still not lead to a material misstatement in the financial statement.

True

A. Separate recordkeeping from accounting for cash to the extent possible. B. Deposit each day's cash receipts intact. C. Separate cash handling from recordkeeping. D. Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks.

The financial management of a company should take steps to see that company's investment securities are protected. Which of the following is not a step that is designed to protect investment securities? a. Access to securities should be vested in more than one person. b. Securities should be registered in the name of the owner. c. Securities should be properly controlled physically in order to prevent unauthorized usage. d. Custody of securities should be assigned to persons who have the accounting responsibility for securities.

d. Custody of securities should be assigned to persons who have the accounting responsibility for securities.

What hardware components are peripheral to the principal hardware component?

input devices and output devices and auxiliary storage devices

Auditors examine financial investments to gain an understanding of the client and its environment, and to assess __________ risks including the risk of fraud. a. inherent b. business c. audit

Cutoff bank statements include activity for the period _______the period being audited. a. after b. before c. disclosing d. inclusive of e. overlapping

To verify cutoff of financial investments, auditors will review: a. transactions for 2 weeks after the balance sheet date b. transactions for 2 weeks prior to the balance sheet date c. transactions during the audit fieldwork d. a sample of transactions during the year

The auditors should review cutoff bank statements for any paid checks issued on or before the BS date but not listed as outstanding on the client's YE bank reconciliation, in order to determine that the amount of cash shown on the BS date was not ____________. a. understated b. overstated

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department?

Canceling supporting documentation after payment.

Which of the following best describes what is meant by the term "fraud risk factor"

Factors often observed in circumstances where frauds have occurred

is owned by the company

Purchase cutoff procedures should be designed to test whether purchases recorded near year-end: - is owned by the company. - on the year-end balance sheet was carried at lower of cost or market. -on the year-end balance sheet was paid for by the company. - is in the possession of the company.

To document auditors understanding of internal controls over cash, auditors often use a flowchart or internal control __________.

Questionnaire

Statistical sampling cannot be used to test all control activities. True False

True

"Kiting" of cash.

a. Preparing and verifying a schedule of bank transfers.

attributes

are characteristics that provide evidence that a control was actually performed

49. Which of the following cash transfers is most likely to result in a misstatement of cash at December 31, 19X7?

bank transfer schedule disbursing receipt recorded/ paid recorded/ paid book by bank book by bank a.12/31/x7 / 1/4/x8 12/31/x7 / 12/31/x7 b. 1/04/x8 / 1/5/x8 12/31/x7 / 1/4/x8 c. 12/31/x7 / 1/5/x8 12/31/x7 / 1/4/x8 d.1/4/x8 / 1/11/x8 1/4/x8 / 1/4/x8

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

in testing controls over cash disbursements the auditors most likely would determine that the person who signs checks also:

is responsible for mailing the checks

a primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with:

knowledge necessary to determine the nature, timing, and extent of further audit procedures

Controls over financial reporting are often classified as preventative, detective or corrective. Which of the following is an example of detective control?

preparing bank reconciliations

interception of data when it is transmitted

private lines

The number of personnel in an information system may limit the extent to which segregation of duties is feasible. what is the minimum amount of segregation of duties that will permit satisfactory internal control?

programmer must be separate from operating computer and controlling input operates should not have custody or details knowledge of programs

to estimate the total audited dollar value of the population of 10,000 items, using the mean per unit estimation method, one would multiply the sample mean audited value times 10,000

Stratification selection?

technique of dividing a population into relatively homogenous subgroups called *strata*

A company's decision to use the fair value option for valuation of marketable securities is most likely to affect which of the following assertions the most?

Presentation and Disclosure.

Preventive Supervisory approval of time cards is a preventative control because it would serve to prevent errors and fraud with respect to payroll transactions. The supervisor approval would help to prevent errors or fraud in the time records.

Match the situation by selecting the sampling technique that would be most appropriate. The auditors wish to estimate the value of accounts receivable by confirmation; the auditors expect a very low deviation rate in recorded amounts.

Probability proportional to size sampling

When the auditors are performing a first-time internal control audit in accordance with the Sarbanes_Oxley Act and PCAOB standards, they should:

Test controls for all significant accounts.

5. "This is because it was not written until 1/1/year 6."

Replace with "But since the bank transfer schedule shows that it was received on 12/31/year 5 in the special account, we should investigate this transaction further."

4. "The deposit in transit seems properly handled on the bank reconciliation (Exhibit 2) with a debit to cash."

Replace with "The deposit in transit seems to have taken too long to reach the bank; we should investigate this further."selected answer correct

2. "No adjusting entry is needed as of 12/31/year 5."

Replace with "We should propose an adjusting entry as of 12/31/year 5 debiting cash and crediting accounts receivable for $6,000."selected answer correct

T or F: A cutoff bank statement addresses whether checks outstanding at year‑end were included in the list of outstanding checks in the year‑end bank reconciliation.

True

T or F: A derivative is a financial instrument that derives its value from another financial instrument, an underlying asset, or indices.

True

T or F: In general, all items in excess of a material misstatement need to be examined and sampling of them is inappropriate.

True

T or F: Unrestricted random sampling with replacement may result in a larger sample size than unrestricted random sampling without replacement.

True

Under PCAOB standards, when a significant deficiency exists, the auditors' report on internal control is most likely to include an opinion that is: qualified. disclaimer. unqualified. adverse.

unqualified.

In a restaurant setting, control over cash sales are best handled when: a. the sales ticket is prepared by an employee who also receives cash from the customer and deposits cash to bank daily b. the sales ticket is prepared by an employee who also receives cash from the customer c. the sales ticket is prepared by a separate employee and cash is received from a centrally located cashier

Which of the following is not an advantage of establishing an enterprise risk management system system within the organization

Eliminate all risks

Which of the following is not an advantage of establishing an enterprise risk management system within an organization?

Eliminates all risks

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

False

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

False

Good internal control over financial investments requires that the treasurer obtain certificates for all securities and keep them in the company safe. True False

False

Kiting

Manipulations causing an amount of cash to be included simultaneously in the balance of two or more bank accounts. These kind of schemes are based on the float period - the time necessary for a check deposited in one bank to clear the bank on which it was drawn.

A derivative is a financial instrument that derives its value from another financial instrument, an underlying asset, or indices. True False

True

Haphazard selection?

items selected on an arbitrary basis, but without any conscious bias

selecting every 50th invoice for inclusion in a sample is termed systematic sampling

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:

stamped "paid" by the check signer

Selecting every 50th invoice for inclusion in a sample is termed ________ ________

systematic selection

Most misstatements of assets involve: a. Overstatement b. Understatement

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

False

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

False

Using ratio and difference estimation for a sample is an example of a dual purpose test. True False

False

steps involved in using sample evaluation tables

1) select corresponding table 2) locate column that contains the actual # of deviations 3) Locate row that contains the sample size 4) Read the upper deviation limit from the intersection of the row and column

When performing tests of controls over authorization of cash receipts, which of the following sampling methods would be most appropriate? A. Stratified. B. Variables. C. Ratio. D. Attributes.

Discovery sampling is particularly effective when:

the auditors are looking for critical deviations that are not expected to be frequent in number

The petty cash funds and change funds may be counted at any time before or after the __________ date.

Balance sheet

risk of assessing control risk too low

this most important risk is the possibility that the assessed level of control risk based on the sample is less than the true operating effectiveness of the controls

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

False

The audit working paper known as a "proof of cash" is a means of proving that checks paid by the bank during the test period were not in excess of authorized cash receipts during that same test period. True False

False

Sampling without replacement?

means that once an item is drawn for a sample, it cannot be included again results in a smaller sample size because the population is treated as finite

systematic selection

the technique of selecting a sample by drawing every nth item in the population, following one or more random starting points

the tolerable misstatement is an estimate of the maximum monetary amount that may exist in an account and still not lead to a material misstatement in the financial statement

Holding all other factors constant, an increase in the planned allowance for sampling risk will occur if the:

tolerable misstatement increases.

To establish the existence and ownership of a large long-term investment in the common stock of a publicly traded company, the auditors ordinarily perform a security count or:

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

What are the last four steps of audit sampling for substantive testing?

5. Select the sample. 6. Test the sample items. 7. Evaluate the sample results. 8. Document the sampling procedure.

What factors should be considered in qualitatively evaluating sample results?

Evidence of management override , collusion, and fraud

Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control? Segregation of duties over cash disbursements. Requiring approval of purchase transactions. Preparing bank reconciliations. Maintaining backup copies of key transactions.

Preparing bank reconciliations

You are performing an audit of Systex Corporation and evaluating various controls. Classify the following controls as being primarily preventive, detective, or corrective. Supervisory approval of time cards.

Preventive

What is stratification?

Technique of dividing population into relatively homogeneous subgroups.

FASB ASC 320 divides securities into three portfolios including: (Select all that apply) a. trading securities b. held-to-maturity securities c. available-for-sale securities d. liquid securities

A, B, C

Auditors working papers for cash typically include: (Select all that apply) a. lead schedule b. bank confirmations c. aged trial balance d. cash count sheets e. petty cash reconciliations

A, B, D

True

True or False: only when the upper deviation rate is less than or equal to the tolerable deviation rate would the sample results support the auditors' planned assessed level of control risk

Using the same facts as in (k) above, what is the estimated total audited value of the population using the difference method?

$201,000

Understand the different types of sampling plans used in auditing (9-3) (PACD)

1) Probability-proportional-to-size sampling - expresses a conclusion in monetary dollar amounts 2) Attributes sampling- would estimate the the % of extensions that are in error, estimating the rate of deviation in a population 3) Classical variables sampling - estimate of numerical quantity 4) Discovering sampling - planned for locating at least 1 deviation, providing that the deviation occurs in the population with a specified frequency

b. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the: 1. Efficiency of the audit 2. Effectiveness of the audit 3. Selection of the sample 4. Audit quality controls

1. • The risk of incorrect rejection and the risk of assessing control risk too high relate to the efficiency of the audit. This is because the errors from the efficiency of the audit result in additional audit procedures.

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The entity's cash receipts of the first few days of the subsequent year were properly deposited in its general operating account after the yearend. However, the auditor suspects that the entity recorded the cash receipts in its books during the last week of the year under audit. (Select only 1 procedure.)

The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer check received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare the: a. Details of bank deposit slips with details of credits to customer accounts b. Daily cash summaries with the sums of the cash receipts journal entries c. Individual bank deposit slips with the details of the monthly bank statements d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded

Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by:

Direct participation by the owner in key record keeping and control activities of the business

The auditors have sampled 50 accounts from a population of 1,000 account receivable. The sample items have a mean book value of $200 and a mean audited value of $203. The book value in the population is $198,000. What is the estimated audited value of the population using the mean-per-unit method?

$203,000

The auditors have sampled 50 accounts from a population of 1,000 accounts receivable. The sample items have a mean book value of $200 and a mean audited value of $203. the book value in the population is $198,000. What is the estimated audited value of the population using the mean-per-unit method?

$203,000

Use the following information: Mean book value of items in sample: $32 Mean audited value of items in sample: $31 Mean book value of items in population: $33 Number of items in population: 10,000 Using difference estimation, the estimated total audited value is:

$320,000

$330,000

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. Involvement of the owner in key control functions should be a major step toward preventing material errors or defalcations. Answer (1) would not be cost-effective. Answer (3) would provide some measure of control, but not as much as would daily participation by the owner. If it were feasible to hire additional employees, it would be cheaper to hire permanent employees rather than temporary. The need for internal control is permanent. Answer (4) would weaken, not strengthen internal control

The preliminary assessments of control risk are often referred to as: (1) The assessed level of control risk. (2) The planned assessed level of control risk. (3) Control risk. (4) Internal control objectives risk.

(2) The planned assessed level of control risk. The planned assessed level of control risk is determined during planning.

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. An increase in the substantive procedures will decrease detection risk, and thereby compensate for the increased level of control risk due to a weakness in internal control. Answer (1) is incorrect because if the weakness exists, increasing the extent of tests will only provide more evidence on the weakness—not evidence that compensates for the weakness. Answers (2) and (4) are incorrect because a decrease in detection risk or inherent risk, not an increase, would compensate. Also, in the case of inherent risk, it may not be possible to change the assessment since it is a function of the firm's environment.

the risk of incorrect rejection of an account

(alpha risk) possibility that the sample results will indicate an account balance is materially misstated, when in fact, it is not misstated

Non-statistical sampling

(auditor's opinion) the risk of error is estimated by the auditors by judgement rather than by laws of probability advantage: faster, no training of auditors disadvantage: provides no means of quantifying sampling risk (they could be taking a costly sample size without knowing it)

the risk of incorrect acceptance of an account

(beta risk) possibility that sample results will indicate that an account balance is not materially misstated, when in fact, it is materially misstated

Factors when deciding the extent of tests of controls

- Nature of the control - frequency of operations - importace of the control

As illustrated on the next slide, the auditor must consider two dimensions of the control deficiency:

- likelihood (reasonably possible) - magnitude (material, significant, or insignificant)

Discuss 6 types of control that would apply to this microcomputer application

1) programs and operating processing should be documented 2) operators should be well trained 3) operators should not be in a position to create errors or prevent their detection 4) log work of station use 5) system of authorization 6) back up

j. An auditor needs to estimate the average highway weight of tractor-trailer trucks using a state's highway system. Which estimation method is most appropriate? 1. Mean per unit 2. Difference 3. Ratio 4. Probability proportional to size

1. • The best estimation method would be mean per unit. There is no definite weight so using the mean per unit difference would be the best bet.

For each term in the first column, find the closest definition (or portion of a definition) in the second column. Each definition may be used only once or not at all. A. Compensating control B. Complementary control C. Corrective control D. Deficiency in internal control E. Material weakness in internal control F. Walk-through G. Transaction cycle

1. A control established to remedy misstatements that are discovered 2. A control that functions together with another control to achieve the same control objective 3. A control that reduces the risk that an existing or potential control weakness will result in a failure to meet a control objective 4. A control that reduces the risk of misstatement by remediating control deficiencies through automated means 5. A deficiency in internal control such that there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis 6. A deficiency in internal control that is less severe than a material weakness, but more severe than a significant deficiency 7. A situation in which a control does not allow management or employees, in the normal course of performing their functions, to prevent or detect misstatements on a timely basis 8. Duplicate controls that achieve a control objective 9. Procedures cycled periodically through the auditors' internal control deviation analysis 10. The sequence of procedures applied by the client in processing a particular type of recurring transaction 11. A procedure in which an auditor follows a transaction from origination through the company's processes, including information systems, until it is reflected in the company's financial records

To calculate projected misstatement, what are the 7 columns, left to right?

1. Book Value 2. Audited Value 3. Misstatement 4. Tainting Percentage (misstatement / book value) 5. Sampling interval 6. projected misstatement (tainting percentage x sampling interval) 7. upper limit on misstatements

f. The auditors are using unstraitifed mean-per-unit sampling to audit accounts receivables as they did in the prior year. Which of the following changes are characteristics or specifications would result in a large required sample size this year than he required in the prior years? 1. Larger variance in the dollar value of accounts 2. Smaller population size 3. Larger tolerable misstatement 4. Higher risk of incorrect acceptance

1. Larger variance in the dollar value of accounts

Once you have the sample size and sampling interval, what is the calculation for PPS Evaluation of Results?

1. Projected misstatement 2. + basic precision (reliability factor x sampling interval) 3. + incremental allowance = Upper Limit on Misstatement

Auditors can measure and control the risk of material sampling error by deciding on an appropriate:

1. level of sampling risk 2. allowance for sampling risk

a. Which of the following is an element of sampling risk? 1. Choosing an audit procedure that is inconsistent with the audit objective 2. Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement. 3. Failing to detect an error on a document that has been inspected by an auditor. 4. Failing to perform audit procedures that are required by the sampling plan

2. • Sampling risk is making a decision based on the sample result that could be the wrong decision. All the other answer choices are examples are Nonsampling risk.

Using the same facts as in (k) above, what is the estimated total auditted value of the population using the difference method?

201,000

Select the audit procedure with the error or fraud that the procedure is likely to detect. a. Preparing and verifying a schedule of bank transfers. b. Tracing remittance advices to postings in the accounts receivable records. c. Comparing the serial numbers of securities on hand to numbers recorded in the prior year's audit working papers. d. Review of the bank cutoff statement. e. Preparing a "proof of cash" for the entire audit period. "Kiting" of cash.

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? a. A bank lockbox system b. Prenumbered remittance advices c. Monthly bank reconciliations d. Daily deposit of cash receipts

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? A. A bank lockbox system. B. Prenumbered remittance advices. C. Monthly bank reconciliations. D. Daily deposit of cash receipts.

A bank lockbox system

False

A substantial portion of the company's inventory was written off as obsolete on January 31.

A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements? - A major subsidiary was sold on February 7. - The client decided to change depreciation methods in the coming year. - A substantial portion of the company's inventory was written off as obsolete on January 31. - The factory building was damaged by a fire on January 19.

Modified opinion

A qualified opinion, an adverse opinion, or a disclaimer of opinion.

Incoming customer checks are opened by mailroom employees who: (Select all that apply) a. send the remittance advices and a copy of the control listing to the employee responsible for the customer's accounts b. send a copy of the control listing and the cash receipts to the controller c. endorse the checks "for deposit only"

A, C

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

A. A fraudulent cash confirmation.

Listed below are controls that have been developed by the management of Cirus Manufacturing Co. Management surveys customers about their satisfaction with the company's service. A. Monitoring B. Control Environment C. Control Activities D. Risk Assessment E. Accounting information

A. Monitoring—ongoing.

Rollover approach

An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements (including projecting misstatements where appropriate) only during the current year.

Auditors can use __________ procedures to test the reasonableness of the amounts of recorded dividend and interest income.

Analytical

What is audit sampling?

Applying a procedure (test) to less than 100% of a population.

What affects audit effectiveness?

Assessing control risk too low (too little risk); not performing enough testing

An improper type of reporting

Assume that the opinion paragraph of an auditors' report begins as follows: "With the explanation given in Note 6, . . . the financial statements referred to above present fairly. . ." This is: - An unmodified opinion. - A disclaimer of opinion. - An "except for" opinion. - An improper type of reporting.

Which of the following sampling techniques is typically used for tests of controls?

Attribute sampling

After auditing cash, it is important to evaluate proper financial statement presentation and __________ of cash. a. adjusting b. counting c. disclosure d. inventory e. misstatement

When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they must: A) Modify their report for any significant deficiencies identified. B) Use a "bottom-up" approach to identify controls to test. C) Test controls for all significant accounts. D) Perform a separate assessment of controls over operations

C) Test controls for all significant accounts. In an audit of internal control performed under PCAOB standards, the auditors must test controls for all significant accounts.

On receiving the bank cutoff statement, the auditor should trace:

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

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

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

Anderson embezzled $20,000 from her company's account in Bank X. At year-end, she hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. She has not recorded the transaction on the books. Which of the following is most likely to be effective in detecting this fraud?

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

For each of the controls, identify the internal control component and, if applicable, the subcomponent or principle to which it relates. Control components may be selected more than once. The human resources department investigates the educational background of prospective employees.

Control environment. /commitment to attract, develop and retain competent employees.

A control established to remedy misstatements that are discovered

Corrective control

(E) Which of the following are not confirmed on standard bank confirmation form used for cash balances at financial institutions? a. Checking account balances b. Savings balance c. Loans payable d. Securities held for client by financial institution

(E) Your client left cash receipts journal open at YE for extra day and included 1/1 cash receipts in december totals. Cash sales. What likely happened? a. Sales understated b. A/R understated c. Inventory overstated d. Net income overstated

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

D) General ledger.

Management of Warren Company has decided to respond to a particular risk by hedging the risk with futures contracts. This is an example of: A) Avoidance. B) Acceptance. C) Reduction. D) Sharing.

D) Sharing. Hedging the risk is an example of risk sharing in that it involves reducing risk likelihood or impact by transferring or sharing a portion of the risk.

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

D. Check Clearing for the 21st Century Act

8. "Check 2032 appears to result in the cash being recorded in both accounts per books as of year-end and thus overstates total cash by $1,500 at year-end."

Delete entire point 8.

Details of bank deposit slips with details of credits to customer accounts

Documentation

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:

Establish internal control with no material weakness

What are examples of nonsampling errors?

Examples of nonsampling errors include: the auditors may fail to apply appropriate audit procedures, or they may fail to recognize errors in the documents or transactions that are examined.

A compensating balance agreement always requires that cash be reclassified as a noncurrent asset. True False

False

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

False

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

False

An improper bank reconciliation designed to conceal a cash shortage is more likely to overstate than understate the amount of outstanding checks. True False

False

Auditors normally verify the amount of dividends earned on the client's security investments by writing directly to the companies which paid the dividends. True False

False

Marketable equity securities should be valued at cost. T/F

False

T or F: Auditors normally verify the amount of dividends earned on the client's security investments by writing directly to the companies that paid the dividends.

False

T or F: Good internal control over financial investments requires that the treasurer obtain certificates for all securities and keep them in the company safe.

False

The inspection of securities on hand should be coordinated with the verification of inventories because both involve counting and inspection and can conveniently be combined. True False

False

T or F: The audit working paper known as a "proof of cash" is a means of proving that checks paid by the bank during the test period were not in excess of authorized cash receipts during that same test period.

False - reconciles bank and client activity

T or F: Unrestricted random sampling normally results in a smaller sample size than does stratified sampling.

False - unrestricted results in larger size

to gather evidence regarding the balance per bank reconciliation, the auditors would examine ant of the following except:

General ledger

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The entity borrowed funds from a financial institution. Although the transaction was properly recorded, the auditor suspects that the loan created a lien on the entity's real estate that is not disclosed in its financial statements. (Select only 1 procedure.)

When auditors arbitrarily select items from a population they are using _____________ sampling.

Haphazard

Write-offs must be approved by a responsible official review of credit department

Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable: - Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. - Write-offs must be approved by the accounts receivable department. - Write-offs must be authorized by the shipping department. - Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.

Implemented

What is tainting?

In PPS sampling, the percentage of misstatement of an item (misstatement amount divided by book value).

Well-kept records of perpetual inventory are maintained

Instead of taking a physical inventory count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and: - Well-kept records of perpetual inventory are maintained. - Inventory is slow-moving. - Computer error reports are generated for missing prenumbered inventory tickets. - Obsolete inventory items are segregated and excluded.

For purposes of an audit of financial statements, electronic confirmation of cash balances

Is acceptable when properly controlled.

For purposes of an audit of financial statements, electronic confirmation of cash balances:

Is acceptable when properly controlled.

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also:

Is responsible for mailing the checks

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: A. Reviews the monthly bank reconciliation. B. Returns the checks to accounts payable. C. Is denied access to the supporting documents. D. Is responsible for mailing the checks.

Is responsible for mailing the checks.

12. The auditor suspects that the entity's controller has overstated sales and accounts receivable by recording fictitious sales to regular customers in the entity's books. (Select only 2 procedures.)

J,L. ------- J Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer.

Larger variance in the dollar value of accounts

Statistical sampling generally may be applied to test internal control when the client's internal control procedures:

Leave an audit trail in the form of evidence of compliance

1. "Lapping" of accounts receivable. b 2. Using the company's securities during the year and replacing them. c 3. "Kiting" of cash. a 4. Understating the outstanding checks on the year-end bank reconciliation. d 5. Recording fictitious cash sales. e

Listed below are types of errors or fraud that might occur in financial statements. Select the audit procedure with the error or fraud that the procedure is likely to detect. Audit Procedure a. Preparing and verifying a schedule of bank transfers. b. Tracing remittance advices to postings in the accounts receivable records. c. Comparing the serial numbers of securities on hand to numbers recorded in the prior year's audit working papers. d. Review of the bank cutoff statement. e. Preparing a "proof of cash" for the entire audit period.

An entity's ongoing monitoring activities often include: Periodic audits by internal auditors. The audit of the annual financial statements. Approval of cash disbursements. Management review of weekly performance reports.

Management review of weekly performance reports.

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

Many forms of it require no action by the auditors.

In mean-per-unit estimation, what is the estimated total audited value?

Mean audited value x number of accounts

An auditor needs to estimate the average highway weight of tractor-trailer trucks using a state's highway system. Which estimation method is more appropriate ?

Mean per unit

An auditor needs to estimate the average highway weight of tractor-trailer trucks using a state's highway system. Which estimation method is most appropriate?

Mean per unit

For each of the controls, identify the internal control component and, if applicable, the subcomponent or principle to which it relates. Control components may be selected more than once. Management surveys customers about their satisfaction with the company's service.

Monitoring. /OnGoing

For each of the controls, identify the internal control component and, if applicable, the subcomponent or principle to which it relates. Control components may be selected more than once. The internal auditors periodically evaluate the controls in the various departments of the company.

Monitoring. /separate evaluations.

Duplicate controls that achieve a control objective

N/A

Tests of controls ordinarily are designed to provide evidence of: Balance correctness. Control implementation. Disclosure adequacy. Operating effectiveness.

Operating effectiveness.

Tests of controls ordinarily are designed to provide evidence of:

Operating effectiveness. Tests of controls address operating effectiveness of controls.

revenue and expense account totals to the corresponding figures of the preceding years

Overall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly: - revenue and expense account totals to the corresponding figures of the preceding years. - income statement ratios to published industry averages. - income statement ratios to balance sheet ratios. - revenue and expense account balances to the monthly reported net income.

The auditor suspects that the entity is inappropriately increasing the cash reported on its balance sheet by drawing a check on one account and not recording it as an outstanding check on that account and simultaneously recording it as a deposit in a second account.

Prepare a bank transfer schedule.

Preventive

Reconciliation of the bank account should not be performed by an individual who also: A. Processes cash disbursements. B. Has custody of securities. C. Prepares the cash budget. D. Reviews inventory reports.

Process cash disbursements

Reconciliation of the bank account should not be performed by an individual who also:

Processes cash disbursements

6. The auditor suspects that selected employees of the entity received unauthorized raises from the entity's payroll supervisor, who has access to payroll records. (Select only 1 procedure.)

Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files.

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

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

Assessing the control risk too low results in an inappropriate _______ of the extent of substantive procedures.

Reduction

Internal control over financial investments should require that securities are ____________ in the name of the company.

Registered

Relationship of costs and benefits

6. "...be deleted from the outstanding check list; no adjusting journal entry seems necessary."

Replace with "be deleted from the check list, with a possible adjusting journal entry proposed debiting cash and crediting a miscellaneous revenue type account."selected answer correct

Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent

What are some risks associated with nonstatistical sampling?

Sample may be larger than necessary or auditors may unknowingly accept a higher than acceptable degree of sampling risk.

Variables sampling

Sampling plans designed to estimate a numerical measurement of a population, such as a dollar value.

What is sampling risk?

Sampling risk is the risk that the auditors' conclusion based on a sample might be different from the conclusion they would reach if they examined every single item in the entire population.

Which of the following is not confirmed on the standard confirmation form used for cash balances at financial institutions?

Securities held for the client by the financial institution.

In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to miscellaneous revenue. The most effective method for detecting this type of error is:

Send a bank confirmation as of year-end.

Which of the following statistical sampling techniques involves taking samples in a series of stages?

Sequential Sampling

Distinguish between sequential methods of data processing and direct access processing

Sequential- files are arranged sequentially and transaction data are sequenced before processing. The entire file must be read each time a transaction is processed Direct assess- file data are not maintained in any particular order, Not necessary to read entire file to update

______ auditors are the auditors of a service organization.

Service

Auditors selected by a service organization to assess systems

Service Auditors

Perform data processing/computer/IT services, like payroll processing, for various clients

Service Organization

In auditing through a computer, CPAs may use test data (8-6) what are test data? Why do CPAs use test data?

Set of data representing a range of simulated transactions some of which may have errors 1) gain better understanding of how compute process 2) test accuracy by comparing manual results 3) test whether or not the system is capable of detecting errors

b. 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:

Stamped "paid" by the check signer.

After the auditors identify and assess risks of material misstatement for the assertions about cash, they can plan appropriate __________ procedures that address them.

Substantive

Which portion of an audit is least likely to be completed before the balance sheet date

Substantive procedures

An auditor may compensate for a weakness in internal control by increasing the extent of:

Substantive tests of details

an auditor may compensate for a weakness in internal control by increasing the extent of:

Substantive tests of details

reviewing the titles and descriptions for all construction work orders issued during the year

Tennessee Company violated company policy by erroneously capitalizing the cost of painting its warehouse. The auditors examining Tennessee's financial statements would most likely learn of this error by: - discussing Tennessee's capitalization policies with its controller. - observing, during the physical inventory - observation that the warehouse has been painted. - examining in detail a sample of construction requests. - reviewing the titles and descriptions for all construction work orders issued during the year.

When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they should: Modify their report for any significant deficiencies identified. Use a "bottom-up" approach to identify controls to test. Test controls for all significant accounts. Perform a separate assessment of controls over operations.

Test controls for all significant accounts.

Misstatements Projected yes Misstatements Other yes Misstatements Known yes

The aggregated misstatement in the financial statements is made up of: Misstatements Known Misstatements Projected Misstatements Other Yes Yes Yes Yes Yes No No Yes No No Yes Yes

Uses a standard cost system that produces variance reports

The auditor's analytical procedures will be facilitated if the client: - Uses a standard cost system that produces variance reports. - Segregates obsolete inventory before the physical inventory count. - Corrects material weaknesses in internal control before the beginning of the audit. - Reduces inventory balances to the lower of cost or market.

How do auditors use ratio estimation?

The auditors use a sample to estimate the ratio of the misstatement in a sample to its book value and project it to the entire population.

substantive procedure

The confirmation of the client's trade accounts receivable as a means of obtaining audit evidence is ordinarily considered to be a: - test of a control. - required observation technique. - substantive procedure. - basic principle of attestation

Custody of the securities should be assigned to persons who have the accounting responsibility for securities

The financial management of a company should take steps to see that company's investment securities are protected. Which of the following is not a step that is designed to protect investment securities? - Securities should be properly controlled physically in order to prevent unauthorized usage. - Access to securities should be vested in more than one person. - Custody of securities should be assigned to persons who have the accounting responsibility for securities. - Securities should be registered in the name of the owner.

The preliminary assessments of control risk are often referred to as:

The planned assessed level of control risk. The planned assessed level of control risk is determined during planning.

transactions

The primary difference between an audit of the balance sheet and an audit of the income statement lies in the fact that the audit of the income statement deals almost completely with the verification of: - transactions. - costs. - authorizations. - cutoffs.

management of the company

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly-held company rests with the: - management of the company. - partner assigned to the audit engagement. - auditor in charge of the field work. - Securities and Exchange Commission.

What are the three major factors that determine the sample size for an attributes sampling plan?

The risk of assessing control risk too low, the tolerable deviation rate, and the expected population deviation rate. In addition, the size of the population has a small effect on the sample size.

Risk of incorrect rejection

The risk that sample results will indicate that a population is materially misstated when in fact, it is not.

Risk of incorrect acceptance

The risk that sample results will indicate that a population is not materially misstated when, in fact, it is materially misstated.

What is detection risk?

The risk that the auditors' procedures will fail to detect a material misstatement if it exists.

Ratio estimation

The sample net misstatement divided by the book value of the items in the sample.

Date of the auditors' report

The search for unrecorded liabilities for a public company includes procedures usually performed through the: - Day the audit report is issued. - End of the client's year. - Date of the auditors' report. - Date the report is filed with the SEC.

To determine that all sales have been recorded, the auditors would select a sample of transactions from the: a. Shipping documents file. b. Sales journal. c. Accounts receivable subsidiary ledger. d. Remittance advices.

To test the existence assertion for recorded receivables, the auditors would select a sample from the: a. Sales orders file. b. Customer purchase orders. c. Accounts receivable subsidiary ledger. d. Shipping documents (bills of lading) file.

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

Treasurer

A report that documents a service organization's controls and documents their suitability

Type 1 Report

Select each of the following terms with the appropriate attributes. No reply is used more than once. Follow a transaction through the system

Walk-through

When are the ratio estimation and difference estimation techniques most likely to be preferable to the mean-per-unit estimation method?

When differences between book and audited values are frequent.

Theft of cash register sales

Which of the following is an example of misappropriation of assets relating to sales? - Accidentally recording cash that represents a liability as revenue. - Holding the sales journal open to record next year's sales as having occurred in the current year. - Intentionally recording cash received from a new debt agreement as revenue. - Theft of cash register sales.

A property, plant, and equipment cutoff error near year-end has a more significant effect on net income

Which of the following statements is not typical of property, plant, and equipment as compared to most current asset accounts? - A property, plant, and equipment cutoff error near year-end has a more significant effect on net income. - Relatively few transactions occur in property, plant, and equipment during the year. - The assets involved with property, plant, and equipment ordinarily have relatively longer lives. - Property, plant, and equipment accounts typically have a higher dollar value.

A. An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation. B. A cash sale which was not recorded on the books and was stolen by a bookkeeper. C. An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank. D. A credit sale which has been recorded twice in the sales journal.

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

The possibility that the results of a sample will indicate that a balance of a particular account are not materially misstated when, in reality, it is materially misstated is: a. risk of incorrect acceptance b. risk of incorrect rejection c. audit risk d. control risk

Monitoring is considered: a component of internal control. a portion of the information and communication system. the primary asset safeguarding technique. an element of the control environment.

a component of internal control.

deviation rate

a defined rate

discovery sampling

a sampling plan for locating at least 1 deviation, providing that the deviation occurs in the population with a specified frequency

ratio estimation

a sampling plan that uses the ratio of audited (correct) values to book values of items in the sample to calculate the estimated total audited value of the population

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: a) Details of bank deposit slips with details of credits to customer accounts. b) Daily cash summaries with the sums of the cash receipts journal entries. c) Individual bank deposit slips with the details of the monthly bank statements. d) Dates uncollectible accounts are authorized to be written off with the dates the writeoffs are actually recorded.

a) Details of bank deposit slips with details of credits to customer accounts.

Reconciliation of the bank account should not be performed by an individual who also: a) Processes cash disbursements. b) Has custody of securities. c) Prepares the cash budget. d) Reviews inventory reports.

a) Processes cash disbursements.

3. The purchasing department manager and assistant manager are the authorized check signers.

agree

Adding and subtracting the _________ ___ _________ ____ to and from the estimated total audited value creates an interval within which the true value of the population is likely to lie

allowance for sampling risk

expected population deviation rate

an advance estimate of a deviation rate. this estimate is necessary for determining the required sample size in an attributes sampling plan

haphazard selection

arbitrarily selecting samples

When performing an audit of internal control, the period or date on which the opinion relates under PCAOB standards is the: end of each quarter of the year. last day of significant fieldwork. as of date. entire period under audit.

as of date.

Changes in population characteristics

as population increases in size, the sample size necessary to estimate the population with a specified sampling risk and allowance for sampling risk will *increase*; when population size is above 500, an increase is only a very small amount

Discovery sampling is a form of attributes sampling designed to locate __ _____ ___ deviation (exception) in the population

at least one

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

A. Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal. B. Receive a cutoff statement directly from the client's bank. C. Prepare a four column bank reconciliation using the year-end bank statement. D. Confirm the year end balance using the standard form to confirm account balance information with financial institutions.

A. To prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel. B. To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks. C. To insure accuracy of the accounts receivable records, the records should be reconciled monthly to the accounts receivable controlling account. D. To prevent theft of cash, receipts should be deposited daily.

Which of the following is a frequent control over cash disbursements? a. Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation. b. Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations. c. Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement. d. Checks should be signed by the controller and at least one other employee of the company.

b. Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.

Which of the following is an example of sampling risk? a. choosing an audit procedure that is inconsistent with the audit objective. b. concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement. c. failing to detect an error on a document that has been inspected by an auditor. d. failing to perform audit procedures that are required by the sampling plan.

b. Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement.

Which of the following would be least likely to be considered an objective of internal control? a. Checking the accuracy and reliability of accounting data. b. Detecting management fraud. c. Encouraging adherence to managerial policies. d. Safeguarding assets.

b. Detecting management fraud.

60. Listed below are four interbank cash transfers, indicated by the letters a, b, c and d, of a client for late December 20X1, and early January 20X2. Your answer choice for the next two questions should be selected from this list.

bank acct 1 bank acct 2 disbursing date receiving date per bank/ per book per bank/ per book a. 1-02 / 12/30 12/31 /12/30 b. 1/04 /12/31 1/02 / 12/31 c. 1/03 / 12/31 1/02 / 1/02 d. 1/02 / 1/02 12/31 / 1/02

Which of the following statistical sampling techniques is least desirable for use by the auditors?

block selection

A. Consideration of the internal controls with respect to cash. B. Close of business on the balance sheet date. C. Count of investment securities. D. Count of inventories.

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: a) Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. b) Coordinate the count of cash with the cutoff of accounts payable. c) Coordinate the count of cash with the count of marketable securities and other negotiable assets. d) Count the cash immediately upon the return of the confirmation letters from the financial institution.

c) Coordinate the count of cash with the count of marketable securities and other negotiable assets.

c. List the two general purposes that a client might acquire a financial derivative.

c. Clients engage in financial derivative transactions for two major purposes: • Hedging--to hedge changes in value of an existing asset or liability or of a prospective future transaction. • Speculating--to bet on the change in value of another financial instrument, an asset, or an index.

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

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

Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control? a. Segregation of duties over cash disbursements. b. Requiring approval of purchase transactions. c. Preparing bank reconciliations. d. Maintaining backup copies of key transactions.

c. Preparing bank reconciliations.

When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they must: a. Modify their report for any significant deficiencies identified. b. Use a "bottom-up" approach to identify controls to test. c. Test controls for all significant accounts. d. Perform a separate assessment of controls over operations.

c. Test controls for all significant accounts.

As compared to manual processing, electronic processing of cash transactions generally makes kiting: a. neither easier, nor more difficult to accomplish. b. easier to accomplish. c. more difficult to accomplish. d. impossible to accomplish.

c. more difficult to accomplish.

In most audits, are auditors more concerned with an under- or overstatement of inventory? a.Overstatement, because net income would be understated. b.Understatement, because net income would be overstated. c.Overstatement, because Cost of Goods Sold would be understated. d.Understatement, because this would indicate that liabilities are likely to be understated.

c.Overstatement, because Cost of Goods Sold would be understated.

A client's __________ factors include such things as management philosophy and operating style, and organizational structure.

control environment

A ___________ is a bank statement covering a few days after year end that is used by the auditors to verify the client's bank reconciliation.

cutoff bank statement

A. Credit standards were liberalized in the current year. B. Twice as many accounts receivable were written off in the prior year as compared to this year. C. A greater percentage of accounts were currently listed in the "more than 90 days overdue" category than in the prior year. D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

A. Receive and deposit checks, and also approve write-offs of customer accounts. B. Approve vouchers for payment, and also receive and deposit cash. C. Reconcile the bank statements, and also receive and deposit cash. D. Sign checks, and also cancel supporting documents.

A. Recorded cash disbursement transactions are properly authorized. B. Proper cash purchase discounts have been recorded. C. Cash disbursements are for goods and services actually received. D. No discrepancies exist between the data on the checks and the data in the journal.

A. Securities are held by the cashier. B. Securities are registered in the name of the custodian. C. Detailed records of securities are maintained by the custodian of the securities. D. Securities are held under joint control of two or more officials.

A. Separating cash handling from recordkeeping. B. Centralizing the receipt of cash. C. Depositing each day's receipts intact. D. Obtaining a receipt for every disbursement.

If auditors find that 10 of the 50 invoices in a test of control were not properly approved: a. the expected rate is 10% b. the expected rate is 20% c. the deviation rate is 10% d. the deviation rate is 20%

An entity's ongoing monitoring activities often include: a. Periodic audits by internal auditors. b. The audit of the annual financial statements. c. Approval of cash disbursements. d. Management review of weekly performance reports.

d. Management review of weekly performance reports.

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

d. Maximum.

Omitting several outstanding checks from the year-end bank reconciliation.

d. Review of the bank cutoff statement.

Under PCAOB standards, when a significant deficiency exists, the auditors' report on internal control is most likely to include an opinion that is: a. disclaimer. b. qualified. c. adverse. d. unqualified.

d. unqualified.

To enhance the control environment, management develops job __________.

descriptions

upper deviation rate = tolerable deviation rate = upper precision limit

deviation rate + allowance for sampling risk =

stratification

dividing a population into two or more relatively homogeneous subgroups

In attributes sampling, sample size increases as...?

expected population deviation rate increases

when using sampling with replacement an item

from the population may be selected two or more times for inclusion in the sample

if the variability of the population increases, as measured by the standard deviation, the required sample size increases

What are the auditor's post-audit responsibilities?

immediately investigate subsequently discovered facts; advise clients to make disclosures to anyone relying on the report; if the client refuses to make disclosures, CPA should inform the board of directors; CPA should also notify applicable regulatory agencies and, if practicable, each person known to be relying on the financial statements

No single employee in a company should have __________ allowing the employee to both perpetrate and conceal errors or fraud in the normal course of performing his or her job.

incompatible duties

Increases in expected population deviation rates will _____________ the sample size required for tests of controls.

increase

Audit firms use structured approaches to non-statistical sampling that are based on statistical methods in order to:

increase consistency of sampling judgments throughout the firm

In classical variables sampling, greater variability among the item values in the population _________ required sample size?

increases

In variables sampling, as the variability of the population _________, as measured by the standard deviation, the required sample size increases

increases

Attribute sampling is often used in conjunction with tests of the client's _______ _______

internal control

Changes in sampling risk?

inverse relationship; the lower the sample risk, the bigger the population must be

What must an auditor consider in evaluating audit findings?

known misstatements, projected misstatements, and other estimated misstatements

large variance in the dollar value of accounts

One or more _________ in internal control result in an adverse opinion on internal control.

material weaknesses

An auditor needs to estimate the average highway weight of tractor-trailer trucks using a state's highway system. Which estimation method is most appropriate?

mean per unit

Organizational structure provides a basis for planning, directing, and controlling _________.

operations

The only type of program documentation that should be provided to the computer operator is the ____________ _________ that contains processing instructions

operations manual

Explain the nature and functions of computer software

programs and routines that facilitate operations

1. random number tables. 2. random number generators. 3. systematic selection.

random selection samples can be selected by: (3)

Stratification allows auditors to combine populations into homogeneous subgroups which:

reduces the number of sample items required

variables sampling

sapling plans designed to estimate a numerical measurement of a population, such as a dollar value

List the types of procedures that are necessary to complete an audit?

search for unrecorded liabilities; review the minutes of meetings; perform final analytical procedures; perform procedures to identify loss contingencies; perform the review of subsequent events; obtain the letter of representation

random selection

selecting items from a population in a manner in which every item has an equal chance of being included in the sample

an error when entering an account number

self checking numbers

Yes.

should a misplaced document be treated as a deviation?

Auditors are required by professional standards to communicate __________ and material weaknesses to the audit committee.

significant deficiencies

If employees lack ________, they may be ineffective in performing their duties.

skills

The term _____________ refers to the process of dividing a population into relatively homogeneous subgroups called _____

stratification, strata

Two types of software used by a computer system are known as ____________ software and ________________ software

system application

Describe the methods of selecting a representative sample (9-2) (SSSRP)

systematic selection- drawing every nth item from the population sampling without replacement - once that item is drawn for a sample it cannot be included again, it results in a smaller sample size because the population is treated as finite sampling with replacement - it is immediately replaced into the population of eligible items and may be selected a second time making the population as infinite random sampling- every item has an equal chance of being included physical representation of the the population- recorded value that represents the entire population, population from which auditors sample

Distinguish between systems programs and application programs

systems- preform generalized functions for one or more application programs applications- contain instructions that enable the user to perform data processing tasks such as payroll calculations

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

population

the entire field of items from which a sample might be drawn

physical representation of the population

the population from which the auditors sample

the risk of incorrect rejection relates to the efficiency of a substitute procedures, but not to the effectiveness of the test

substantive procedures

the sampling plans that are used for _____ _____ are designed to estimate the dollar amount of misstatement in a particular account balance

systematic selection

the technique of selecting a sample by drawing every nth item

systematic selection

the technique of selecting a sample by drawing every nth term in the population, following one or more random starting points

Risk of assessing control risk too low?

this *more important risk* is the possibility that the sample results will cause the auditors to assess control risk at a lower level than is warranted based on actual operating effectiveness of the control

An auditor's flowchart of a client's internal control is a diagrammatic representation that depicts the auditors': understanding of the system. documentation of control risk. planned tests of controls. program for tests of controls.

understanding of the system.

c. 1/03 12/31 1/02 1/02

understated

The auditors of a service organization, known as service auditors, may review the controls at the organization and issue a report that may be relied upon by __________.

user auditors

nonstatistical sampling

using professional judgement to sample is _____

A _________ ________ is an input __________ check that involves the comparison of an account number against a master file of account numbers to test its authenticity

validity test validation

2. Describe the difference between sampling risk and nonsampling risk.

• Sampling risk is when auditors make a decision based on the sample results. To control the sampling risk, the auditors use a larger sample size. Nonsampling risk is based on the factors not on the sampling. When using Nonsampling, there is more of a chance of human error by overlooking errors in the samples then when using sampling.

Testing and evaluating operating effectiveness of cotnrols

- nature of testing - TImeing of tests of controls - Extent of tests of controls

Use the following information: Mean book value of items in sample: $32 Mean audited value of items in sample: $31 Mean book value of items in population: $33 Number of items in population: 10,000 Using the mean-per-unit estimation, the estimated total audited value is:

$310,000

$39,200

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. Because the auditors' purposes for considering internal control are to obtain the necessary knowledge to (a) assess the risks of material misstatement, and (b) to determine the nature, timing, and extent of the tests to be performed, answer (1) is correct.

Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? (1) Checklist. (2) Confirmation. (3) Flowchart. (4) Questionnaire.

(2) Confirmation. A confirmation is designed to obtain evidence from a third-party. It is not used to document internal control.

Tests of controls do not address: (1) How controls were applied. (2) How controls were originated. (3) The consistency with which controls were applied. (4) By what means the controls were applied.

(2) How controls were originated Auditors are not in general concerned with how controls originated.

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. An enterprise risk management system cannot eliminate all risks.

Which of the following is least likely to be a test of controls? (1) Inquiries of client personnel. (2) Inspection of documents. (3) Observation of confirmations. (4) Reperformance of controls.

(3) Observation of confirmations. While tests of controls involve, inquiry, inspection, observation and re-performance, "observation of confirmations" doesn't have a clear meaning.

Statistical sampling

(logic) the risk of error quantified through the use of mathematics and laws of probability advantage: reliable and designed effective disadvantage: extra training and cost of audit staff, sometimes inconsistent because of the auditor training

Significant accounts and disclosures and their relevant assertions, assess

- size and composition of the account - susceptibility to misstatement due to errors or fraud - volume of activity, complexity, and homogeneity or the indivdual transactions processed through the account or reflected in the disclosure - Nature of the account of disclosure - accounting and reporting complexitites associated with the account or disclosure -exposure to losses in the account -possibility of significant contingent liabilites arising from the activites relfected in the account or disclosure

If an actual (but unknown) deviation rate of 4% exists in the population, and the sample's deviation rate is 3%, the sampling error is:

Describe the nature of various types of information technology based systems (8-2) An IT system may possess one or more of the following elements: (BODIE)

1) Batch processing - input data is gathered and processed in separate groups called batches 2) Online capabilities - allows users to have direct (online) assess to the data stored in the system 3) Database storage - method for storing info, each application has its own application data file 4) IT networks - computers linked together through telecommunications 5) End user computing - the user departments are responsible for the development and execution of certain IT applications

Describe the factors that influence sample size when using statistical attribute sampling for tests of controls (9-5) (TREP)

1) tolerable deviation rate 2) risk of assessing control risk too low 3) expected population deviation rate 4) population size when auditing small population

What are the first 5 steps of the attributes sampling for tests of controls?

1. Determine the objective of the test. 2. Define the attributes and deviation conditions. 3. Define the population to be sampled. 4. Choose an audit sampling technique and specify the risk of assessing control risk too low and the tolerable deviation rate. 5. Estimate the expected population deviation rate.

What are the first four steps of audit sampling for substantive testing?

1. Determine the objective of the test. 2. Define the population and sampling unit. 3. Choose an audit sampling technique, specify the risk of incorrect acceptance and the tolerable misstatement. 4. Determine the sample size.

Sales- I/S how to audit

1. Occurrence - Vouch from the sales journal to the BOL and to the customer order 2. Valuation - Compare monthly sales and if there's a huge spike in sales in december- you might have a problem with channel stuffing 3. Cut off - Review the dates 4. Completeness - Trace from shipping documents to the sales journal 5. Accuracy - Quantities from shipped to the invoice as the same

ICFR Defined

1. Pertain to the maintenance of records that accurately and fairly reflect the transactions and dispositions of the assets of the company. 2. Provide reasonable assurance that transactions are properly authorized and recorded in accordance with GAAP. 3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets.

1. The expected deviation rate exceeds the tolerable deviation rate

PCAOB AS 2201- Internal Control Opinions

1. Unqualified -The company maintained, in all material respects, effective internal control over financial reporting -No material weakness exist as of the balance sheet date 2. Adverse - the company has not maintained effective internal control over financial reporting - effective internal control over financial reporting - At least one material weakness exists as of the BS date 3. Disclaimer - do not express an opinion (due to a severe scope limitation) -Only issue a disclaimer if there is some feature that prevents you from performing a test of controls

Unlike statistical sampling, auditors who use non-statistical sampling:

1. do not typically quantify the factors used to determine sample size 2. do not quantify the level of sampling risk

Nonstatistical sampling allows auditors to:

1. draw valid inferences about the population 2. estimate population projected misstatement

G. Transaction cycle

10. The sequence of procedures applied by the client in processing a particular type of recurring transaction

F. Walk-through

11. A procedure in which an auditor follows a transaction from origination through the company's processes, including information systems, until it is reflected in the company's financial records

c. Which of the following statistical sampling techniques is least desirable for use by the auditors? 1. Random number table selection 2. Block selection 3. Systematic selection 4. Random number generator selection

2. • The least desirable sampling technique for auditors is block selection. Block sample consist of all items in a selected time period, numerical sequence, or alphabetical sequence. Due to the relatively large number of blocks needed to form a reasonable audit conclusion, block sampling cannot generally be relied upon to efficiently produce a representative sample.

2. Block selection

The auditors have sampled 50 accounts from a population of 1,000 accounts receivable. The sample items have a mean book value of 200 and a mean audited value of 203. the book value in the population is 198000. What is the estimated audited value of the population using the mean-per-unit method?

203,000

What are the last 5 steps of the attributes sampling for tests of controls?

6. Determine the sample size. 7. Select the sample. 8. Test the sample items. 9. Evaluate the sample results. 10. Document the sampling procedure.

Results: Our sample size of 150 had 8 deviations. We determined that the upper deviation limit is 9.5%. What are the next steps?

8/150 = 5.3% 5.3% is lower than the tolerable deviation rate of 6%, however, this does not account for sampling error. The 9.5% accounts for sampling error, and that is above 6%.

A ___________ allows auditors to examine checks listed as outstanding and the details of deposits in transit on the company's reconciliation a. Cutoff bank statement b. Bank reconciliation c. Statement of cash flows d. None of the above

A check that is written incorrectly and therefore defaced to eliminate the possibility of further use is called a ____________ check. a. voided b. canceled c. reconciled

After performing test of controls, auditors should reassess the level of __________ for each financial statement assertion regarding cash. a. control risk b. business risk c. audit risk

Auditors confirm cash balances directly with financial institutions in order to substantiate the __________ of the amount of cash shown on the balance sheet. a. existence b. cutoff c. completeness

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: a. An investment committee of the board of directors b. The chief operating officer c. The corporate controller d. The treasurer

Trace several transactions for purchases and sales of investments through the accounting system is an example of: a. Ensure transactions are recorded and classified properly b. Ensure policies written are being followed c. Verify that internal auditors' observations are consistent with those of external auditors d. Ensure reports tie to client activity

When internal control over the recording of cash receipts and disbursements is considered weak, the auditors may prepare a ___________, which reconciles cash transactions occurring during a specific period. a. proof of cash b. bank cutoff statement c. standard confirmation form

Which of the following correctly identifies a risk facing SSC that might affect its ability to continue as a going concern over the long run? a. Competition from several competitors. b. Your CPA firm's decision to issue standard unmodified audit reports not mentioning the goingconcern status during the past five years. c. Obsolescence of all products due to rapid changes in technology in the industry. d. The nature of inventory items—small in size, high in value.

Match the type of attribute sampling with its description. a. Discovery sampling b. Sequential sampling c. Nonstatistical sampling 1. Purpose is to detect at least one deviation in the sample 2. Audit sample taken in several stages starting with small sample and subsequent stages depend on the previous stage 3. Risk of assessing control risk too low and tolerable deviation rate considered but need not be quantified

A - 1 B - 2 C - 3

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees?

A bank lockbox system.

Cut off bank statement

A bank statement covering a specified number of business days (usually 7 to 10) after the client's balance sheet date. Auditors use this statement to determine that checks issued on or before the balance sheet date and paid during the cutoff period were listed as outstanding on the year-end bank reconciliation. Another use is to determine that reconciling items shown on the year-end bank reconciliation have cleared the bank within a reasonable amount of time.

Qualified Yes Unmodified with Emphasis-of-Matter no

A change in accounting principles that the auditors believe is not justified is likely to result in which of the following types of audit opinions? Qualified Unmodified with Emphasis-of-Matter Yes Yes Yes No No Yes No No

Deviation rate

A defined rate of departure from prescribed controls. Also referred to as "occurrence rate" or "exception rate".

Voucher

A document authorizing a cash disbursement. It usually provides space for employees to initial after they have performed approval functions. (The term may also be applied to the group of documents supporting a cash disbursement)

SEC registration statement

A document including audited financial statements that must be filed with the SEC by any company in order to sell its securities to the public through the mails or interstate commerce.

Loss contingency

A possible loss, stemming from past events that will be resolved as to existence and amount by some future event. Loss contingencies should be disclosed in notes to the financial statements if there is a reasonable possibility that a loss has been incurred. When loss contingencies are considered probable and can be reasonably estimated, they should be accrued in the accounts.

Attributes sampling

A sampling plan enabling the auditors to estimate the rate of deviation (occurrence) in a population.

Discovery sampling

A sampling plan for locating at least 1 deviation, providing that the devaition occurs in the population with a specified frequency.

Sequential (stop-or-go) sampling

A sampling plan in which the sample is selected in stages, with the need for each subsequent stage being conditional on the results of the previous stage.

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally not be able to detect:

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

Going concern problem

A significant issue for users of financial statements, because assets and liabilities are normally recorded and classified on the assumption that the company will continue to operate.

Representation letter

A single letter or separate letters prepared by officers of the client company at the auditors' request setting forth certain representations about the company's financial position or operations.

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

A) A bank lockbox system.

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

A) Understatement of outstanding checks.

Auditors design test of controls and substantive procedures that: (Select all that apply) a. verify the cutoff of cash transactions b. test all internal controls related to cash transactions c. determine the accuracy of cash transactions d. review all cash transactions

A, C

Auditors inspect the client's securities by: (Select all that apply) a. checking serial numbers against prior years working papers b. counting securities held by the client at the end of the fieldwork c. confirming securities are registered in the company's name d. reviewing statements provided by the client's managements

A, C

10. The auditor suspects that a lapping scheme exists because an accounting department employee who has access to cash receipts also maintains the accounts receivable ledger and refuses to take any vacation or sick days. (Select only 2 procedures.)

A, J. ---- A Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date.

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

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

7. The entity's cash receipts of the first few days of the subsequent year were properly deposited in its general operating account after the year-end. However, the auditor suspects that the entity recorded the cash receipts in its books during the last week of the year under audit. (Select only 1 procedure.)

A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips.

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

A. Develop an understanding of the economic substance of each derivative.

Auditors should have an understanding of the various terms that relate to their consideration of internal control of an organization. For each term presented below, select the category that most clearly defines or includes the term. The categories may be selected once, more than once, or not at all. 1. Accounting information system 2. Control environment 3. Flowchart 4. Controls over operating effectiveness 5. Less severe than a material weakness 6. Monitoring 7. Questionnaire 8. Walk-through 9. Allows a reasonable possibility of a material misstatement 10. Reasonable assurance

A. Generally of no concern to auditors B. Control condition C. Component of internal control D. Documentation E. Implemented F. Material weakness G. Test of control H. Significant deficiency I. Relationship of costs and benefits

Listed below are controls that have been developed by the management of Cirus Manufacturing Co. The internal auditors periodically evaluate the controls in the various departments of the company. A. Monitoring B. Control Environment C. Control Activities D. Risk Assessment E. Accounting information

A. Monitoring—separate evaluations.

The auditors who physically examine securities should insist that a client representative be present in order to: A. Detect fraudulent securities. B. Lend authority to the auditors' directives. C. Acknowledge the receipt of securities returned. D. Coordinate the return of securities to the proper locations.

Acknowledge the receipt of securities returned.

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

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

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

A. Understatement of outstanding checks.

k. The auditors who physically examine securities should insist that a client representative be present in order to:

Acknowledge the receipt of securities returned.

Standard Confirmation January 1-10 Cutoff Form Statement A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes

Are confirmations required for accounts receivable, accounts payable or both?

A/R

For each of the controls, identify the internal control component and, if applicable, the subcomponent or principle to which it relates. Control components may be selected more than once. The accounting department uses a manual of accounting policies and procedures.

Accounting information and communication system. / (Blank)

The auditors who physically examine securities should insist that a client representative be present in order to:

Acknowledge the receipt of securities returned

the auditors who physically examine securities should insist that a client representative be present in order to:

Acknowledge the receipt of securities returned

The auditors should insist that a representative of the client be present during the physical examination of securities in order to:

Acknowledge the receipt of securities returned.

The risk of incorrect rejection, or _____________, is the possibility that the results of a sample will indicate that an account balance is materially misstated, when in actuality it is not misstated.

Alpha risk

Allowance for sampling risk

Also referred to as precision, an interval around the sample results in which the true population characteristics is expected to lie.

Generally accepted accounting principles (United States)

An audit report for a public client indicates that the financial statements were prepared in conformity with: - Generally accepted auditing standards (United States). - Standards of the Public Company Accounting Oversight Board (United States). - Generally accepted accounting principles (United States). - Generally accepted accounting principles (Public Company Accounting Oversight Board).

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 :

An investment committee of the board of directors

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: A. An investment committee of the board of directors. B. The chief operating officer. C. The corporate controller. D. The treasurer.

An investment committee of the board of directors.

j. 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:

An investment committee of the board of directors.

Adverse opinion

An opinion that the financial statements do not fairly present financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. This situation occurs when the auditors believe that departures from GAAP are both material and pervasive.

By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor will generally be able to detect:

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

Match the situation by selecting the sampling technique that would be most appropriate. The auditors wish to test the operating effectiveness of a control, and expect a 2 percent deviation rate in the population.

Attributes sampling

A bookkeeper prepares a check to herself and records it as having been issued to a major supplier is an example of which type of misstatement? a. unrecorded disbursements b. inaccurate recording of a disbursement c. duplicate payment of purchases

Analyzing bank transfers at the end of the period being audited and the beginning of the next period helps detect ____________. a. confirmation b. kiting c. modification d. reconciliation e. transfers

Concerning overstated cash, a shortage may have been concealed by the insertion of a(n) ____ in the cash on have at year-end, or by the omission of a(n)____ from the year-end bank reconciliation a. outstanding check, fictitious check b. fictitious check, outstanding check

Identify good cash handling practices. a. permit one trusted employee to handle specific transactions from beginning to end b. encourage customers to obtain receipts and observe cash register totals c. have monthly bank reconciliations prepared by employees responsible for custody of cash

Which of the following represents a correct statement concerning the risk of misappropriation of cash for SSC? a. This is not a major concern since sales are made on credit. b. Deposit of cash into a lockbox system decreases the risk of misappropriation. c. Misappropriation of cash is not a significant problem in a commercial company. d. The success of QSand increases the risk that cash will be misappropriated.

(E) The best way to verify the amounts of dividend revenue received during the year is: a. Recomputation b. Verification by reference to dividend record books c. Confirmation with dividend-paying companies d. Examination of cash disbursements records

B - comparing revenue with books

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

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

When considering the risk that YE cash is correct, but should be higher, the auditors should focus on confirming that: (Select all that apply) a. sales on account are recorded in correct period based on shipping information b. cash payments were properly authorized and for a legitimate business purpose c. the client's records reflect all cash transactions that took place during the year

B, C

Auditors will prepare a schedule that lists all of the client's cash accounts, including: (Select all that apply) a. YE balance per bank b. bank name c. YE balance per books d. account number

B, C, D

The major elements of adequate internal control over financial investments include which of the following? (Select all that apply) a. regular review by the company's BOD b. an investment committee that authorizes and reviews financial investment activities c. authorization by internal audit personnel for all investment transactions d. complete detailed records of all securities and derivative instruments owned

B, D

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

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

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

B. Canceling supporting documentation after payment.

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

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

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

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

A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the: a. cashier. b. chief accountant. c. treasurer. d. internal auditors.

After the auditors have performed an adequate test of controls over financial investments, they will most likely: a. assess the risk of material misstatement b. consider inherent risks, including fraud risks c. perform substantive procedures

An employee with access to securities fraudulently converts them for personal use. This act could have been prevented by: a. formal investment policies b. competent personnel c. segregation of duties

An important step in testing investments is to ensure all persons with access to investments are properly ______. a. adjusted b. audited c. bonded d. measured e. observed

The internal control weakness that allowed a bookkeeper to embezzle cash receipts from customers and write off the related receivables, is which of the following? a. inadequate controls for reconciling bank accounts b. inadequate controls for reconciling cash register tapes and accounting records c. lack of segregation of duties

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: a. Count the case in advance of the balance sheet date in order to disclose any kiting operations at year-end b. Coordinate the count of cash with the cutoff of accounts payable c. Coordinate the count of case with the count of marketable securities and other negotiable assets d. Count the cash immediately upon the return of the confirmation letters from the financial institution

At the completion of the audit, the auditors are least likely to know: A) The assessed level of control risk. B) The planned assessed level of control risk. C) Actual control risk. D) The scope of tests of controls.

C) Actual control risk. The auditors never know the exact control risk involved—they always simply have an estimate of it.

The clients' financial institution can handle incoming cash receipts including: (Select all that apply) a. petty cash requests and reconciliations b. voucher authorization sheets c. credit cards and debit cards d. lockbox systems e. electronic transfer of funds by customers

C, D, E

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

C. Canceling supporting documentation after payment.

2. Control environment

C. Component of internal control

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

C. Many forms of it require no action by the auditors.

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

C. Prepare a schedule of bank transfers.

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

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

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

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

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

C. The principal amount paid on a direct liability.

Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the:

Check Clearing for the 21st Century Act

On receiving the bank cutoff statement, the auditor should trace:

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

Component of internal control

Which of the following is an element of sampling risk?

Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement.

A ____________________ exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.

Control Deficiency

The auditors' count of the client's cash should be coordinated to coincide with the:

Count of investment securities.

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

Control activities reasonably ensure that collusion among employees cannot occur.

For each of the controls, identify the internal control component and, if applicable, the subcomponent or principle to which it relates. Control components may be selected more than once. Management compares actual performance with budgets and forecasts.

Control activities. performance reviews.

Cash analyses need to be _______ to the general ledger. a. closed b. confirmed c. counted d. reconciled e. transferred

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: a. controller. b. board of directors. c. executive committee. d. treasurer.

An auditor selects items from the client's inventory listing and identifies the items in the warehouse. This procedure is most likely related to which management assertion:

Existence

Inspect monthly brokerage reports on securities owned, purchased, and sold is an example of: a. Ensure transactions are recorded and classified properly b. Ensure policies written are being followed c. Verify that internal auditors' observations are consistent with those of external auditors d. Ensure reports tie to client activity

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. An auditor suspects that the controller wrote several checks and recorded the cash disbursements just before yearend but did not mail the checks until after the first week of the subsequent year. (Select only 1 procedure.)

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

D. A bank lockbox system.

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

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

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

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

Your client kept the cash receipts journal open after year-end and included january 1 and 2 cash receipts in December 2011 totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the 2011 financial statements )the audit year)? A. Sales are understated B. Accounts receivable are understated C. Inventory is overstated D. Income is overstated

D. Income is overstated

D. Kiting.

D. Net income is overstated.

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

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

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

D. Securities are held under joint control of two or more officials.

Which of the following is not a basic principle relating to control activities? Design controls that restrict board of director oversight. Select and develop control activities that mitigate risks of the achievement of organizational objectives to acceptable levels. Deploy control activities that establish what is expected to effect the organization's policies. Select and develop general control activities over technology to support organization objectives.

Design controls that restrict board of director oversight.

The primary objective of tests of details of transactions performed as substantive procedures is to:

Detect Material misstatements in the financial statements

Which of the following would be LEAST likely to be considered an objective of internal control?

Detecting management fraud

Detective Internal audits of payroll would serve to detect errors and fraud in payroll after they have occurred. Therefore, it is a detective control.

The projected misstatement under the mean-per-unit estimation is which of the following?

Difference between the book value of the population and the sample audited mean multiplied times the number of items in the populations.

Stratification

Dividing a population into two or more relatively homogeneous subgroups. It increases the efficiency of most sampling plans by reducing the variability of items in each stratum. The sample size necessary to evaluate the strata separately is smaller than would be needed to evaluate the total population.

Which of the following is not a control over cash disbursements?

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

Completeness

During the inventory count an auditor selects items and determines that the proper description and quantity were recorded by the client. This procedure is most closely related to: - Existence. - Valuation. - Completeness. - Rights.

An investment committee is a standing committee of _______. a. development staff b. employees c. executives d. human resources e. the board of directors

Which of the following is not an advantage of establishing an enterprise risk management system within an organization? Reduces operational surprises. Provides integrated responses to multiple risks. Eliminates all risks. Identifies opportunities.

Eliminates all risks.

Which of the following is not an advantage of establishing an enterprise risk management system within an organization

Elimination all risks

Many companies require employees to submit ___________ with receipts and explanations for their business expenditures.

Expense reports

9. Allows a reasonable possibility of a material misstatement

F. Material weakness

T or F: A client has $100,000 on deposit at year-end and owes the bank $250,000 on a note payable. The borrowing agreement calls for the client to maintain a minimum (compensating) balance of $40,000 on deposit during the life of the bank loan. On the balance sheet, the asset cash should be stated at $60,000, the excess of the deposit over the compensating balance.

False

T or F: Auditors may determine the risk of incorrect rejection, but they cannot determine the risk that their sample will cause them to accept a population which contains material misstatement.

False

T or F: Block samples are used extensively in auditing.

False

T or F: Discovery sampling is best suited to discovering examples of commonplace errors, such as the wrong price entered on a sales invoice.

False

T or F: In relation to its materiality, the audit of cash requires little audit time.

False

T or F: The inspection of securities on hand should be coordinated with the verification of inventories because both involve counting and inspection and can conveniently be combined.

False

PPS Sampling Example/Given: Population book value: $6,250,000 Tolerable misstatement: $364,000 Sampling risk--incorrect acceptance: 5% Expected misstatement: $50,000 Determined sample size is 66. How do you find the sampling interval?

Find the sampling interval: book value of the population/sample size 6,250,000 / 66 = $95,000 approx.

Miscellaneous expense

For which of the following ledger accounts would the auditor be most likely to analyze the details? - Postage expense. - Miscellaneous expense. - Supplies expense. - Sales salaries expense.

accurate perpetual inventory records are maintained

From the auditor's point of view, inventory counts are more acceptable prior to the year-end when: - internal control is weak. - accurate perpetual inventory records are maintained. - inventory is slow-moving. - significant amounts of inventory are held on a consignment basis.

Select each of the following terms with the appropriate attributes. No reply is used more than once. Substantive procedures and tests of controls

Further audit procedures

4. Controls over operating effectiveness

G. Test of control

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: A. Cutoff bank statement. B. Year-end bank statement. C. Bank confirmation. D. General ledger.

General Ledger

The auditors prepare a list of all the client's cash accounts and related information. This information is traced and reconciled to the ___________.

General ledger

To gather evidence regarding the balance per bank in a bank reconciliation the auditors would examine any of the following except :

General ledger

d. To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except:

General ledger

Test of controls do not address

How controls were originated

10. Reasonable assurance

I. Relationship of costs and benefits

Which of the following could not be more efficiently performed with data analytics?

Identification of an unrecorded cash deposit.

In PPS, what is incremental allowance?

In PPS, an amount determined by ranking the misstatements for logical units that are less than the sampling interval and considering incremental changes in reliability factors.

How is sampling risk reduced?

Increasing the size of the sample.

Audit Risk =

Inherent Risk X Control Risk X Detection Risk

Select each of the following terms with the appropriate attributes. No reply is used more than once. Reporting on internal control and financial statements

Integrated audit

ICFR

Internal controls over financial reporting

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

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

Kiting.

When performing a test of a control over cash disbursements, a CPA may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population:

May occur in a systematic pattern and destroy the sample randomness

Can issue an unqualified opinion without disclosing that she did not observe year-end inventories

McPherson Corp. does not make an annual physical count of year-end inventories, but instead makes weekly test counts on the basis of a statistical plan. During the year, Sara Mullins, CPA, observes such counts as she deems necessary and is able to satisfy herself as to the reliability of the client's procedures. In reporting on the results of her examination, Mullins: - Can issue an unqualified opinion without disclosing that she did not observe year-end inventories. - Should comment in the scope paragraph as to her inability to observe year-end inventories, but can nevertheless issue an unqualified opinion. - Is required, if the inventories are material, to disclaim an opinion on the financial statements taken as a whole. - Should, if the inventories are material, qualify her opinion.

An auditor needs to estimate the average highway weight of tractor-trailer trucks using a state's highway system. Which estimation method is most appropriate? Why?

Mean-per-unit estimation is best because no "book value" is available for the trucks. The difference, ratio, and probability-proportional-to-size methods all require the comparison of a book value to an audited value.

The audit committee of a company must be made up of:

Members of the board of directors who are not officers

Net income is overstated.

The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that:

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

Which of the following is least likely to be a test of controls?

Observation of confirmations

The auditor suspects that fictitious employees have been placed on the payroll by the entity's payroll supervisor, who has access to payroll records and to the paychecks.

Observe payroll check distribution on a surprise basis.

f. 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?

Observe the consistency of the employees' use of cash registers and tapes.

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

Option A

When performing tests of controls, how are measurements expressed?

Percentages, not dollar values.

The auditor suspects that a kiting scheme exists because an accounting department employee who can issue and record checks seems to be leading an unusually luxurious lifestyle.

Prepare a bank transfer schedule.

The procedure of selecting items for inclusion in a sample is called ______________.

Random sampling

as one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. This test provides evidence as to whether:

Recorded sales have been properly posted to customer accounts

In determining sample sizes for non statistical sampling, auditors use a ____________ factor based on the combined assessment of inherent risk and control risk and their assessment of the risk that other substantive procedures will fail to detect a material misstatement.

Reliability

i. 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?

Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

Callouts Determination 1. "...although pass adjustment due to immateriality."

Retain the original text.

Select each of the following terms with the appropriate attributes. No reply is used more than once. Inquiries, analytical procedures, observation

Risk assessment procedures

b. Which of the following correctly identifies a risk facing SSC that might adversely affect cash receipts during the coming years?

Sales to Wingo.

The auditor discovered an unusually large receivable from one of the entity's new customers. The auditor suspects that the receivable may be fictitious because the auditor has never heard of the customer and because the auditor's initial attempt to confirm the receivable has been ignored by the customer.

Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. & Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer.

The auditor suspects that the entity's controller has overstated sales and accounts receivable by recording fictitious sales to regular customers in the entity's books.

Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. & Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer.

Properly designed internal control will permit the same employee to:

Sign checks, and also cancel supporting documents.

A ____________________ is a control deficiency, or a combination of control deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting.

Significant deficiency

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: A. Supported by a vendor's invoice. B. Stamped "paid" by the check signer. C. Prenumbered and accounted for. D. Approved for authorized purchases.

Stamped "paid" by the check signer

If the variability of a population increases, as measured by the ________ ____________, the required sample size for the population will ________

Standard deviation, increases

Which is more common in practice, nonstatistical or statistical sampling?

Statistical sampling can be more time consuming, requires training and can be more costly, so nonstatistical sampling is widely used by auditors.

PPS Sampling Example/Given: Population book value: $6,250,000 Tolerable misstatement: $364,000 Sampling risk--incorrect acceptance: 5% Expected misstatement: $50,000 Reliability factor: 3.0 Expansion factor: 1.6 Calculate the sample size.

Step 4: determine the sample size. recorded amount of population * reliability factor/ tolerable misstatement - (expected misstatement*expansion factor) 6,250,000*3.0/364,000-(50,000*1.6) = 18,750,000/284,000 = 66 The sample size is 66.

An auditor may compensate for a weakness in internal control by increasing the extent of

Substantive tests of details

An auditor may compensate for a weakness in internal control by increasing the extent of: Tests of controls. Detection risk. Substantive tests of details. Inherent risk.

Substantive tests of details.

Non-sampling risk

The aspects of audit risk not due to sampling. This risk normally relates to "human" rather than "statistical" errors.

Tests of controls are most likely in which of the following situations? When substantive procedures are being used as the only further audit procedures. Few transactions have occurred, but for very material amounts. The cost of tests of controls is likely to exceed the savings brought about by a resulting decrease in the scope of substantive procedures. The assessed level of the risk of misstatement includes a presumption that controls operate effectively.

The assessed level of the risk of misstatement includes a presumption that controls operate effectively.

The auditors who physically examine securities should insist that a client representative be present in order to: a. Detect fraudulent securities. b. Lend authority to the auditors' directives. c. Acknowledge the receipt of securities returned. d. Coordinate the return of securities to the proper locations.

Auditors have accumulated sufficient evidence

The auditors' report should be dated as of the date the: - Report is delivered to the client. - Auditors have accumulated sufficient evidence. - Fiscal period under audit ends. - Peer review of the working papers is completed.

If the projected misstatement in non-statistical sampling is $95,000, while the tolerable misstatement is $100,000, what would an auditor likely conclude?

The auditor would conclude that the risk is high that the account is materially misstated.

Existence of obsolete machinery

The auditors are most likely to seek information from the plant manager with respect to the - Adequacy of the provision for uncollectible accounts. - Appropriateness of physical inventory observation procedures. - Existence of obsolete machinery. - Deferral of procurement of certain necessary insurance coverage.

How do auditors use difference estimation?

The auditors use a sample to estimate the average difference between the audited value and the book value of items in a population.

e. Of the following, the most significant risk factor relating to the risk of misstatement arising from fradulent financial reporting for SSC is that:

The company must refinance a significant portion of its debt.

In attributes sampling, what is the confidence level?

The confidence level is the complement of the risk of assessing control risk too low. (Accordingly, if the risk of assessing control risk too low is .05, then the confidence level is .95).

In which of the following circumstances is it least likely that tests of controls will be performed?

The expected deviation rate exceeds the tolerable deviation rate

Tolerable deviation rate

The maximum population rate of deviations from a prescribed control that the auditor will tolerate without modifying the planned assessment of control risk.

Cost Accounting Standards Board

The organization established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles is the: - Cost Accounting Standards Board. -mFinancial Accounting Standards Board. - Public Company Accounting Oversight Board. - Securities and Exchange Commission.

Individual Accountability

The organization must hold individuals accountable for their internal control responsibilities

Obtain direct knowledge that the inventory exists and has been properly counted

The primary objective of a CPA's observation of a client's physical inventory count is to: - Discover whether a client has counted a particular inventory item or group of items. - Obtain direct knowledge that the inventory exists and has been properly counted. - Provide an appraisal of the quality of the merchandise on hand on the day of the physical count. - Allow the auditor to supervise the conduct of the count in order to obtain assurance that inventory quantities are reasonably accurate.

The request was mailed by the assistant treasurer.

What is nonsampling risk?

The risk pertaining to nonsampling errors is referred to as nonsampling risk.

What is control risk?

The risk that a material misstatement that could occur in an assertion will not be prevented or detected on a timely basis by internal control.

What is systematic selection?

The technique of selecting a sample by drawing every nth item in the population, following one or more random starting points.

What is statistical sampling?

The use of statistical sampling does not eliminate professional judgment from the sampling process. It does, however, allow the auditors to measure and control sampling risk. Statistical sampling may assist auditors in (1) designing efficient samples, (2) measuring the sufficiency of the evidence obtained, and (3) objectively evaluating sample results.

there is reason to believe that a substantial number of accounts may be in dispute

The use of the positive (as opposed to the negative) form of receivables confirmation is indicated when: - control risk for accounts receivable is assessed as low. - there is reason to believe that a substantial number of accounts may be in dispute. - a large number of small balances are involved. - there is reason to believe a significant portion of the requests will be answered.

What is the risk of assessing the control risk too low?

This more important risk is the possibility that the sample results will cause the auditors to assess control risk at a lower level than is warranted based on the actual operating effectiveness of the control. (relates to effectiveness)

Shipping documents file

To determine that all sales have been recorded, the auditors would select a sample of transactions from the: - Shipping documents file. - Sales journal. - Accounts receivable subsidiary ledger. - Remittance advices.

Analyze transactions occurring within a few days before and after year end

To determine that sales transactions have been recorded in the proper accounting period, the auditors perform a cutoff review. Which of the following best describes the overall approach used when performing a cutoff review? - Confirm year-end transactions with regular customers. - Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period. - Analyze transactions occurring within a few days before and after year end. - Examine cash receipts in the subsequent period.

Stamped "paid" by the check signer

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: - Supported by a vendor's invoice. - Stamped "paid" by the check signer. - Prenumbered and accounted for. - Approved for authorized purchases.

accept merchandise only if a purchase order or approval granted by the purchasing department is on hand

To strengthen the system of internal control over the purchase of merchandise, a company's receiving department should: - accept merchandise only if a purchase order or approval granted by the purchasing department is on hand. - accept and count all merchandise received from the usual company vendors. - rely on shipping documents for the preparation of receiving reports. - be responsible for the physical handling of merchandise but not the preparation of receiving reports.

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor suspects that vouchers were prepared and processed by an accounting department employee for merchandise that was neither ordered nor received by the entity. (Select only 1 procedure.)

nonsampling error

the auditors' failure to recognize a misstatement in an amount or a deviation in an internal control data processing procedure

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that:

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

should include an additional emphasis-of-matter paragraph highlighting the accounting change

Upon the advice of its auditors, Smith Company changed the method of computing depreciation from the straight-line method to an accelerated method with a material effect upon the financial statements. The auditors' report: - should contain modification of the opinion paragraph. - must be qualified for the accounting change. - should include an additional emphasis-of-matter paragraph highlighting the accounting change. - should be a standard unmodified report.

What effects will an auditor's belief that the population's actual deviation rate exceeds the tolerable deviation rate have on the test of controls sample size?

When an auditor believes that the expected rate exceeds the tolerable deviation rate, no test of controls will generally be performed. This is because control risk will normally be assessed at the maximum level since the control is believed to be ineffective since the expected deviation rate exceeds the deviation rate exceeding the tolerable deviation rate.

Trace sample of initial sales slips through summaries to recorded general ledger sales

Which of the following audit procedures is most effective in testing credit sales for understatement? - Age accounts receivable. - Trace sample of recorded sales from ledger to initial sales slip. - Confirm accounts receivable. - Trace sample of initial sales slips through summaries to recorded general ledger sales.

Review of repairs and maintenance expense

Which of the following audit procedures would be least likely to lead the auditors to find unrecorded fixed asset disposals? - Examination of insurance policies. - Scanning of invoices for fixed-asset additions. - Review of property tax files. - Review of repairs and maintenance expense.

Settlement of litigation

Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements? - A business combination. - Early retirement of bonds payable. - Settlement of litigation. - Plant closure due to a strike.

To evaluate attribute sample results, auditors must determine the _____________, which represents the maximum population deviation rate the auditors can expect based on the results of the sample.

achieved upper deviation rate

The company changed its capitalization policy for small tools in 200x.

Which of the following situations has the best chance of being detected when a CPA compares 200X revenues and expenses with the prior year and investigates all changes exceeding a fixed percentage? - An increase in property tax rates has not been recognized in the company's 200X accrual. - The company changed its capitalization policy for small tools in 200X. - The cashier began lapping accounts receivable in 200X. - Because of worsening economic conditions, the 200X provision for uncollectible accounts was inadequate.

Assess the allowance for uncollectible accounts for reasonableness

Which of the following would provide the most assurance concerning the valuation of accounts receivable? - Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. - Compare receivable turnover ratios to industry statistics for reasonableness. - Inquire about receivables pledged under loan agreements. - Assess the allowance for uncollectible accounts for reasonableness.

Results: Our sample size of 150 had 8 deviations. What do you do next?

You have to find the upper deviation limit. You do that by looking at the chart: "Statistical sampling results evaluation table for tests of controls: Achieved Upper Deviation Rate at 5 Percent Risk of Assessing Control Risk Too Low."

You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes

Your audit of the Abbox Co. reveals that the firm's poor financial condition creates substantial doubt about its ability to continue as a going concern. Assuming that the financial statements have otherwise been prepared in accordance with generally accepted accounting principles and do include proper presentation of the matter, what disclosure should you make of the company's precarious financial position? - You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty. - You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes. - You need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. - You should issue an adverse opinion on the financial statements.

block selection

a _____ sample consists of all items in a selection time period, numerical sequence, or alphabetical sequence

a different between nonstatisitcal and statistical sampling is reflected in the methods used to interpret sample results

sequential (stop-or-go) sampling

a sampling plan in which the sample is selected in stages, with the need for each subsequent stage being conditional on the results of the previous stage

a. List three audit tasks related to the audit of financial investments that may require specialized skill or knowledge.

a. Audit tasks requiring specialized skill or knowledge (only three required): • Identifying controls at service organizations that provide financial services for the client. • Obtaining an understanding of information systems for securities and derivatives that are highly dependent on computer technology. • Applying complex accounting principles. • Understanding the methods of determining fair values of financial investments' • Assessing inherent risk and control risk for assertions about derivatives used for hedging.

A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with: a. Knowledge necessary to determine the nature, timing, and extent of further audit procedures. b. Audit evidence to use in reducing detection risk. c. A basis for modifying tests of controls. d. An evaluation of the consistency of application of management policies.

a. Knowledge necessary to determine the nature, timing, and extent of further audit procedures.

a. Define lapping and describe an audit procedure that might detect lapping.

a. Lapping is the concealment of a cash shortage by delaying the recording of cash receipts. It involves posting receipts to the wrong account. Procedures for detecting lapping include (only one required): • Details of cash receipts may be compared to postings to the accounts receivable subsidiary records, preferably on a surprise basis. • Confirmation of accounts receivable.

At the completion of the audit, the auditor are least likely to know:

actual control risk

a. Describe the functions that should be segregated to provide good internal control over financial investments.

a. The functions that should be segregated with respect to financial investments are: 1. Authorization of purchases and sales, 2. Custody of the securities, and 3. Maintaining records of investments.

Ways in which auditors may test controls in an IT environment are:

a. To test application control activities auditors often use computer assisted auditor techniques (CAAT) such as test data, integrated test facilities, controlled programs, and tagging/tracing transactions b. Generalized audit software is often used to perform substantive procedures applied to computerized records. It is used to test the clerical accuracy of records, make comparisons of related data, and select random samples

Which of the following is accurate regarding tolerable misstatement? a. tolerable misstatement is directly related to materiality. b. tolerable misstatement cannot be determined until the sample results are evaluated. c. tolerable misstatement does not affect sample size. d. tolerable misstatement is a measure of reliability of the sample.

a. Tolerable misstatement is directly related to materiality.

Auditors need to specify the risk that the actual deviation rate exceeds the tolerable deviation rate, which is the risk: a. of assessing control risk too low b. of assessing control risk too high c. of assessing the tolerable deviation rate

a. of assessing control risk too low

Instead of taking a physical inventory count on the balance sheet date. The client may take physical counts prior to the year-end if internal control is adequate and: a.Well-kept records of perpetual inventory are maintained. b.Inventory is slow moving. c.Computer error reports are generated for missing prenumbered inventory tickets. d.The physical inventory count must be done at the balance sheet date.

a.Well-kept records of perpetual inventory are maintained.

expected population deviation rate

an advanced estimate of a deviation rate. This estimate is necessary for determining the required sample size in an attributes sampling plan

projected misstatement

an estimate of the most likely amount of monetary misstatement in a population

decrease

an increase in the allowance for sampling risk would [increase or decrease] the precision of the auditor's conclusion.

decrease

an increase in the sample size would [increase or decrease] the allowance for sampling risk

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 devisions to a responsible financial executive. The best person or persons to make periodic reviews of the investment activity would be:

an investment committee of the board of directors

Probability-proportional-to-size- sampling (dollar-unit sampling)?

applies attributes sampling theory to develop an estimate of the total dollar amount of misstatement in a population A method that defines the sampling unit as each individual dollar Could be used in audit situations where the auditors wish to estimate the value of accounts receivable by confirmation; the auditors expect a very low deviation rate in recorded amounts

Describe the auditing approach referred to as "auditing around the computer" (8-6) Under what conditions do CPAs decide to audit through the computer instead of around the computer?

auditors manually process samples of transactions and compare the results with computer results 1) IT application become complex 2) Auditors trail becomes partly obscured or hidden 3) When it is more efficient

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: a) Supported by a vendor's invoice. b) Stamped "paid" by the check signer. c) Prenumbered and accounted for. d) Approved for authorized purchases.

b) Stamped "paid" by the check signer.

b. Define the term "financial derivative."

b. Derivatives are financial instruments that "derive" their value form other financial instruments, underlying assets, or indices.

Which statement is correct concerning the definition of internal control developed by the Committee of Sponsoring Organizations (COSO)? a. Its applicability is largely limited to internal auditing applications. b. It is a 'process' effected by individuals. c. It emphasizes the effectiveness and efficiency of operations over the reliability of financial reporting. d. It suggests that it is important to view internal control as an end product as contrasted to a process or means to obtain an end.

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

Which of the following is least likely to be a test of controls? a. Inquiries of client personnel. b. Inspection of documents. c. Observation of confirmations. d. Reperformance of controls.

c. Observation of confirmations.

b. Describe two other internal control policies that should be established for financial investments.

b. Other internal controls include (only two required): • Establishing formal investment policies. • Maintaining a complete detailed record of investments and revenue from investments. • Registration of securities in the name of the company. • Periodic physical inspection. • Joint control over securities, or use of an independent custodian. • Preparation of a budget of investment revenue. • Determination of appropriate accounting by competent personnel.

"Lapping" of accounts receivable.

b. Tracing remittance advices to postings in the accounts receivable records.

Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? a. Evaluation of ratio of cash to current liabilities. b. Bank reconciliation. c. Proof of cash. d. Cash confirmation.

c. Proof of cash.

Which of the following sampling techniques is typically used for tests of controls? a. mean-per-unit sampling. b. difference sampling. c. attribute sampling. d. probability-proportional-to-size sampling.

c. Attribute sampling.

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

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

The auditors are using unstratified mean-per-unit sampling to audit A/R as they did in the prior year. Which of the following changes in characteristics or specifications would result in a larger required sample size this year than that required in the prior year? a. larger variance in the dollar value of accounts. b. smaller population size. c. larger tolerable misstatement. d. higher risk of incorrect acceptance.

c. Larger variance in the dollar value of accounts.

Auditors must communicate internal control significant deficiencies to: a. the Public Company Accounting Oversight Board. b. the shareholders. c. the audit committee. d. the SEC.

c. the audit committee.

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: a. board of directors. b. executive committee. c. treasurer. d. controller.

c. treasurer.

audit sampling

can be defined as the process of applying auditing procedures to under 100% of different items in an organization's account balance in a way that every single unit might have an equal probability of being selected. Could be used in audit situations where the auditors apply an audit procedure to less than 100% of a population

Controls that rely on segregation of duties may be circumvented by __________ among employees.

collusion

adding and subtracting the allowance for sampling risk to and from the estimated total audited value

creates an interval within which the true value of the population is likely to lie

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? a) Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. b) Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. c) Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. d) Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

d) Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

Tests of controls ordinarily are designed to provide evidence of: a. Balance correctness. b. Control implementation. c. Disclosure adequacy. d. Operating effectiveness.

d. Operating effectiveness.

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

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

A situation in which the design or operation of a control does not allow management or employees, in the normal course of performing their functions, to prevent or detect misstatements on a timely basis is referred to as a(n): a. inherent limitation of internal control. b. material weakness in internal control. c. significant deficiency. d. control deficiency.

d. control deficiency.

Which of the following would be least likely to be considered an objective of internal control?

detecting management fraud

The have an adequate basis to issue a management report on internal control under section 404 of the sarbanes oxley act management must do all of the following except :

establish internal control with no material weakness

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

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

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

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

in attribute sampling, the risk of assessing control risk too high is often not controlled when using statistical sampling

confidence level

in attributes sampling, the complement of the risk of assessing control risk too low. In variables sampling, the complement of the risk of incorrect acceptance

What does assessing control risk too low result in?

inappropriately reducing the substantive procedures, which reduces the effectiveness of the audit

Before assessing control risk at a level lower than the maximum, the auditor obtains reasonable assurance that controls are in use and operating effectively. This assurance is most likely obtained in part by: inspecting documents. preparing flowcharts. analyzing tests of trends and ratios. performing substantive procedures.

inspecting documents.

update of the wrong master file of accounts

internal file label

to form a basis for expressing an opinion on the effectiveness of ICFR:

must plan and perform the audit to obtain reasonable assurance about whether the entity maintained, in all material respects, effective internal control as of the date specified in the management's assessment

adequacy of replacement funds

n the examination of property, plant, and equipment, the auditors try to determine all of the following except the: - reasonableness of the depreciation. - adequacy of replacement funds. - adequacy of internal control. - extent of property abandoned during the year.

When the auditors estimate sampling risk using professional judgment rather than by using the laws of probability, they are said to be using _______________ sampling

non-statistical

authorization and approval of major fixed-asset additions

o achieve effective internal control over fixed-asset additions, a company should establish procedures that require: - performance of recurring fixed-asset maintenance work solely by maintenance department employees. - classification as investments of those fixed-asset additions that are not used in the business. - authorization and approval of major fixed-asset additions. - capitalization of the cost of fixed-asset additions in excess of a specific dollar amount.

In well-staffed computer systems, a librarian should maintain of _____________ and __________ that may be checked out to the ___________ __________ when processing is to be performed

programs and files computer operator

In ratio estimation, using the average misstatement in the sample, divided by the average book value in the sample, and multiplying it times the total population book value calculates this amount.

projected misstatement

The risk of incorrect _________ is the risk that the sample supports the conclusion that the balance is misstated when it is not misstated Relates more to the audit __________ than to effectiveness

rejection, efficiency

the term stratification refers to the process of dividing a population into

relatively homogenous subgroups called strata

control deficiency

report to management

significant deficiency

report to the audit committee and to management

Explain the effects of changes in various population characteristics and changes in sampling risk on required sample size (9-4)

sampling error- possibly selecting a sample that is not representative of the population, difference between the actual rate and that of the sample allowance of sampling risk- precision, an interval around the sample results in which the true population characteristic is excepted to lie tolerable misstatement- an estimate of materiality for the particular audit test precision- same as allowance for sampling risk expected population deviation rate-advance estimate of deviation rate, necessary for determining the required sample size in an attributes sampling plan

When using _______ ____ ___________ an item from the population may be selected two or more times for inclusion in the sample

sampling with replacement

mean

the average item value, computed by dividing total value by the number of items composing total value

to use attributes sampling tables, the auditors must stipulate

the desired risk of assessing control risk too low, the expected deviation rate in the population, the desired tolerable deviation rate

tolerable misstatement

the maximum population rate of deviations from a prescribed control that the auditor will tolerate without modifying the planned assessment of control risk

physical representation of the population

the population from which the auditors sample. It differs from the actual population when it does not include items that exist in the actual population

Sampling risk?

the possibility that auditors will make an erroneous decision based on a sample risk

Risk of assessing control risk too high?

the possibility that the sample results will cause the auditors to assess control risk at a higher level than is warranted based on the actual operating effectiveness of the control

if the variability of a population increases, as measured by the standard deviation

the required sample size for the population will increase

risk of incorrect acceptance

the risk that sample results will indicate that a population is not materially misstated when, in fact, it is materially misstated

The major factors that determine the sample size for a test of a control are:

1. expected population deviation rate 2. risk of assessing control risk too low 3. tolerable deviation rate

3 steps in the ICFR evaluation process

1. identify financial reporting risks and related controls 2. Consider which locations to include in the evaluation 3. Evaluate evidence about the operating effectiveness of ICFR

Using the sample size formula, these factors directly influence sample size calculations for mean-per-unit estimation.

1. planned allowance for sampling risk 2. incorrect rejection coefficient 3. population size

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 backup copies of key transactions.

(3) Preparing bank reconciliations. Preparing bank reconciliations will detect a variety of misstatements related to cash and is a detective control in the sense that it does not prevent the misstatement from occurring, but may detect it. Answers (1) and (2) are incorrect because segregating duties and requiring approvals are primarily designed to prevent occurrence of misstatements. Answer (4) is incorrect because the primary purpose of keeping backup copies of key transactions (or all transactions) is to prevent loss of information in the event of an information system failure and hence a corrective control.

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. In an audit of internal control performed under PCAOB standards, the auditors must test controls for all significant accounts.

What is the auditor's responsibility?

- Audit ICFR and express an opinion - Auditors must have a reliance strategy for publiccly traded companies

Describe several advantages of computer processing of accounting information over manual systems (UMP)

1) Uniformly subjects all transactions to the same controls 2) More timely reports for management to use in analyzing and supervising 3) Provides greater consistency

2. Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement.

For a large population of cash disbursement transactions, Smith, CPA, is testing internal control by using attributes sampling techniques. Anticipating an deviation rate of 3 percent, Smith found from a table that the required sample size is 400 with a desired tolerable deviation rate of 5 percent and risk of assessing control risk too low of 5 percent. If Smith anticipated a deviation rate of only 2 percent, the sample size would be closest to:

200

3. • Attributes sampling is frequently used in performing test of controls.

d. The auditors' primary objective in selecting a sample of items from an audit population is to obtain: 1. A random sample 2. A stratified sample 3. A representative sample 4. A large sample

3. • The sample will result in conclusions that are similar to those that would be drawn if the sample procedures were applied to the entire population. The sample may but does not have to be random, stratified or large.

l. Using the same facts in (k) above, what is the estimated total audited value of the population using the difference method? 1. $198,000 2. $200,000 3. $201,000 4. 203,000

3. $201,000 = $198000 - ((200-203)*50/50)*1000 = 198000 - (-3000)

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a clients employees?

A bank lockbox system

Other matter paragraph

A paragraph included in the auditors' report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditors' judgment, is relevant to users' understanding of the audit, the auditors' responsibilities, or the auditors' report.

Effective Organizational Structure

A well designed structure provides a basis for planning, directing, and controlling operations

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

A) A fraudulent cash confirmation.

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

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

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

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

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500 imprest petty cash fund? A) Reimbursement occurs twice each week. B) Reimbursement vouchers are not prenumbered. C) The custodian occasionally uses the cash fund to cash employee checks. D) The custodian endorses reimbursement checks.

A) Reimbursement occurs twice each week.

Define computer application controls and explain their purpose (8-4)

Apply to the processing of individual applications Purpose is to ensure reliability and accuracy of processing by using programmed controls (limit test, validity test, item count, cash total)

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

A. A fraudulent cash confirmation.

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

Acknowledge the receipt of securities returned.

At the completion of the audit, the auditors are least likely to know: The assessed level of control risk. The planned assessed level of control risk. Actual control risk. The scope of tests of controls.

Actual control risk.

Consider the possibility of a misstatement in the financial statements

As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should: - Express an opinion that is qualified due to the inability of the client company to continue as a going concern. - Evaluate management's performance in causing this decline. - Require note disclosure. -Consider the possibility of a misstatement in the financial statements

What affects audit efficiency?

Assessing control risk too high (too much risk); performing too much testing

For investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the fair value of the investments. True False

False

It is important to verify ______ of both cash receipts and cash disbursements. a. consideration b. cutoff c. deviation d. disclosure e. existence

Payroll, petty cash, and savings accounts are all classified as __________ accounts. a. LT assets b. Cash c. Investment

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The details of invoices for equipment repairs were not clearly identified or explained to the accounting department employees. The auditor suspects that the bookkeeper incorrectly recorded the repairs as fixed assets. ( Select only 1 procedure.)

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

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

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

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

B) Kiting.

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

B) Option B

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: A) Supported by a vendor's invoice. B) Stamped "paid" by the check signer. C) Prenumbered and accounted for. D) Approved for authorized purchases.

B) Stamped "paid" by the check signer. The auditors will determine whether each voucher is stamped "paid" by the check signer to avoid a situation in which supporting documents are used a second time to elicit a second payment

The preliminary assessments of control risk are often referred to as: A) The assessed level of control risk. B) The planned assessed level of control risk. C) Control risk. D) Internal control objectives risk.

B) The planned assessed level of control risk. The planned assessed level of control risk is determined during planning.

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

B) Yes No

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

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

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

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

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

B. Occurrence of sales transactions.

Sometimes auditors may ______securities on hand. a. consider b. disallow c. inspect d. purchase e. sell

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

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

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

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

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

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

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

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

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

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

A control that functions together with another control to achieve the same control objective

Complementary control

The entity borrowed funds from a financial institution. Although the transaction was properly recorded, the auditor suspects that the loan created a lien on the entity's real estate that is not disclosed in its financial statements.

Confirm the terms of borrowing arrangements with the lender.

Which of the following is NOT ordinarily a procedure for documenting an auditor's understanding of internal control for planning purpose?

Confirmation

Which of the following statements is not correct?

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

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: A. Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. B. Coordinate the count of cash with the cutoff of accounts payable. C. Coordinate the count of cash with the count of marketable securities and other negotiable assets. D. Count the cash immediately upon the return of the confirmation letters from the financial institution.

Coordinate the count of cash with the count of marketable securities and other negotiable assets.

You are performing an audit of Systex Corporation and evaluating various controls. Classify the following controls as being primarily preventive, detective, or corrective. Adjustment of perpetual inventory records to physical counts.

Corrective

Internal control over marketable securities is enhanced when:

Custody of securities is maintained by a stockbroker or bank.

The least crucial element of internal control over cash is: a. separation of cash record keeping from custody of cash. b. preparation of the monthly bank reconciliation. c. canceling the supporting documents for disbursements. d. separation of cash receipts from preparing deposits.

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: a. Cutoff bank statement b. Year-end bank statement c. Bank confirmation d. General ledger

Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? a. Evaluation of ratio of cash to current liabilities. b. Cash confirmation. c. Bank reconciliation. d. Proof of cash.

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

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

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: A) Cutoff bank statement. B) Year-end bank statement. C) Bank confirmation. D) General ledger.

D) General ledger. The general ledger will not have information on the balance per bank. The cutoff bank statement, year-end bank statement and bank confirmation will all include information on the balance per bank.

D) Net income is overstated.

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

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

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? A) Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. B) Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. C) Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. D) Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

D) Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent. Having the securities held in safekeeping by a bank or stockbroker provides strong internal control because they are not available to employees responsible for maintaining the accounting records of the securities. Thus the separation of the custody of securities from the accounting function is complete.

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

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

A financial instrument whose value is dependent upon another investment or asset is called a(n) ____________.

Derivative

11. The auditor suspects that the entity is inappropriately increasing the cash reported on its balance sheet by drawing a check on one account and not recording it as an outstanding check on that account and simultaneously recording it as a deposit in a second account. (Select only 1 procedure.)

E. Prepare a bank transfer schedule.

The auditor suspects that a kiting scheme exists because an accounting department employee who can issue and record checks seems to be leading an unusually luxurious lifestyle. (Select only 1 procedure.)

E. Prepare a bank transfer schedule.

Derivative

Financial instrument that "derives" its value from other financial instruments, underlying assets, or indexes. (Examples are option, forward contracts, and futures contracts)

Observation of physical inventory counts

From which of the following evidence gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories? - Observation of physical inventory counts. - Written inventory representations from management. - Confirmation of inventories in a public warehouse. - Auditor's recomputation of inventory extensions.

Evaluate Identified Control Deficiencies

If a deficiency, or combination of deficiencies, prevents the auditor from having reasonable assurance that transactions are recorded properly, then the auditor should treat the deficiency as an indicator of a material weakness.

c. In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also:

Is responsible for mailing the checks.

Attracting, Developing, and Retaining Competent Employees

Management is committed to hiring employees with appropriate levels of education, experience, and evidence of integrity and ethical behavior

An entity's ongoing monitoring activities often include

Management review of weekly performance reports

Kiting.

A control deficiency may be serious enough that it is to be considered not only a significant deficiency but also a _____________ in the system of internal control. A material weakness is a deficiency, or a combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

Material Weakness

Moody's Category A

Material Weakness related to controls over specific account balances or transaction-level processes

An auditor suspects that the controller wrote several checks and recorded the cash disbursements just before year-end but did not mail the checks until after the first week of the subsequent year.

Obtain the cutoff bank statement and compare the cleared checks to the year-end bank reconciliation.

Which of the following is not a control that generally is established over cash transactions?

Obtaining a receipt for every disbursement.

Tests of controls ordinarily are designed to provide evidence of

Operating effectiveness

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

Prepare a schedule of bank transfers.

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

Presentation and Disclosure

3. "The comment is a "boilerplate" disclaimer of liability that definitely does not affect the reliability of the information we obtained."

Replace with "This comment (disclaimer) on the confirmation may cast doubt about the completeness and accuracy of the information contained in the response and, accordingly, we should obtain further audit evidence."selected answer correct

7. "No further audit response is necessary related to check 2027."

Replace with "We should perform further procedures to determine why the account reconciliation excludes this item, which should be listed as an outstanding check as of year-end."selected answer correct

The details of invoices for equipment repairs were not clearly identified or explained to the accounting department employees. The auditor suspects that the bookkeeper incorrectly recorded the repairs as fixed assets.

Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization.

Internal control over marketable securities is enhanced when:

Securities are held under joint control of two or more officials.

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

Excessive recurring losses on assets retired

The auditors may conclude that depreciation charges are insufficient by noting: - Insured values greatly in excess of book values. - Large amounts of fully depreciated assets. - Continuous trade-ins of relatively new assets. - Excessive recurring losses on assets retired.

In performing a substantive test of the book value of a population, auditors must be concerned with two aspects of sampling risk. What are the two aspects of the sampling risk, and which aspect is of greater importance to auditors? Explain.

The first is the risk of incorrect rejection (alpha risk) of an account. This is the possibility that sample results will indicate that an account balance is materially misstated when, in fact, it is not misstated. The second is the risk of incorrect acceptance (beta risk) of an account. This is the possibility that sample results will indicate that an account balance is not materially misstated when, in fact, it is materially misstated. The risk of incorrect acceptance of an account is of greater importance to the auditors because the effectiveness of the audit is compromised.

Which of the following best describes what the auditor means by the expected rate of deviation in an attributes sampling plan?

The rate of deviations that can reasonably be expected to be found in a population.

Preparation of a shipping document

The receiving department is least likely to be responsible for the: - Determination of quantities of goods received. - Detection of damaged or defective merchandise. - Preparation of a shipping document. - Transmittal of goods received to the store's department.

The mean-per-unit estimation method calculates the estimated total audited value of a population of accounts receivable as which of the following?

The sample mean audited value multiplied by the number of items in the population.

Explain the manner in which auditors obtain understanding of internal control in an information technology environment (8-5) (WIF)

They can use a 1) Written Narrative - audito'r's documentation of the client's IT based system, advantage: explains precise control applicable to each examination, disadvantage: time and difficulty of clear writing 2) Internal Control Questionnaire- contains a separate section for each major transaction cycle, enabling work of completing the questionnaire to be divided conveniently among several audit staff members, advantage: distinction between major and minor control weaknesses, disadvantage: lack of flexibility 3) Flowcharts - symbolic representation of a system in a specified sequence, advantage: more specific clearer understanding of client's system, disadvantage: internal control weaknesses are not identified as clear as questionnaire

Risk of assessing control risk too low

This most important risk is the possibility that the assessed level of control risk based on the sample is less than the true operating effectiveness of the controls.

Risk of assessing control risk too high

This risk is the possibility that the assessed level of control risk based on the sample is greater than the true operating effectiveness of the control.

All purchases of factory equipment are required to be made by the department in need of the equipment

Which of the following is an internal control weakness related to factory equipment? - Checks issued in payment of purchases of equipment are not signed by the controller. - All purchases of factory equipment are required to be made by the department in need of the equipment. - Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired. - Proceeds from sales of fully depreciated equipment are credited to other income. References

Recording sales when the customer is likely to return the goods.

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? - Inaccurate billing due to a lack of controls. - Lapping of accounts receivable. - Misbilling a client due to a data input error. - Recording sales when the customer is likely to return the goods.

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? a) Observe the consistency of the employees' use of cash registers and tapes. b) Inquire about employees' access to recorded but undeposited cash. c) Trace deposits in the cash receipts journal to the cash balance in the general ledger. d) Compare the cash balance in the general ledger with the bank confirmation request.

a) Observe the consistency of the employees' use of cash registers and tapes.

A. Comparing the vendor's invoice with the receiving report. B. Canceling supporting documentation after payment. C. Verifying the mathematical accuracy of the vendor's invoice. D. Preparing the check for signature by an authorized person.

A. Date due of a direct liability. B. The principal amount paid on a direct liability. C. Description of collateral for a direct liability. D. The interest rate of a direct liability.

A. Transfer A B. Transfer B C. Transfer C D. Transfer D

When the standard deviation of the chosen sample differs from that of the auditor's estimate of the population standard, auditors try to maintain the risk of incorrect acceptance at its planned level by calculating: a. allowance for sampling risk b. adjusted allowance for sampling risk c. projected misstatement

Which of the following statements is correct concerning statistical sampling in tests of controls? A. For a given tolerable rate, a larger sample size should be selected as the expected population deviation rate decreases. B. The population size has little effect on determining sample size except for very small populations. C. As the population size doubles, the sample size also should double. D. The expected population deviation rate has little or no effect on determining sample size except for very small populations.

Which of the following is most likely to provide an auditor with the most assurance about the effectiveness of the operation of internal control? a. Inquiry of client personnel. b. Observation of client personnel applying the control. c. Recomputation of account balance amounts. d. Confirmation with outside parties.

b. Observation of client personnel applying the control.

A. Review composition of authenticated deposit slips. B. Review subsequent bank statements and canceled checks received directly from the banks. C. Prepare a schedule of bank transfers. D. Prepare year-end bank reconciliations.

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

A. Cutoff bank statement. B. Year-end bank statement. C. Bank confirmation. D. General ledger.

Taylor Sales Co. maintains a large full-time internal audit staff that reports directly to the chief accountant. Audit reports prepared by the internal auditors indicate that internal control is functioning as it should and that the accounting records are reliable. The external auditor will probably: increase the depth of the consideration of administrative controls. eliminate tests of controls. make limited use of the work performed by the internal audit staff. avoid duplicating the work performed by the internal audit staff.

make limited use of the work performed by the internal audit staff.

an entity's ongoing monitoring activities often include

management review of weekly performance reports

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. The internal auditors' objectivity refers to their relative independence from the organizational units they have been evaluating. This may best be determined by considering the organizational level to which the internal auditors report. The other answers address the issues of the internal auditors' competence, not objectivity.

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. Management may issue a report on internal control regardless of whether the system has a material weakness.

sampling risk

the risk that the auditors' conclusion based on a sample might be different from the conclusion they reach if the test were applied to the entire population

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

When the auditors are performing a first time internal control audit in accordance with the sarbanes oxley act and PCAOB standards they should

test controls for all significant accounts.

Which of the following is least likely to be considered a substantive procedure relating to payroll?

test whether employee time reports are approved by supervisors

Explain two ways that an auditor might determine the risk of assessing control risk too low

1) Use the same risk for assessing control risk too low for all items 2) The lower the planned assessed level of control risk, the lower the risk assessing control risk too low

1. • A large variance in the dollar value of accounts will result in a large required sample size this year than the prior years. The standard deviation is in the numerator to calculate sample size, which increases the numerator to increase the sample size. The remaining answer options, when applied, will make the sample size smaller.

The risk of assessing control risk too high relates to ________ of the audit process?

efficiency

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate:

Treasurer.

a. 1 b. 2 c. 6 d. 4 e. 8 f. 7 g. 3 h. 5

1. A contractual obligation to carry out a transaction at specified terms in the future. Material commitments should be disclosed in the financial statements. 2. A possible liability, stemming from past events, that will be resolved as to existence and amount by some future event. 3. A possible loss, stemming from past events, that will be resolved as to existence and amount by some future event. 4. An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years. 5. An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements(including projecting misstatements where appropriate) only during the current year. 6. An element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements. 7. Misstatements identified by the auditors during the course of the audit that are due to either extrapolation from audit evidence or differences in accounting estimates. 8. Specific misstatements identified by the auditors during the course of the audit. a. commitment b. contingent liablility c. general risk contingency d. iron curtain approach e. known misstatements f. likely misstatements g. loss contingency h. rollover approach

An example of a test of controls would be to compare the details of a sample of recorded disbursements in the __________ journal to accounts payable postings, purchase orders, receiving reports, invoices, and paid checks. a. cash disbursements b. cash receipts c. sales

Difference estimation sampling

A sampling plan that uses the difference between the audited (correct) values and book values of items in a sample to calculate the estimated total audited value of the population. Could be used in audit situations where the auditors wish estimate the dollar value of 1,000 inventory items that have been priced by the client; the auditors expect a moderately high misstatement rate in the client's pricing of the items

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? A) A bank lockbox system. B) Prenumbered remittance advices. C) Monthly bank reconciliations. D) Daily deposit of cash receipts.

A) A bank lockbox system. A bank lock box is a post office box controlled by a company's bank at which cash remittances from customers are received. With such a system the bank collects the remittances, immediately credits the cash to the company's bank account, and forwards the remittance advices to the company. Use of a bank lockbox system makes it extremely difficult for employees to divert cash receipts since those cash receipts are sent directly to the post office box controlled by the bank. Answer (2) is incorrect because remittance advices may be prenumbered, but since they come from various customers, they do not have one overall sequence for the client. Answers (3) and (4), bank reconciliations, and daily deposit of cash receipts, are controls, but controls that ordinarily are not as effective as a bank lockbox system.

all inventory represented by an inventory tag is listed on the inventory sheets

An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the physical inventory sheets. The purpose of this procedure is to obtain assurance that: - the final inventory is valued at cost. - all inventory represented by an inventory tag is listed on the inventory sheets. - all inventory represented by an inventory tag is bona fide. - inventory sheets do not include untagged inventory items.

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

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

Substantive Procedures: a. Prepare a bank transfer schedule. 1 b. Prepare a four-column proof of cash. 5 c. Use a standard confirmation form to confirm account balance information. 7 d. Obtain bank cutoff statements. 6 e. Search for large checks to directors, officers, and employees. 8

Auditors perform a number of procedures relating to cash—some unique, some not unique. For each substantive procedure below, identify its primary objective or indicate that the procedure serves no purpose. The primary objective of the procedure may be selected once, or not at all. Replies: A primary objective of the procedure is to: 1. Detect kiting. 2. Detect lapping. 3. Determine that receivables are converted to cash in a reasonable amount of time. 4. Establish the valuation of cash to reflect currency translation losses and gains. 5. Reconcile cash receipt and disbursement totals between company records and bank records. 6. Verify reconciling items on the year-end bank reconciliation. 7. Verify year-end cash and liability balance information. 8. Identify related party transactions. 9. None. This procedure serves no purpose related to cash.

Which of the following would be least likely to be considered an objective of internal control? A) Checking the accuracy and reliability of accounting data. B) Detecting management fraud. C) Encouraging adherence to managerial policies. D) Safeguarding assets.

B) Detecting management fraud. Detecting management fraud is generally not considered to be an objective of internal control. In fact, one of the inherent limitations of internal control is that it is subject to override by management. All of the other answers represent valid objectives of internal control.

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

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

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

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

C. The request was mailed by the assistant treasurer.

The entity's cash receipts of the first few days of the subsequent year were properly deposited in its general operating account after the year-end. However, the auditor suspects that the entity recorded the cash receipts in its books during the last week of the year under audit.

Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips.

Kiting would least likely be detected by:

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

When a CPA decides that the work performed by internal auditors may have an effect on the nature timing and extent of the CPAS, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should:

Consider the organizational level to which the internal auditors report the results of their work.

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: Consider the organizational level to which the internal auditors report the results of their work. Review the internal auditors' work. Consider the qualifications of the internal audit staff. Review the training program in effect for the internal audit staff.

Consider the organizational level to which the internal auditors report the results of their work.

For each of the controls, identify the internal control component and, if applicable, the subcomponent or principle to which it relates. Control components may be selected more than once. Management has developed and distributed a code of conduct.

Control environment. /integrity and ethical values.

In determining the sample size using a structured non statistical sample, the reliability factor used takes into consideration the auditor's assessment of?

Control risk, inherent risk, and risk related to other substantive procedures.

Send positive confirmation requests

Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances 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: - Send positive confirmation requests. - Send negative confirmation requests. - Examine evidence of subsequent cash receipts. - Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

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:

Coordinate the count of cash with the count of marketable securities and other negotiable assets

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:

Coordinate the count of cash with the count of marketable securities and other negotiable assets

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

D) Obtaining a receipt for every disbursement.

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

D) The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

A sample internal control questionnaire question may ask about _________ inherent in the investment policy. a. clients b. dollars c. money d. people e. risk

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor suspects that the entity is inappropriately increasing the cash reported on its balance sheet by drawing a check on one account and not recording it as an outstanding check on that account and simultaneously recording it as a deposit in a second account. (Select only 1 procedure.)

T or F: Auditors must be present to perform a count of securities and cash on the balance sheet dates.

False - not always possible to count on BS date

qualify their opinion or issue an adverse opinion

If the auditors believe that related party transactions are not adequately described in the notes to the financial statements, they should: - qualify their opinion or issue an adverse opinion. - add an emphasis-of-matter paragraph to their unmodified opinion. -consider more thoroughly the client's going concern status. -disclaim an opinion.

Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms

In an audit report on combined financial statements, reference to the fact that a portion of the audit was performed by a component auditor is: - Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms. - Not in accordance with generally accepted auditing standards. - A qualification that lessens the collective responsibility of both CPA firms. - An example of a dual opinion requiring the signatures of both auditors.

A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with

Knowledge necessary to determine the nature timing and extent of further audit procedures

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

Occurrence of sales transactions.

confer with management regarding transfer of the amount from the balance sheet to the income statement

Patentex developed a new secret formula that is of great value because it resulted in a virtual monopoly. Patentex has capitalized all of its research and development costs associated with this formula. Greene, CPA, who is examining this account will probably: - confer with management regarding a change in the title of the account to "goodwill". - confer with management relating to controls maintained over formula confidentiality. - confirm that the secret formula is registered and on file with the county clerk's office. - confer with management regarding transfer of the amount from the balance sheet to the income statement.

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? A. Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept B. Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. C. Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. D. Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

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

Send a bank confirmation as of year-end.

Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information

Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next: - Notify the board of directors that the auditor's report must no longer be associated with the financial statements. - Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. - Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. - Issue revised pro forma financial statements taking into consideration the newly discovered information.

Three conditions generally are present when fraud occurs. Which is not one of these conditions

Supervisory Position

Effective internal control requires organizational independence of departments. Organizational independence would be impaired in which of the following situations? The controller reports to the vice president of production. The internal auditors report to the audit committee of the board of directors. The payroll accounting department reports to the chief accountant. The cashier reports to the treasurer.

The controller reports to the vice president of production.

In which of the following circumstances is it least likely that tests of controls will be performed?

The expected deviation rate exceeds the tolerable deviation rate.

Sampling risk

The risk that the auditor's conclusion based on a sample might be different from the conclusion they would reach if the test were applied to the entire population. For tests of controls, sampling risks include the risks of assessing control risk too high and too low; for substantive testing, sampling risks include the risks of incorrect acceptance and rejection.

Distinguish between the traditional file and database methods for organizing data

Traditional- separate files of data are created for each processing application, they are organized into master files and transaction files Database- stores all data in one central file and allows each user access to portion needed

An auditor plans to examine a sample of 20 checks for counter signatures as prescribed by the client's control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and:

Treat the missing check as a deviation for the purpose of evaluating the sample

A cutoff bank statement provides assurance to the auditors that all checks outstanding at year-end were included in the list of outstanding checks in the year-end bank reconciliation. True False

True

A salesperson who uses a cash register to record over-the-counter sales should, at the end of each work day, turn over to a supervisor the cash register tape and a corresponding amount of cash. True False

True

T or F: To estimate the total audited dollar value of a population of 10,000 items, using the mean-per-unit estimation method, one would multiply the sample mean audited value times 10,000.

True

The best way to verify the amounts of dividend revenue received during the year is: A. Recomputation. B. Verification by reference to dividend record books. C. Confirmation with dividend-paying companies. D. Examination of cash disbursements records.

Verification by reference to dividend record books.

l. The best way to verify the amounts of dividend revenue received during the year is:

Verification by reference to dividend record books.

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to:

Verify reconciling items on the client's bank reconciliation.

Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations

Which of the following is a frequent control over cash disbursements? - Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations - Checks should be signed by the controller and at least one other employee of the company - Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement - Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation

Establish that the client includes only inventory on hand at year-end in inventory totals

Which of the following is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold? - Determine that the valuation of inventories and cost of goods sold is arrived at by appropriate methods. - Determine the existence of inventories and the occurrence of transactions affecting cost of goods sold. - Establish that the client includes only inventory on hand at year-end in inventory totals. - Establish the completeness of inventories.

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

A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An embezzlement of cash receipts not recorded in the cash receipts journal before they had been deposited into the bank. D. A receivable collected that had previously been written off as uncollectible.

A. Understatement of outstanding checks. B. Overstatement of outstanding checks. C. Understatement of deposits in transit. D. Overstatement of bank services charges.

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

A. The confirmation request was signed by the treasurer. B. Sending the request was meaningless because the account was closed before the year end. C. The request was mailed by the assistant treasurer. D. The CPA did not sign the confirmation request before it was mailed.

If an actual (but unknown) deviation rate of 4% exists in the population, and the sample's deviation rate is 3%, the sampling error is: a. 3% b. unknown c. 1% d. 4%

When using probability-proportional-to-size sampling, the allowance for sampling risk is the combination of basic precision and the: A. Projected misstatement. B. Upper limit on misstatements. C. Incremental allowance. D. Tainting.

The auditors who physically examine securities should insist that a client representative be present in order to: a) Detect fraudulent securities. b) Lend authority to the auditors' directives. c) Acknowledge the receipt of securities returned. d) Coordinate the return of securities to the proper locations.

c) Acknowledge the receipt of securities returned.

Also referred to as precisions, this sampling item allows auditors to create an interval around the sample results in which the true population characteristic is expected to lie. a. non sampling risk b. tolerable misstatement c. sampling error d. allowance for sampling risk

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: a) Reviews the monthly bank reconciliation. b) Returns the checks to accounts payable. c) Is denied access to the supporting documents. d) Is responsible for mailing the checks.

d) Is responsible for mailing the checks.

Probability-proportional-to-size (PPS) sampling, which is also referred to as _______ ____ ________, is used to estimate the total dollar amount of misstatement in a population

dollar unit sampling

Which of the following is not an advantage of establishing an enterprise risk management system within an organization

eliminates all risks

The tolerable misstatement is an estimate of the ________ ________ ______________ that may exist in an account and still not lead to a material misstatement in the financial statement

maximum monetary misstatement

This sampling method assumes a sample's average audited value will, for a certain sampling risk and allowance for sampling risk, represent the true audited value of the population.

mean-per-unit estimation

Auditors need to specify the risk that the actual deviation rate exceeds the tolerable deviation rate, which is the risk:

of assessing control risk too low

detection risk may be separated into two risks

one relating to analytical procedures and the other is the allowable risk of tests of details

When tests of an audit sample result in a similar conclusion to those that would be drawn if the same procedures were applied to the entire population, the audit sample is said to be:

representative

require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent

In performing tests of controls, the auditors are primarily concerned with the critical aspect of sampling risk known as the ____ __ __________ _______ ____ __ ___.

risk of assessing control risk to low

in performing tests of controls, the auditors are primarily concerned with the critical aspect of sampling risk known as the

risk of assessing control risk too low

Attributes sampling?

sampling plan enabling the auditors to estimate the rate of deviation (occurrence) in a population Also it is the most frequently used general method that arrives at an estimated deviation rate Could be used in audit situations where the auditors wish to test the operating effectiveness of a control, and expect a 2% deviation rate in the population

Discovery sampling?

sampling plan for locating at least one deviation, providing that the deviation occurs in the population with specified frequency Also it is a method that is most effective in circumstances in which auditors expects a very low rate of occurrence of some critical deviation (e.g., a fraudulent cash disbursement) Could be used in audit situations where the auditors wish to test for the existence of a critical deviation in internal control

18. An auditor may obtain information on the December 31 month end balance per bank in which of the following?

standard confirmation form / jan 1-10 cutoff statement a. yes yes b. yes no c. no yes d. no no

The audit risk against which the auditors require reasonable protection is a combination of two separate risks. The first of these is that material misstatements will occur and the second is that:

those misstatements that occur will not be detected in the auditors' procedures.

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.idered an objective of internal control?

(2) Detecting management fraud. Detecting management fraud is generally not considered to be an objective of internal control. In fact, one of the inherent limitations of internal control is that it is subject to override by management. All of the other answers represent valid objectives of internal control.

At the completion of the audit, the auditors are least likely to know: (1) The assessed level of control risk. (2) The planned assessed level of control risk. (3) Actual control risk. (4) The scope of tests of controls.

(3) Actual control risk. The auditors never know the exact control risk involved—they always simply have an estimate of it.

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. Management review of weekly performance reports is an ongoing monitoring activity that may detect errors or fraud. Answer (1) is incorrect because while periodic audits by internal audit represent a monitoring activity, they are best classified as separate evaluations, and not ongoing monitoring activities. Answer (2) is incorrect because the audit of the annual financial statements is the function of the external auditors. Answer (3) is incorrect because approvals of cash disbursements represent a control activity.

The auditor can also rely on work performed by

- Consider any changes from the prior year(s) - internal audit - company management - the audit committee - consultants hired by management (or receive assistance from them) - The auditor will be taking responsibility for - the work performed by others.

What is management's responsibility?

- Establish and maintain adequate ICFR - Assess and assert whether ICFR is effective "as of" and BS date. (publicly- traded companies). - What does this mean practically speaking for a business? - Internal audit will test over controls - Will cause management to be more aware to controls

PCAOB AS 2201 (Previously AS 5)

- Ultimately objective is to express an opinion on the effectiveness of ICFR "as of" the date of the financial statements. - Must conduct an integrated audit of ICFR and the FS using a "top-down risk-based approach" - Must identify significant accounts and test controls related to "relevant assertions"

Effect of the Audit of Internal Control on the Financial Statement Audit

- When the auditor performs an integrated audit, he or she will have access to a large amount of information about the client's controls. This information can make the financial statement audit more efficient and result in reduced substantive procedures. - Regardless of the level of control risk in connection with the audit of the financial statements, auditing standards require the auditor to perform some substantive procedures for all significant accounts and disclosures.

Name 3 subcategories of information and processing controls in a computerized system (GAU)

1) General controls 2) Application controls 3) User controls

5 general controls and state common attribute (OSHAD)

1) Organization and operation 2) System development and documentation 3) Hardware and software 4) Access 5) Data and procedural IT environment and all it's activities rather than to a single IT application

Auditors perform a number of procedures relating to cash-some unique, some not unique. For each substantive procedure below, identify its primary objective or indicate that the procedure serves no purpose: 1. Prepare a bank transfer schedule. 2. Search for large checks to directors, officers, and employees. 3. Pepare a four-column proof of cash. 4. Obtain bank cutoff statements. A. Detect kiting B. Detect lapping C. Establish the valuation of cash to reflect currency translation losses and gains D. Reconcile cash receipt and disbursement totals between company records and bank records. E. Verify reconciling items on the year-end bank reconciliation F. Identify related party transactions G. None. This procedure serves as purpose related to cash.

1. A 2. F 3. D 4. E

1. Mean per unit

Issues detected while auditing the financial statements can inform the auditor about the operating effectiveness of internal controls. Consider:

1. Misstatements detected. 2. The auditor's risk evaluations in connection with the selection and application of substantive procedures, especially those related to fraud. 3. Findings with respect to illegal acts and related-party transactions. 4. Indications of management bias in making accounting estimates and in selecting accounting principles.

Identifying controls to test

1. Understand the flow of transactions related to the relevant assertions 2. Identify the points within the entity's processes at which a misstatement could arise that would be material ("What could go wrong?") 3. Identify the controls that management has implemented to prevent these potential material misstatements ("What will prevent things from going wrong?") 4. These are the controls we want to test.

Nonsampling risk pertains to nonsampling errors such as failing to apply appropriate audit procedures. Nonsampling risk can be reduced through:

1. effective planning and supervision of audit engagements 2. quality control procedures implemented by the CPA firm

e. Discovery sampling is particularly effective when: 1. There are a large number of errors in the population 2. The auditors are looking for critical deviations that are not expected to be frequent in number 3. The auditors know where deviations are likely to occur 4. The population is large in size

2. • Discovery sampling is a form of attributes sampling is designed to locate at least one deviation in the population. It is used in situations in which the auditors might use discovery sampling to attempt to locate a fraudulent cash disbursement.

l. Using the same facts in (k) above, what is the estimated total audited value of the population using the difference method? 1. $198,000 2. $200,000 3. $201,000 4. 203,000

3. • $203-$200=$3 • $3 x 1000 = $3000 • $198,000 + $3000 = $201,000

A. Compensating control

3. A control that reduces the risk that an existing or potential control weakness will result in a failure to meet a control objective

Reconciliation of the bank account should not be performed by an individual who also: a. Processes cash disbursements b. Has custody of securities c. Prepares the cash budget d. Reviews inventory reports

A - or receipts

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

A bank lockbox system.

ratio estimation sampling

A classical method that uses the ratio of audited to book values of items in the sample to obtain an estimated total audited value

Mean-per-unit (MPU) estimation

A classical variables sampling plan enabling the auditors to estimate the average dollar value (or other variable) of items in a population by determining the average value of items in a sample.

render an adverse opinion and give reasons

A client company has changed its accounting practices during the year, materially affecting its financial statements so as to make them seriously misleading and not in conformity with generally accepted accounting principles. The CPAs examining these financial statements should: - modify the opinion with respect to consistency and, in an emphasis-of-matter paragraph, explain the changes and their effects on the net income of the period. - disclaim an opinion and give reasons. - modify the opinion with respect to consistency, referring to explanatory notes of the financial statements to fulfill disclosure requirements. - render an adverse opinion and give reasons.

Standard confirmation form

A confirmation form, agreed to by the AICPA, the American Bankers Association, and the Bank Administration Institute, that is designed to provide corroborating evidence about the client's account balances and outstanding loans.

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

A fraudulent cash confirmation.

c. Which of the following correctly identifies a risk facing SSC that might adversely affect sales during the coming years?

A general slowdown in the economy.

Whether to issue an adverse opinion rather than a qualified opinion

A material departure from generally accepted accounting principles will result in auditor consideration of: - Whether to issue an adverse opinion rather than a disclaimer of opinion. - Whether to issue a disclaimer of opinion rather than a qualified opinion. - Whether to issue an adverse opinion rather than a qualified opinion. - Nothing, because none of these opinions is applicable to this type of exception.

Qualified opinion

A modification of the auditors' standard report, employing a clause such as except for to limit the auditors' opinion on the financial statements. Indicates that, except for the effects of some limitation on the scope of the audit or some departure from GAAP, the financial statements are fairly presented.

expenditures for fixed assets have been capitalized

A normal audit procedure is to analyze the current year repairs and maintenance accounts to provide evidence in support of the audit proposition that: - capital expenditures have been properly authorized. - non capitalizable expenditures have been properly expensed. - expenditures for fixed assets have been recorded in the proper period. - expenditures for fixed assets have been capitalized.

Emphasis of a matter

A paragraph included in the auditors' report that is required by GAAS or is included at the auditors' discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to users' understanding of the financial statement.

Explanatory paragraph

A paragraph inserted in an auditors' report to explain a matter or to describe the reasons for giving an opinion that is other than unmodified. This term is still used in PCAOB standards, but has been replaced in AICPA standards by an emphasis of matter paragraph and an other matter paragraph.

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

A. Check Clearing for the 21stCentury Act

In selecting items for examination, an auditor considered three alternatives: (1) random number table selection, (2) systematic selection, and (3) random number generator selection. Which, if any, of these methods would lead to a random sample if properly applied? What if the population is not in random order?

All three of the methods of selecting items for examination (random number table selection, systematic selection, random number generator selection) will produce a random sample if properly applied. However, when using systematic sampling on a population that is not in random order it may be necessary to stratify the population into segments, or to use a relatively large number of starting points to produce a random sample.

Select items of equipment in the accounting records and then locate them in the plant

An effective procedure for identifying unrecorded retirements of equipment is to: - Foot related property records. - Recalculate depreciation on the related equipment. - Select items of equipment in the accounting records and then locate them in the plant. - Select items of equipment and then locate them in the accounting records.

distributing payroll checks to subordinate employees

An example of an internal control weakness is to assign to a supervisor the responsibility for: - reviewing and approving time reports for subordinate employees. - authorizing payroll checks for terminated employees. - distributing payroll checks to subordinate employees. - initiating requests for salary adjustments for subordinate employees.

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect:

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

Review and test reports of investment activity for the investment committee is an example of: a. Ensure transactions are recorded and classified properly b. Ensure policies written are being followed c. Verify that internal auditors' observations are consistent with those of external auditors d. Ensure reports tie to client activity

When reviewing financial investments, auditors need to review: a. only purchases and sales of investments b. beginning and ending balances, and changes c. only ending balances of investments

How should an auditor determine the allowance for sampling risk required in establishing a statistical sampling plan for a substantive procedure?

By the materiality of an allowable margin of misstatement the auditor is willing to accept.

(E) Auditor should insist representative of client be present during physical exam of securities in order to: a. Lend authority of auditors directives b. Detect forged securities c. Acknowledge the receipt of the securities returned

Marketable equity securities should be valued at cost. True False

False

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

D) Presentation and Disclosure

Define computer general controls and explain their purpose (8-4)

Designed to control/support computer applications Purpose is to control program development, program changing, computer operations, secure access to programs and data

When using a statistical sampling plan, the auditors would probably require a smaller sample if the:

Desired risk of incorrect acceptance increases

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

Develop an understanding of the economic substance of each derivative.

Documentation

8. Walk-through

E. Implemented

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: Establish internal control with no material weakness. Accept responsibility for the effectiveness of internal control. Evaluate the effectiveness of internal control using suitable control criteria. Support the evaluation with sufficient evidence. Explanation

Establish internal control with no material weakness.

What is basic precision?

In PPS sampling, the reliability factor (for zero misstatements at the planned risk of incorrect acceptance) times the sampling interval.

1. a. adjustment b. consider disclosure c. consider disclosure d. adjustment e. consider disclosure 2. c,e

In connection with your audit of the financial statements of Hollis Mfg. Corporation for the year ended December 31, 20X3, your review of subsequent events disclosed the following items: a. January 7, 20X4: The mineral content of a shipment of ore en route to Hollis Mfg. Corporation on December 31, 20X3, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment. b. January 15, 20X4: Following a series of personal disagreements between Ray Hollis, the president, and his brother-in-law, the treasurer, the latter resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31, 20X3. Payment is to be made in two equal amounts in cash on April 1 and October 1, 20X4. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis's sister. c. January 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off. d. On January 18, 20X4, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years. e. On January 28, 20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry. 1. For each of the subsequent events, indicate whether they should result in: Adjustment—an adjusting entry as of 20X3. Consider Disclosure—consideration of note disclosure as of 20X3. 2. Select the two events least likely to be reflected (resulting in adjustment or disclosure) in the financial statements.

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: a. Reviews the monthly bank reconciliation. b. Returns the checks to accounts payable. c. Is denied access to the supporting documents. d. Is responsible for mailing the checks.

K, L. --- K Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer.

A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with

Knowledge necessary to determine the nature, timing, and extent of further audit procedures

A deficiency in internal control that is less severe than a material weakness, but more severe than a significant deficiency

N/A

The auditors should make certain that consigned items from suppliers are included in physical inventory totals.

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

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

Which of the following is least likely to be a test of controls? Inquiries of client personnel. Inspection of documents. Observation of confirmations. Reperformance of controls.

Observation of confirmations.

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting?

Prepare a schedule of bank transfers

Why is documentation important to management and the auditor?

Provides primary source of information about the flow of transactions. It assists in reviewing the system, training new employees, and revising existing systems

What is always present and must be accounted for in calculations?

Sampling risk

Significant deficiency

Known: Deviations from sample 8/150 = 5.3% Tolerable deviation rate = 6% Upper deviation rate = 9.5% What can be concluded?

The control risk is high, more substantive testing needs to be done. The CR is going up, so DR needs to go down by doing more substantive testing.

date of the auditor's report

The date of the management representation letter should coincide with the: - date of the auditor's report. - date of the engagement agreement. - date of the latest subsequent event referred to in - the notes to the financial statements. balance sheet date.

The preliminary assessments of control risk are often referred to as:

The planned assessed level of control risk

Existence

When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is: - Existence. - Completeness. - Clarity. - Presentation.

costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.

When an auditor tests a client's cost accounting system, the auditors' tests are primarily designed to determine that: - quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand. - physical inventories are in substantial agreement with book inventories. - the system is in accordance with generally accepted accounting principles and is functioning as planned. - costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.

The auditors have sampled 50 accounts from a population of 1,000 accounts receivable. The sample items have a mean book value of $200 and a mean audited value of $203. The book value in the population is $198,000. What is the estimated total audited value of the population using the difference method?

When calculating the estimated audited value of the population using the difference method the average misstatement is first calculated as $203 - $200 = $3. The projected misstatement is then calculated by multiplying the average misstatement times the number of accounts in the population, or $3 x 1000 = $3000. Because the average misstatement is an understatement, the projected misstatement of $3000 is added to the population book value of $198,000 to calculate the estimated audited value of $201,000.

The duties of hiring, payroll computation, and payment to employees should be segregated.

Which of the following best describes proper internal control over payroll? - The duties of hiring, payroll computation, and payment to employees should be segregated. - The preparation of the payroll must be under the control of the personnel department. - The payment of cash to employees should be replaced with payment by checks. - The confidentiality of employee payroll data should be carefully protected to prevent fraud.

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? a. A bank lockbox system. b. Prenumbered remittance advices. c. Monthly bank reconciliations. d. Daily deposit of cash receipts.

The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records

Which of the following is an effective control over accounts receivable? - Responsibility for approval of the write-off of uncollectible accounts receivable should be assigned to the cashier. - The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records. - Only persons who handle cash receipts should be responsible for the preparation of documents that reduce accounts receivable balances. - Balances in the subsidiary accounts receivable ledger should be reconciled to the general ledger control account once a year, preferably at year end.

Quantities ordered are excluded from the receiving department copy of the purchase order

Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received? - Quantities ordered are excluded from the receiving department copy of the purchase order. - Vouchers are prepared by accounts payable department personnel only after they match item counts on the receiving report with the purchase order. - Receiving department personnel are expected to match and reconcile the receiving report with the purchase order. - Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports.

Which of the following is an example of misappropriation of assets relating to sales? a. Accidentally recording cash that represents a liability as revenue. b. Holding the sales journal open to record next year's sales as having occurred in the current year. c. Intentionally recording cash received from a new debt agreement as revenue. d. Theft of cash register sales.

Test whether employee time reports are approved by supervisors.

Which of the following is least likely to be considered a substantive procedure relating to payroll? - Investigate fluctuations in salaries, wages, and commissions. - Test computations of compensation under profit sharing for bonus plans. - Test commission earnings. - Test whether employee time reports are approved by supervisors.

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? a. Restrictions placed on sales by laws and regulations. b. Decline in sales due to economic declines. c. Decline in sales due to product obsolescence. d. Over-recorded sales due to a lack of control over the sales entry function.

Which of the following is not among the criteria that ordinarily exist for revenue to be recognized? a. Collectibility is reasonably assured. b. Delivery has occurred or is scheduled to occur in the near future. c. Persuasive evidence of an arrangement exists. d. The seller's price to the buyer is fixed or determinable.

It includes the term "PCAOB Compliant" in the title

Which of the following is not correct relating to an audit report for a public company? - It includes an additional paragraph indicating that the auditors have also issued a report on the client's internal control over financial reporting. - It must include the city and state in which it was issued. - It refers to standards of the Public Company Accounting Oversight Board. - It includes the term "PCAOB Compliant" in the title.

Observe merchandise and raw materials during the client's physical inventory taking

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory? - Compare the physical quantities of slow-moving items with corresponding quantities in the prior year. - Observe merchandise and raw materials during the client's physical inventory taking. - Review the management's inventory representations letter for accuracy. - Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average.

Perform analytical procedures

Which of the following procedures is most likely to be included near completion of an audit? - Obtain an understanding of internal control. - Confirmation of receivables. - Observation of inventory. - Perform analytical procedures.

Observe the consistency of the employees' use of cash registers and tapes.

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? - Observe the consistency of the employees' use of cash registers and tapes. - Inquire about employees' access to recorded but undeposited cash. - Trace deposits in the cash receipts journal to the cash balance in the general ledger. - Compare the cash balance in the general ledger with the bank confirmation request.

Have customers send payments directly to the company's depository bank

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable? - Request that customers' payment checks be made payable to the company and addressed to the treasurer. - Have customers send payments directly to the company's depository bank. - Segregate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. - Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts.

Which of the following would most likely be detected by an auditor's review of the client's sales cutoff? a. Excessive goods returned for credit. b. Unrecorded sales discounts. c. Lapping of year-end accounts receivable. d. Inflated sales for the year.

An auditor may obtain information on the December 31 month end balance per bank in which of the (Y/N) December 31 Bank Statement Schedule of Bank (cash Transfers)

Yes , No

An auditor may obtain information on the December 31 month end balance per bank in which of the; (Y/N) Standard Confirmation Form January 1-10 Cutoff statement

Yes for both

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: a. Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. b. Coordinate the count of cash with the cutoff of accounts payable. c. Coordinate the count of cash with the count of marketable securities and other negotiable assets. d. Count the cash immediately upon the return of the confirmation letters from the financial institution.

ratio

_____ estimation is preferred when the size of misstatements is nearly proportional to the book values of the items. That is, it is appropriate when larger accounts have larger misstatements and smaller accounts have smaller misstatements

A. A bank lockbox system. B. Approval of all disbursements by an individual independent of cash receipts. C. Monthly bank cutoff statements. D. Prenumbered remittance advices.

Listed below are four interbank cash transfers, indicated by the letters a, b, c and d, of a client for late December 20X1, and early January 20X2. Your answer choice for the next two questions should be selected from this list. For each of transfers a through d indicate whether cash is understated, unaffected, or overstated by the transfer.

a. 1/02 12/30 12/31 12/30 unaffected

Which of the following is least likely to be evidence of operating effectiveness of controls? a. Cancelled supporting documents. b. Confirmations of accounts receivable. c. Records documenting usage of computer programs. d. Signatures on authorization forms.

b. Confirmations of accounts receivable.

Which of the following is ordinarily considered a test of a control? a. Obtain or prepare reconciliations of bank accounts as of the balance sheet date. b. Examine signatures on checks. c. Send confirmation letters to financial institutions. d. Count and list cash on hand.

b. Examine signatures on checks.

Which of the following is not considered one of the five major components of internal control? a. risk assessment. b. Segregation of duties. c. Control activities. d. Monitoring.

b. Segregation of duties.

The preliminary assessments of control risk are often referred to as: a. The assessed level of control risk. b. The planned assessed level of control risk. c. Control risk. d. Internal control objectives risk.

b. The planned assessed level of control risk.

The standard form to confirm cash accounts also requests the financial institution to confirm any __________ to the bank.

balanced owed

At the completion of the audit, the auditors are least likely to know: a. The assessed level of control risk. b. The planned assessed level of control risk. c. Actual control risk. d. The scope of tests of controls.

c. Actual control risk.

Monitoring is considered: a. the primary asset safeguarding technique. b. an element of the control environment. c. a component of internal control. d. a portion of the information and communication system.

c. a component of internal control.

Which of the following is true about the auditors' observation of the client's inventory? a.The auditors should plan the inventory count. b.The auditors should segregate damaged and obsolete goods. c.The auditors should evaluate the adequacy of the client's counting procedures. d.The auditors should supervise the client's personnel.

c.The auditors should evaluate the adequacy of the client's counting procedures

Block selection?

consists of all items in a selected time period, numerical sequence, or alphabetical sequence

A situation when the design or operation of a control does not allow management or employees, in the normal course of performing their functions, to prevent or detect misstatements on a timely basis is referred to as a(n): material weakness in internal control. significant deficiency. inherent limitation of internal control. control deficiency.

control deficiency.

The purpose of tests of controls is to provide reasonable assurance that the: entity has complied with disclosure requirements of generally accepted accounting principles. entity has complied with requirements of quality control. controls are operating effectively. accounting treatment of transactions and balances is valid and proper.

controls are operating effectively.

A. Completeness. B. Existence. C. Fairness. D. Presentation and Disclosure

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: a) Cutoff bank statement. b) Year-end bank statement. c) Bank confirmation. d) General ledger.

d) General ledger.

Taylor Sales Co. maintains a large full time internal audit staff which reports directly to the chief accountant. Audit reports prepared by the internal auditors indicate that internal control is functioning as it should and that the accounting records are reliable. The external auditor, after assessing competence and objectivity will probably: a. avoid duplicating the work performed by the internal audit staff. b. eliminate tests of controls. c. increase the depth of the consideration of administrative controls. d. make limited use of the work performed by the internal audit staff.

d. make limited use of the work performed by the internal audit staff.

A. Confirmation from the broker. B. Inspection of year-end brokers' statements. C. Vouching all changes during the year to brokers' advises and statements. D. Examination of paid checks issued in payment of securities purchased.

dA. Date due of a direct liability. B. The principal amount paid on a direct liability. C. Description of collateral for a direct liability. D. The interest rate of a direct liability.

Tolerable deviation rate is the maximum rate of __________ the auditor is willing to accept without altering the planned assessed level of control risk. Deviations increase the likelihood of misstatements in the accounting records

deviations

6. All cash receipts (checks) received through the mail are prelisted by the two individuals who open the mail.

disagree

7. All cash receipts received through the mail are restrictively endorsed when received.

disagree

8. When a disbursement is made based on paper supporting documents, those supporting documents are canceled by the individual who signs the check.

disagree

Contingent liability

A possible liability, stemming from past events that will be resolved as to existence and amount by some future event.

Loss contingency

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n): - Analytical process. - Loss contingency. - Probable loss. - Unasserted claim.

Checks payable to officers should be carefully reviewed by the auditors to determine whether the transactions were properly: (Select all that apply) a. authorized b. confirmed c. calculated d. disclosed e. recorded

A, D, E

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

A. A bank lockbox system.

What is the formula for audit risk?

AR = IR x CR x DR Inherent risk x control risk x detection risk

At the completion of the audit, the auditors are least likely to know:

Actual control risk. The auditors never know the exact control risk involved—they always simply have an estimate of it.

February 10, 20X9

An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated: - December 31, 20X8. - January 17, 20X9. - February 10, 20X9. - February 16, 20X9.

An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31, 20X0. By this procedure, the auditor would be most likely to learn which of the following? - An account balance is past due and should be written off. - An October check from a customer was posted in error to the account of another customer with a similar name. - An October invoice was improperly computed. - An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.

__________ ________ plans are typically used for tests of controls, whereas variables sampling plans are typically used for ___________ _____

Attribute sampling, substantive tests

Auditors often utilize sampling methods when performing tests of controls. Which of the following sampling methods is most useful when testing controls?

Attributes sampling

Jones, CPA, believes the industry-wide occurrence rate of client billing errors is 3% and has established a tolerable deviation rate of 5%. In the review of client invoices, Jones should use:

Attributes sampling

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

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

B. Presentation and Disclosure

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

B. Treasurer.

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

Which of the following is not an advantage of establishing an enterprise risk management system within an organization? A) Reduces operational surprises. B) Provides integrated responses to multiple risks. C) Eliminates all risks. D) Identifies opportunities.

C) Eliminates all risks. An enterprise risk management system cannot eliminate all risks.

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

C. Prepare a schedule of bank transfers.

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

Check Clearing for the 21st Century Act

Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the:

Check Clearing for the 21st Century Act.

Garcia was engaged to audit the financial statements of Delta Corporation for the year ended September 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?

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

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

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

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

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

Component of internal control

In the course of auditing accounts receivable, the auditors calculated the estimated total audited value ($3,100,000), the allowance for sampling risk ($100,000), and the tolerable misstatement ($175,000). If the book value of accounts receivable is $3,250,000, what is the audit conclusion and projected misstatement?

Conclude the book value is materially misstated and the projected misstatement is $150,000.

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

Confirmation.

When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, an extent of the CPA's procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity the CPA should:

Consider the organizational level to which the internal auditors report the results of their work

Block selection

Consists of all items in a selected time period, numerical sequence, or alphabetical sequence.

treasurer

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: - controller - treasurer - executive committee - board of directors

Auditors are often concerned with the _______of cash, as this is where most misstatements occur. a. disclosure b. existence c. inventory d. overstatement e. understatement

The financial management of a company should take steps to see that company's investment securities are protected. Which of the following is not a step that is designed to protect investment securities? a. Securities should be properly controlled physically in order to prevent unauthorized usage. b. Securities should be registered in the name of the owner. c. Access to securities should be vested in more than one person. d. Custody of securities should be assigned to persons who have the accounting responsibility for securities.

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

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

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

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

7. Questionnaire

D. Documentation

Details of bank deposit slips with details of credits to customer accounts

You are performing an audit of Systex Corporation and evaluating various controls. Classify the following controls as being primarily preventive, detective, or corrective. Internal audits of payroll.

Detective

When a client engages in transactions involving derivatives, the auditor should:

Develop an understanding of the economic substance of each derivative.

In attributes sampling, which one of the following must be known in order to appraise the results of the auditor's sample?

Deviations in sample.

Match the situation by selecting the sampling technique that would be most appropriate. The auditors wish to test for the existence of a critical deviation in internal control.

Discovery sampling

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

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

Which of the following has made it difficult to engage in kiting in recent years?

Electronic processing of checks.

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

Examination of paid checks issued in payment of securities purchased

Examination of paid checks issued in payment of securities purchased.

The auditor suspects that vouchers were prepared and processed by an accounting department employee for merchandise that was neither ordered nor received by the entity.

Examine the supporting purchase orders and receiving reports for selected paid vouchers.

H. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment.

Kiting

A primary objective of procedures performed to obtain an understanding or internal control is to provide

Knowledge necessary to determine the nature, timing, and extent of further audit procedures

A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with: Knowledge necessary to determine the nature, timing, and extent of further audit procedures. Audit evidence to use in reducing detection risk. A basis for modifying tests of controls. An evaluation of the consistency of application of management policies.

Knowledge necessary to determine the nature, timing, and extent of further audit procedures.

Material weakness

An advantage of using statistical sampling techniques is that such techniques:

Mathematically measure risk

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

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

Which of the following procedures would the auditors most likely perform to test controls relating to managements's assertion about the completeness of cash receipts for cash sales at a retail outlet

Observe the consistency of the employees use of cash registered and tapes

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?

Observe the consistency of the employees' use of cash registers and tapes

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? A. Observe the consistency of the employees' use of cash registers and tapes B. Inquire about employees' access to recorded but undeposited cash C. Trace deposits in the cash receipts journal to the cash balance in the general ledger. D. Compare the cash balance in the general ledger with the bank confirmation request.

Observe the consistency of the employees' use of cash registers and tapes

What is the tolerable deviation rate?

Rate the auditor will tolerate without modifying the planned assessment of control risk.

Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation?

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

Reconciliation of the bank account should not be performed by an individual who also: a. Processes cash disbursements. b. Has custody of securities. c. Prepares the cash budget. d. Reviews inventory reports.

For each of the controls, identify the internal control component and, if applicable, the subcomponent or principle to which it relates. Control components may be selected more than once. Management periodically evaluates the threats to preparing reliable financial statements.

Risk assessment. / (Blank)

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

Securities held for the client by the financial institution.

Select each of the following terms with the appropriate attributes. No reply is used more than once. Merits attention, less than a material weakness

Significant deficiency

Various factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size

Smaller measure of tolerable misstatement

test of controls

The auditor is examining copies of sales invoices only for the initials of the person responsible for checking the extensions. This is an example of a: - test of balances. - substantive procedure. - dual purpose test. - test of controls.

The auditors are looking for critical deviations that are not expected to be frequent in number

Explain how the auditors may obtain an estimate of a population's standard deviation to determine an appropriate sample size.

The auditors may obtain an estimate of the dollar amount of the standard deviation by procedures such as by (1) using the results obtained in previous years, (2) calculating the standard deviation of the population's book values, or (3) taking a small pilot sample.

verify reconciling items on the client's bank reconciliation

The auditors who are engaged to examine the financial statements of a business enterprise with request a cutoff bank statement primarily in order to: -detect kiting - verify reconciling items on the client's bank reconcilliation - verify the cash balance reported on the standard financial institution confirmation form -detect lapping

An emphasis-of-matter paragraph to the auditors' report

The auditors who wish to draw reader attention to a financial statement note disclosure on significant transactions with related parties should disclose this fact in: - An emphasis-of-matter paragraph to the auditors' report. - A footnote to the financial statements. - The body of the financial statements. - The "summary of significant accounting policies" section of the financial statements.

Verification by reference to dividend record books

The best way to verify the amounts of dividend revenue received during the year is: - Recomputation. - Verification by reference to dividend record books. - Confirmation with dividend-paying companies. - Examination of cash disbursements records.

The best way to verify the amounts of dividend revenue received during the year is: a. Recomputation. b. Verification by reference to dividend record books. c. Confirmation with dividend-paying companies. d. Examination of cash disbursements records.

What is inherent risk?

The risk of a material misstatement in an assertion, assuming there were no related controls.

Control Risk

The risk that a misstatement could occur and not be prevented or detected by the client's internal control

Check 21 Act

This act allows financial institutions to create and process electronic "substitute checks" in place of customer written hard-copy checks. The purpose of this act is to decrease the time for check clearing.

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: a. Supported by a vendor's invoice. b. Stamped "paid" by the check signer. c. Prenumbered and accounted for. d. Approved for authorized purchases.

Accounts receivable subsidiary ledger

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

The sequence of procedures applied by the client in processing a particular type of recurring transaction

Transaction cycle

An employee who prepares checks and submits them with supporting documents to the official authorized to sign checks should not be responsible for mailing the signed checks. True False

True

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

True

T or F: A salesperson who uses a cash register to record over the counter sales should, at the end of each workday, turn over to a supervisor the cash register tape and a corresponding amount of cash.

True

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

Understatement of outstanding checks.

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

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

Which of the flooding is most likely to be an overall response to fraud risks identified in an audit

Use less predictable audit procedures

The best way to verify the amounts of dividend revenue received during the year is:

Verification by reference to dividend record books

A procedure in which an auditor follows a transaction from origination through the company's processes, including information systems, until it is reflected in the company's financial records

Walk-through

Qualified No Adverse Yes

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? Qualified Adverse Yes Yes Yes No No Yes No No

Stratification allows auditors to combine populations into homogeneous subgroups which: a. reduces the number of sample items required b. increases the number of sample items required c. reduces the efficiency of sampling procedures

A. The cashier prepares the daily deposit. B. The cashier makes the daily deposit at a local bank. C. The cashier posts the receipts to the accounts receivable subsidiary ledger. D. The cashier endorses the checks.

The possibility that the results of a sample will indicate that a balance of a particular account are not materially misstated when, in reality, it is materially misstated is:

risk of incorrect acceptance

Inherent in the use of sampling is the risk of ______ _____ which is the possibility of selecting a sample that is not representative of the __________

sampler error, population

The auditors who are engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: a. verify reconciling items on the client's bank reconciliation. b. detect kiting. c. verify the cash balance reported on the standard financial institution confirmation form. d. detect lapping.

When reviewing of client's client prepared bank reconciliations, auditors should directly confirm ___________ with the financial institution. a. bank balances b. book balances c. reconciling items

Which of the following is not one of the auditors' primary objectives in an examination of investments in securities? a. To determine whether all securities are in proper, secure, files at year-end. b. To determine whether securities are properly classified on the balance sheet. c. To determine whether securities actually exist. d. To determine whether securities are the property of the client.

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? a. Observe the consistency of the employees' use of cash registers and tapes b. Inquire about employees' access to recorded but undeposited cash c. Trace deposits in the cash receipts journal to the cash balance in the general ledger d. Compare the cash balance in the general ledger with the bank confirmation request

Match the sampling risk for substantive procedures with its description. a. Risk of incorrect rejection b. Risk of incorrect acceptance 1. Possibility that sample results will indicate an account balance is materially misstated when, in fact, it is not misstated 2. Possibility that sample results will indicate that an account balance is not materially misstated when, in fact, it is materially misstated

A - 1 B - 2

Match the sample technique with its description. a. Nonstatistical sampling b. Statistical sampling 1. Based on laws of probability, this technique allows auditors to measure and control sample risk 2. Use professional judgment rather than laws of probability but does not provide means to quantify sampling risk

A - 2 B - 1

Match the sampling risk with its description. a. Risk of assessing control risk too high b. Risk of assessing control risk too low 1. Test of control sample results cause auditors to perform less substantive procedures than is necessary in the circumstance (effectiveness of the audit) 2. Test of control sample results cause auditors to perform more substantive procedures than is necessary in the circumstance (efficiency of the audit)

A - 2 B - 1

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: A) An investment committee of the board of directors. B) The chief operating officer. C) The corporate controller. D) The treasurer.

A) An investment committee of the board of directors. The investment committee of the board of directors is not involved in the routine of making buy and sell decisions and can therefore review the transactions objectively. On the other hand, the chief operating officer, the controller, and the treasurer may be closely associated on a daily basis with the financial executive responsible for the investment decisions.

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

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

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

A) Check Clearing for the 21st Century Act.

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

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: A) Consider the organizational level to which the internal auditors report the results of their work. B) Review the internal auditors' work. C) Consider the qualifications of the internal audit staff. D) Review the training program in effect for the internal audit staff.

A) Consider the organizational level to which the internal auditors report the results of their work. The internal auditors' objectivity refers to their relative independence from the organizational units they have been evaluating. This may best be determined by considering the organizational level to which the internal auditors report. The other answers address the issues of the internal auditors' competence, not objectivity.

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: A) Details of bank deposit slips with details of credits to customer accounts. B) Daily cash summaries with the sums of the cash receipts journal entries. C) Individual bank deposit slips with the details of the monthly bank statements. D) Dates uncollectible accounts are authorized to be written off with the dates the writeoffs are actually recorded.

A) Details of bank deposit slips with details of credits to customer accounts. Lapping will result in a delay in the recording of specific remittance credits in the financial records, but the checks will be deposited in the bank as they are received. Therefore, a comparison of the checks deposited to the credits to customer accounts will likely uncover the scheme.

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: A) Establish internal control with no material weakness. B) Accept responsibility for the effectiveness of internal control. C) Evaluate the effectiveness of internal control using suitable control criteria. D) Support the evaluation with sufficient evidence.

A) Establish internal control with no material weakness. Management may issue a report on internal control regardless of whether the system has a material weakness.

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

A) Is acceptable when properly controlled.

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? A) Observe the consistency of the employees' use of cash registers and tapes. B) Inquire about employees' access to recorded but undeposited cash. C) Trace deposits in the cash receipts journal to the cash balance in the general ledger. D) Compare the cash balance in the general ledger with the bank confirmation request.

A) Observe the consistency of the employees' use of cash registers and tapes. The use of cash registers and tapes helps assure that all sales of a retail store are recorded. Answer (2) is incorrect because the cash has already been recorded. Answer (3) is incorrect because the procedure only deals with recorded deposits and, therefore, the completeness assertion is not addressed as directly as in answer (1). Answer (4) is incorrect because one would not expect the cash balance in the general ledger to agree with the bank confirmation request due to items in transit and checks outstanding.

Reconciliation of the bank account should not be performed by an individual who also: A) Processes cash disbursements. B) Has custody of securities. C) Prepares the cash budget. D) Reviews inventory reports.

A) Processes cash disbursements. The individual who reconciles the bank account should not be involved in the processing of cash receipts or disbursements. Therefore, answer (1) is correct. All of the other functions are compatible with reconciliation responsibilities.

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

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

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor suspects that a lapping scheme exists because an accounting department employee who has access to cash receipts also maintains the accounts receivable ledger and refuses to take any vacation or sick days. (Select only 2 procedures.)

A, J

Of the following, the most significant risk factor relating to the risk of misstatement arising from fradulent financial reporting for SSC is that: a. Company officers serve on the board of directors. b. The company must refinance a significant portion of its debt. c. The company operates in the Bisbee, Arizona, area. d. The company paid no dividend this year.

Accumulated depreciation

Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment? - Accumulated depreciation. - Cost of goods sold. - Purchase returns and allowances. - Purchase discounts.

Cash confirmations need to be mailed under the control of the __________.

Auditor

a. yes b. no c. yes d. yes e. yes f. no g. yes

Auditors report on the consistency of application of accounting principles. Assume that the following list describes changes that have a material effect on a client's financial statements for the current year. For each of the following situations, state whether the audit report should include an emphasis-of-matter paragraph on consistency. a. A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts. b. A change in the estimated service lives of previously recorded plant assets based on newly acquired information. c. Correction of a mathematical error in inventory pricing made in a prior period. d. A change from direct costing to full absorption costing for inventory valuation. e. A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits. f. A change to including the employer's share of FICA taxes as "Retirement benefits" on the income statement. This information was previously included with "Other taxes." g. A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing.

Agreements to maintain compensating balances should be ___________ in the financial statements. a. recorded b. disclosed c. adjusted

Intentional misstatements of the value of closely held investments could have been prevented by which of the following internal controls? a. segregation of duties b. effective audit committee c. formal investment policies

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500 imprest petty cash fund? a. The custodian occasionally uses the cash fund to cash employee checks. b. Reimbursement occurs twice each week. c. The custodian endorses reimbursement checks. d. Reimbursement vouchers are not prenumbered.

Which of the following is a frequent control over cash disbursements? A) Checks should be signed by the controller and at least one other employee of the company. B) Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations. C) Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation. D) Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement.

B) Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.

Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by: A) Employment of temporary personnel to aid in the separation of duties. B) Direct participation by the owner in key record keeping and control activities of the business. C) Engaging a CPA to perform monthly write-up work. D) Delegation of full, clear-cut responsibility for a separate major transaction cycle to each employee.

B) Direct participation by the owner in key record keeping and control activities of the business. Involvement of the owner in key control functions should be a major step toward preventing material errors or defalcations. Answer (1) would not be cost-effective. Answer (3) would provide some measure of control, but not as much as would daily participation by the owner. If it were feasible to hire additional employees, it would be cheaper to hire permanent employees rather than temporary. The need for internal control is permanent. Answer (4) would weaken, not strengthen internal control.

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

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

B) The principal amount paid on a direct liability.

The best way to verify the amounts of dividend revenue received during the year is: A) Recomputation. B) Verification by reference to dividend record books. C) Confirmation with dividend-paying companies. D) Examination of cash disbursements records.

B) Verification by reference to dividend record books. Comparing the recorded amount of dividend revenue with dividend record books (published by investment advisory services) provides evidence of the amount of dividend revenue that should have been received during the year. It is virtually impossible to confirm the receipt of dividends with the company paying those dividends.

Internal control over cash receipts is weakened when an employee who receives customer mail receipts also: A) maintains a petty cash fund. B) records credits to individual accounts receivable. C) prepares bank deposit slips for all mail receipts. D) prepares initial cash receipts records.

B) records credits to individual accounts receivable.

The least crucial element of internal control over cash is: A) separation of cash record keeping from custody of cash. B) separation of cash receipts from preparing deposits. C) canceling the supporting documents for disbursements. D) preparation of the monthly bank reconciliation.

B) separation of cash receipts from preparing deposits.

To verify the client is not overstating cash balances, auditors should analyze bank transfers for the: (Select all that apply) a. the fieldwork period b. first week in the year following the audit c. last week of the audit year d. entire period being audited

B, C

Important internal controls over cash disbursements include: (Select all that apply) a. reconciliation of monthly banks statements by the employee who signs checks b. using computers to print checks and maintain item counts and control totals c. use of voucher system assembled by mailroom employees d. using prenumbered checks and accounting for all numbers in the series

B, D

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

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

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

B. Acknowledge the receipt of securities returned.

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

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

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

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

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

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

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

B. Develop an understanding of the economic substance of each derivative.

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

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

9. The details of invoices for equipment repairs were not clearly identified or explained to the accounting department employees. The auditor suspects that the bookkeeper incorrectly recorded the repairs as fixed assets. (Select only 1 procedure.)

B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization.

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

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

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

B. Understatement of outstanding checks.

Which of the following statistical sampling techniques is least desirable for use by the audit

Block section

Listed below are controls that have been developed by the management of Cirus Manufacturing Co. Invoices are reviewed for accuracy before they are mailed to customers. A. Monitoring B. Control Environment C. Control Activities D. Risk Assessment E. Accounting information

C. Control activities—transaction processing (or application) control.

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

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: A) Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. B) Coordinate the count of cash with the cutoff of accounts payable. C) Coordinate the count of cash with the count of marketable securities and other negotiable assets. D) Count the cash immediately upon the return of the confirmation letters from the financial institution.

C) Coordinate the count of cash with the count of marketable securities and other negotiable assets. Unless all negotiable assets are verified at one time, an opportunity exists for a dishonest officer or employee to conceal a shortage by transferring it from one asset category to another a step ahead of the auditors. For example, marketable securities could be pledged as collateral for a loan. The cash thus obtained could be included with other cash being counted by the auditors. After the cash count, the cash derived from the securities could be removed and used to redeem the pledged securities which would then be available for counting by the auditors. Of course, this type of manipulation could hardly be carried on unless there were weaknesses in internal control. Answer (1) is incorrect because counting cash in advance of the balance sheet date does not relate to kiting. Answer (2) is not persuasive because accounts payable can not be substituted for cash as can negotiable assets. Answer (4) is not correct because there is no particular significance to the amount of cash on hand on the day the bank confirmation letters happen to be returned.

The financial management of a company should take steps to see that company's investment securities are protected. Which of the following is not a step that is designed to protect investment securities? A) Securities should be registered in the name of the owner. B) Access to securities should be vested in more than one person. C) Custody of securities should be assigned to persons who have the accounting responsibility for securities. D) Securities should be properly controlled physically in order to prevent unauthorized usage.

C) Custody of securities should be assigned to persons who have the accounting responsibility for securities.

Which of the following is least likely to be a test of controls? A) Inquiries of client personnel. B) Inspection of documents. C) Observation of confirmations. D) Reperformance of controls.

C) Observation of confirmations. While tests of controls involve, inquiry, inspection, observation and reperformance, "observation of confirmations" doesn't have a clear meaning.

C) Prepare a schedule of bank transfers.

Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control? A) Segregation of duties over cash disbursements. B) Requiring approval of purchase transactions. C) Preparing bank reconciliations. D) Maintaining backup copies of key transactions.

C) Preparing bank reconciliations. Preparing bank reconciliations will detect a variety of misstatements related to cash and is a detective control in the sense that it does not prevent the misstatement from occurring, but may detect it. Answers (1) and (2) are incorrect because segregating duties and requiring approvals are primarily designed to prevent occurrence of misstatements. Answer (4) is incorrect because the primary purpose of keeping backup copies of key transactions (or all transactions) is to prevent loss of information in the event of an information system failure and hence a corrective control.

An auditor may compensate for a weakness in internal control by increasing the extent of: A) Tests of controls. B) Detection risk. C) Substantive tests of details. D) Inherent risk.

C) Substantive tests of details. An increase in the substantive procedures will decrease detection risk, and thereby compensate for the increased level of control risk due to a weakness in internal control. Answer (1) is incorrect because if the weakness exists, increasing the extent of tests will only provide more evidence on the weakness—not evidence that compensates for the weakness. Answers (2) and (4) are incorrect because a decrease in detection risk or inherent risk, not an increase, would compensate. Also, in the case of inherent risk, it may not be possible to change the assessment since it is a function of the firm's environment.

As compared to manual processing, electronic processing of cash transactions generally makes kiting: A) impossible to accomplish. B) easier to accomplish. C) more difficult to accomplish. D) neither easier, nor more difficult to accomplish.

C) more difficult to accomplish.

A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the: B) cashier. C) internal auditors. C) treasurer. D) chief accountant.

C) treasurer.

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: A) controller. B) executive committee. C) treasurer. D) board of directors.

C) treasurer.

The auditors who are engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: A) detect lapping. B) detect kiting. C) verify reconciling items on the client's bank reconciliation. D) verify the cash balance reported on the standard financial institution confirmation form.

C) verify reconciling items on the client's bank reconciliation.

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

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

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

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

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

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

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

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

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

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

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

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

Match the situation by selecting the sampling technique that would be most appropriate. The auditors wish to estimate the dollar value of 1,000 inventory items that have been priced by the client; the auditors expect a moderately high misstatement rate in the client's pricing of the items.

Difference estimation

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

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

For each of the controls, identify the internal control component and, if applicable, the subcomponent or principle to which it relates. Control components may be selected more than once. Invoices are reviewed for accuracy before they are mailed to customers.

Control activities. /transaction processing (or application) control.

For each of the controls, identify the internal control component and, if applicable, the subcomponent or principle to which it relates. Control components may be selected more than once. Management has prepared and distributed an organizational chart.

Control environment. /effective structure, reporting lines, and authority and responsibility.

Corrective Adjustments of perpetual inventory records to physical counts would serve to correct the inventory records.

In order to avoid the misappropriation of company-owned financial investments, which of the following is the best course of action that can be taken by the management of a company with a large portfolio of financial investments? a. Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. b. Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. c. Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. d. Require that the safekeeping function for securities be assigned to a securities broker who will act as a custodial agent.

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? a. Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept b. Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access c. Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis d. Require that the safekeeping function for securities be assigned to a bank or stockbroker that will at as a custodial agent

Which of the following correctly identifies a risk facing SSC that might adversely affect cash receipts during the coming years? a. Establishment of the audit committee. b. Increase in the popularity of home swimming pools. c. Sales to many different customers. d. Sales to Wingo.

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: a. Reviews the monthly bank reconciliation b. Returns the checks to accounts payable c. Is denied access to the supporting documents d. Is responsible for mailing the checks

D - not returned to accounting department

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

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

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: A) Reviews the monthly bank reconciliation. B) Returns the checks to accounts payable. C) Is denied access to the supporting documents. D) Is responsible for mailing the checks.

D) Is responsible for mailing the checks. When checks are signed they should not be returned to the accounting department. This control is used so as to avoid a situation in which the accounts payable department fabricates documents, and then collects the checks. Not returning the checks makes it more difficult for this sort of fraud in that the perpetrator must also establish a "safe" address for the check to be mailed to. Answer (1) is incorrect because control is stronger if individuals who are otherwise independent of the cash function prepare and review the monthly bank reconciliation. Answer (2) is incorrect because, as discussed, the checks should not be returned to accounts payable. Answer (3) is incorrect because the individual signing the checks needs access to the supporting documents so he or she can determine whether the expenditure is proper.

An entity's ongoing monitoring activities often include: A) Periodic audits by internal auditors. B) The audit of the annual financial statements. C) Approval of cash disbursements. D) Management review of weekly performance reports.

D) Management review of weekly performance reports. Management review of weekly performance reports is an ongoing monitoring activity that may detect errors or fraud. Answer (1) is incorrect because while periodic audits by internal audit represent a monitoring activity, they are best classified as separate evaluations, and not ongoing monitoring activities. Answer (2) is incorrect because the audit of the annual financial statements is the function of the external auditors. Answer (3) is incorrect because approvals of cash disbursements represent a control activity.

D) Many forms of it require no action by the auditors.

D) Net income is overstated.

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

D) Obtaining a receipt for every disbursement.

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

D) Presentation and Disclosure.

Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? A) Cash confirmation. B) Bank reconciliation. C) Evaluation of ratio of cash to current liabilities. D) Proof of cash.

D) Proof of cash.

In order to avoid the misappropriation of company-owned financial investments, which of the following is the best course of action that can be taken by the management of a company with a large portfolio of financial investments? A) Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. B) Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. C) Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. D) Require that the safekeeping function for securities be assigned to a securities broker who will act as a custodial agent.

D) Require that the safekeeping function for securities be assigned to a securities broker who will act as a custodial agent.

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

D) Securities are held under joint control of two or more officials.

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

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

D) Sign checks, and also cancel supporting documents.

D) The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

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

D. Acknowledge the receipt of securities returned.

Detective The annual physical inventory is a detective control because it would serve to detect misstatements of inventory after they have occurred.

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

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

. An auditor suspects that the controller wrote several checks and recorded the cash disbursements just before year-end but did not mail the checks until after the first week of the subsequent year. (Select only 1 procedure.)

D. Obtain the cutoff bank statement and compare the cleared checks to the year-end bank reconciliation.

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

D. Obtaining a receipt for every disbursement.

Listed below are controls that have been developed by the management of Cirus Manufacturing Co. Management periodically evaluates the threats to preparing reliable financial statements. A. Monitoring B. Control Environment C. Control Activities D. Risk Assessment E. Accounting information

D. Risk assessment.

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

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

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

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

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

D. Sign checks, and also cancel supporting documents.

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

D. Sign checks, and also cancel supporting documents.

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

D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by

Direct participation by the owner in key record keeping and control activities of the business

Detective The monthly reconciliation of bank accounts is a detective control because it would serve to detect misstatements of cash after they have occurred.

In which of the following areas are the auditors least likely to use the work of a specialist?

Determination of the existence of a complex financial instrument.

h. 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:

Details of bank deposit slips with details of credits to customer accounts.

Which of the following would be least likely to be considered an objective of internal control? Checking the accuracy and reliability of accounting data. Detecting management fraud. Encouraging adherence to managerial policies. Safeguarding assets.

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: Employment of temporary personnel to aid in the separation of duties. Direct participation by the owner in key record-keeping and control activities of the business. Engaging a CPA to perform monthly write-up work. Delegation of full, clear-cut responsibility for a separate major transaction cycle to each employee.

Direct participation by the owner in key record-keeping and control activities of the business.

What is discovery sampling?

Discovery sampling, a form of attributes sampling, is designed to locate at least one deviation (exception) in the population. Discovery sampling often is used in situations in which the auditors expect a very low rate of occurrence of some critical deviation. As an example, the auditors might use discovery sampling to attempt to locate a fraudulent cash disbursement.

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor suspects that a kiting scheme exists because an accounting department employee who can issue and record checks seems to be leading an unusually luxurious lifestyle. (Select only 1 procedure.)

f. In addition to the risk factor identified in the preceding question, another risk factor relating to misstatements arising from fraudulent financial reporting is:

Earnings this year are lower than management had hoped.

In assessing sampling risk, the risk of incorrect rejection and the risk assessing control risk too high relate to the :

Efficiency of the audit

In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the:

Efficiency of the audit

Auditors send a confirmation request to investment brokers to confirm __________ and ownership.

Existence

False

An official of the client company took securities from the safe deposit box and sold them to obtain cash to meet a personal financial crisis. Even with proper internal control, if the official purchased identical securities before the year-end and placed them in the safe deposit box, this improper "borrowing" would probably go undetected during the annual audit. True False

False

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

False

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

False

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

False

T or F: An official of the client company took securities from the safe deposit box and sold them to obtain cash to meet a personal financial crisis. Even with proper internal control, if the official purchased identical securities before the year-end and placed them in the safe deposit box, this improper "borrowing" would probably go undetected during the annual audit.

False

T or F: In performing tests of controls, the auditors focus on the risk of assessing control risk too high rather than the risk of assessing control risk too low.

False

T or F: Nonstatistical sampling may be used for tests of controls but should never be used for substantive procedures.

False

T or F: Unrestricted random sampling normally results in a smaller sample size than does stratified sampling.

False

The definition of a "deviation" for a test of a control should include only those deviations that result in misstatements in the financial statements. True False

False

General Ledger

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: - Cutoff bank statement. - Year-end bank statement. - Bank confirmation. - General ledger.

properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors

If the auditors indicate in the report that the opinion is based, in part, on the report of component auditors who were responsible for the audit of part of the total financial statement data, the auditors are: - properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors. - abrogating responsibility to those users who rely on the CPA firm's reputation as a basis for relying on the reported financial statements. - in effect qualifying the opinion. - taking complete responsible for the work of the other auditors.

a. adjustment b. adjustment c. consider disclosure d. consider disclosure e. consider disclosure

In connection with her audit of the financial statements of Flowmeter, Inc., for the year ended December 31, 20X3, Joan Hirsch, CPA, is aware that certain events and transactions that have taken place after December 31, 20X3, but before she has issued her report dated February 28,20X4, may affect the company's financial statements. The following material events or transactions have come to her attention: a. On January 3, 20X4, Flowmeter, Inc., received a shipment of raw materials from Canada. The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3. b. On January 15, 20X4, the company settled and paid a personal injury claim of a former employee as the result of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim. c. On January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Co. The business combination is likely to double the sales volume of Flowmeter, Inc. d. On February 1, 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured loss of inventory. e. On February 5, 20X4, Flowmeter, Inc., issued to an underwriting syndicate $2 million in convertible bonds. Required: For each of the subsequent events, indicate whether they should result in: Adjustment—an adjusting entry as of 20X3. Possible Disclosure—Consider note disclosure as of 20X3.

Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

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? - Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. - Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. - Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. - Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

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? a. Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. b. Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. c. Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. d. Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor suspects that the entity's controller has overstated sales and accounts receivable by recording fictitious sales to regular customers in the entity's books. (Select only 2 procedures.)

J, L

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor discovered an unusually large receivable from one of the entity's new customers. The auditor suspects that the receivable may be fictitious because the auditor has never heard of the customer and because the auditor's initial attempt to confirm the receivable has been ignored by the customer. (Select only 2 procedures.)

K, L

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: a. Cutoff bank statement. b. Year-end bank statement. c. Bank confirmation. d. General ledger.

Which of the following is accurate regarding tolerable misstatement?

Tolerable misstatement is directly related to materiality

A deficiency in internal control such that there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis

Material weakness in internal control

Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?

Materiality and audit risk

A report that documents a service organization's controls and documents their suitability and effectiveness

Type 2 Report

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor suspects that fictitious employees have been placed on the payroll by the entity's payroll supervisor, who has access to payroll records and to the paychecks. (Select only 1 procedure.)

variables sampling

sampling plans designed to estimate a numerical measurement of a population, such as a dollar value

Preventive Requiring dual signatures for checks is a preventative control because it would serve to prevent errors and fraud with respect to cash disbursements.

Preventive Segregation of duties over purchasing would serve to prevent errors and fraud relating to purchase transactions. Segregation of duties prevents individuals from perpetrating errors and fraud and covering them up in the course of performing their assigned duties.

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor suspects that selected employees of the entity received unauthorized raises from the entity's payroll supervisor, who has access to payroll records. (Select only 1 procedure.)

What are the auditor's responsibilities for the detection and evaluations of various types of subsequent events?

type 1 and type 2

a. Disclaimer b. Unmodified - standard c. Qualified d. Unmodified with an emphasis of matter paragraph e. Adverse

Select the type of audit report the auditors generally should issue in the situations presented below. Type of audit report may be used once, more than once, or not at all. Disclaimer Unmodified - standard Qualified Unmodified with an emphasis of matter paragraph Adverse a. Client-imposed restrictions significantly limit the scope of the auditors' procedures, and they are unable to obtain sufficient appropriate audit evidence. The possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive. b. The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements. c. The auditors believe that the financial statements have been presented in conformity with generally accepted accounting principles in all respects, except that a loss contingency that should be disclosed through a note to the financial statements is not included. While they consider this a material omission, they do not believe that it pervasively affects the financial statements. d. The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors concur with this change. The effect is considered material to the financial statements, although inventory is not a large part of total assets. e. The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors do not concur with this change. The effect is considered material and pervasive.

neither a comment on the use of alternative auditing procedures nor an opinion qualification

The auditors have not been able to confirm a large account receivable, but they have satisfied themselves as to the proper amount of the receivable by means of alternative auditing procedures. The auditors' report on the financial statements should include: - neither a comment on the use of alternative auditing procedures nor an opinion qualification. - both a scope qualification and an opinion qualification. - a description of the limitation on the scope of their audit and the alternative auditing procedures used, but an opinion qualification is not required. - an opinion qualification, but reference to the use of alternative auditing procedures is not required.

And accounts receivable are immaterial, or the use of confirmations would be ineffective

The auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low. - And accounts receivable are immaterial, or the use of confirmations would be ineffective. - And accounts receivable are composed of large accounts. - And the effectiveness of confirmations is absolutely determined. - Or accounts receivable are from extremely reputable customers.

Details of bank deposit slips with details of credits to customer accounts

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: - Details of bank deposit slips with details of credits to customer accounts. - Daily cash summaries with the sums of the cash receipts journal entries. - Individual bank deposit slips with the details of the monthly bank statements. - Dates uncollectible accounts are authorized to be written off with the dates the writeoffs are actually recorded.

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: a. Details of bank deposit slips with details of credits to customer accounts. b. Daily cash summaries with the sums of the cash receipts journal entries. c. Individual bank deposit slips with the details of the monthly bank statements. d. Dates uncollectible accounts are authorized to be written off with the dates the writeoffs are actually recorded.

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

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

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

The request was mailed by the assistant treasurer.

Which of the following is not a control that generally is established over cash receipts?

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

Designating the cashier to be custodian of the petty cash fund is more acceptable from the standpoint of internal control than making the cashier responsible for maintenance of accounts receivable records. True False

True

T or F: An employee who prepares checks and submits them with supporting documents to the official authorized to sign checks should not be responsible for mailing the signed checks.

True

T or F: Designating the cashier to be custodian of the petty cash fund is more acceptable from the standpoint of internal control than making the cashier responsible for maintenance of accounts receivable records.

True

T or F: Selecting every 50th invoice for inclusion in a sample is an example of systematic sampling.

True

T or F: The "lapping" of cash receipts is most likely to occur when one person has both responsibility for recordkeeping for cash receipts and custody of cash.

True

T or F: To be random, every item in the population must have an equal chance of being selected for inclusion in the sample.

True

T or F: When sampling from the population of accounts receivable for certain objectives, the auditor might sample only active accounts with balances.

True

The practice of "kiting" as a means of overstating cash is possible only if the client maintains two or more bank accounts. True False

True

The standard financial institution confirmation request used by the auditors is a means of obtaining documentary evidence about both assets and liabilities. True False

True

A Type ___ report assesses the controls and their suitability.

Type 1

A Type ___ report assesses the controls, their suitability, and effectiveness.

Type 2

Want the client to schedule the physical inventory count at the end of the year

When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably: - Want the client to schedule the physical inventory count at the end of the year. - Insist that the client perform physical counts of inventory items several times during the year. - Increase the extent of tests for unrecorded liabilities at the end of the year. - Have to disclaim an opinion on the income statement for that year.

When is ratio estimation more appropriate to use?

When the size of misstatements is nearly proportional to the book values of the items. That is, it is appropriate when larger accounts have large misstatements and smaller accounts have small misstatements. (i.e. for receivables)

Repairs and Maintenance

Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are not understated? - Depreciation. - Accounts Payable. - Cash. - Repairs and Maintenance.

Customer checks deposited prior to year-end, but determined to be uncollectible after year-end

Which of the following is most likely to be considered a Type 1 subsequent event? - A business combination completed after year-end, but for which negotiations began prior to year-end. - A strike subsequent to year-end due to employee complaints about working conditions which originated two years ago. - Customer checks deposited prior to year-end, but determined to be uncollectible after year-end. - Introduction of a new line of products after year-end for which major research had been completed prior to year-end.

Test deductions from accumulated depreciation for assets purchased during the year

Which of the following is not an overall test of the annual provision for depreciation expense? - Compare rates used in the current year with those used in prior years. - Test computation of depreciation provisions for a representative number of units. - Test deductions from accumulated depreciation for assets purchased during the year. - Perform analytical procedures.

Coordinate the count of cash with the count of marketable securities and other negotiable assets.

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: - Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. - Coordinate the count of cash with the cutoff of accounts payable. - Coordinate the count of cash with the count of marketable securities and other negotiable assets. - Count the cash immediately upon the return of the confirmation letters from the financial institution.

difference estimation

a sampling plan that uses the difference between the audited (correct) values and book values of items in a sample to calculate the estimated total audited value of the population

In ratio estimation, using the average misstatement in the sample, divided by the average book value in the sample, and multiplying it times the total population book value calculates this amount. a. estimated total audited value b. projected misstatement c. sample net misstatement

When using probability-proportional-to-size sampling, the actual total misstatement in a population is most likely to be closest to the: A. Allowance for sampling risk. B. Projected misstatement. C. Basic precision. D. Upper limit on misstatement.

The best way to verify the amounts of dividend revenue received during the year is: a) Recomputation. b) Verification by reference to dividend record books. c) Confirmation with dividend-paying companies. d) Examination of cash disbursements records.

b) Verification by reference to dividend record books.

Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? a. Checklist. b. Confirmation. c. Flowchart. d. Questionnaire.

b. Confirmation.

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

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

Internal control over cash receipts is weakened when an employee who receives customer mail receipts also: a. prepares bank deposit slips for all mail receipts. b. records credits to individual accounts receivable. c. prepares initial cash receipts records. d. maintains a petty cash fund.

b. records credits to individual accounts receivable.

A. Bank confirmation. B. Bank transfer schedule prepared using only the cash receipts and cash disbursements journals. C. Comparison of bank cutoff statement to the cash receipts and disbursements records. D. Receivable confirmation.

A. Disbursements should be made by check. B. A check protecting machine should be used. C. Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse. D. Voided checks should be defaced and filed with paid checks.

In mean-per-unit estimation, what is the acceptance interval?

estimated total audited value plus & minus allowance for sampling risk

Systematic selection?

involves selecting every *n*th item in the population following one or more random starting points

Classical variables sampling?

sampling applications that provide the auditors with an estimate of a numerical quantity, such as the dollar balance of an account

inherent in the use of sampling is the risk of

sampling error which is the possibility of selecting a sample that is not representative of the populations

5. Explain briefly the term systematic selection as used in auditing and indicate the precautions to be taken if a random sample is to be obtained. Is systematic selection applicable to unnumbered documents? Explain

• "Systematic selection" is auditing means selecting every nth item in the population following one or more random starting points. Selecting every nth item in the population may not result in a random sample when positions in the population are assigned in other than a random order. To prevent drawing a nonrandom or biased sample when systematic selection is used, the auditors should first attempt to determine whether the population is arranged in random order. If the population is not in random order, the auditors should use multiple random starting points for their systematic selection process. The systematic selection technique has the advantage of enabling the auditors to obtain a sample from a population of unnumbered documents or transactions. If the documents to be examined are unnumbered, there is no necessity under this method to number them either physically or mentally, as required under the random number table selection technique. Rather, the auditors just count off the sampling interval to select the documents or use a ruler to measure the interval.

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