Final Exam - Auditing I

Which of the following is an accurate statement relating to separation of duties?

All of the above are accurate statements.

The auditor uses a proof of cash to determine whether

All recorded cash disbursements were paid by the bank. YES All amounts that were paid by the bank were recorded. YES

The internal control framework used by most U.S. companies is the ________ framework.

COSO

Which of the following is a category of fraud?

Fraudulent financial reporting YES Misappropriation of assets YES

________ is fraud that involves theft of an entity's assets.

Misappropriation of assets

Which of the following best describes an entity's accounting information and communication system?

Monitor transactions NO Record and process transactions YES Initiate transactions YES

Which of the following is an accurate statement relating to the extent of procedures for testing controls?

The extent of testing depends on the frequency of the operation of the controls.

Tests of controls and substantive tests of transactions are an important determinant of the extent of the auditor's use of tests of details of balances. Which of the following is true?

They are likely to be performed prior to the client's end of the fiscal year.

The auditor obtains a sufficient understanding of internal control to assess the risk of material misstatement at the overall financial statement level and at the relevant assertion level.

True

Most cases of fraudulent reporting involve

an overstatement of income.

Tests of controls

are the procedures used to test the effectiveness of controls and determine control risk.

Which of the following is not one of the three primary objectives of effective internal control?

assurance of elimination of business risk

When designing audit procedures, tracing of source documents to the customers subsidiary ledger and to the general ledger is done to satisfy what assertion?

completeness

Which type of audit procedure is not used by the auditor to obtain an understanding of the design and implementation of internal control?

confirmation

Narratives, flowcharts, and internal control questionnaires are three common methods of

documenting the auditor's understanding of internal controls.

The important balance-related audit objectives in the audit of cash include all except which of the following?

occurrence

For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve

write-offs of customer accounts.

Listed below are four interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, of a client for late December 2015 and early January 2016: Bank Account One Disbursing Date (Month/Day) Per Bank Per Books 12/31 12/30 1/2 12/30 1/3 12/31 1/3 12/31 Bank Account Two Receiving Date (Month/Day) Per Bank Per Books 12/31 12/30 12/31 12/31 1/2 1/2 1/2 12/31 Based on the schedule of interbank transfers above, which of the cash transfers indicates an error in cash cutoff at December 31, 2015?

3

What needs to be included in a standard inquiry to the client's attorney letter sent to a client's legal counsel?

Any pending threatened litigation with which the attorney has had significant involvement YES The amount of legal fees paid by the client to the attorney NO

Which of the following statements related to application controls is correct?

Application controls relate to the processing of individual transactions.

The auditors test the client's monthly bank reconciliation to verify whether the client's recorded bank balance is the same amount as the actual cash in the bank. Which of the following would not explain a difference between the company's cash balance and the bank's balance for the client?

Checks that are written by the client in the same month the checks clear the bank.

Which of the following statements is most correct with respect to separation of duties?

Employees who authorize transactions should not have custody of related assets.

Which of the following statements regarding the letter of management representation is not correct?

It is optional, not required, that the auditor obtain such a letter from management.

To determine if significant internal control deficiencies are material weaknesses, they must be evaluated on their

Likelihood YES Significance YES

When an auditor believes that analytical procedures indicate a reasonable possibility of misstatement, the auditor usually would

Perform additional tests of controls NO Decide to modify tests of details of balances YES

In connection with the annual audit, which of the following is not a "subsequent events" audit procedure?

Prepare necessary closing journal entries for the current year financial reports.

Which type of subsequent event requires consideration by management and evaluation by the auditor?

Subsequent events that have a direct effect on the financial statements and require adjustment YES Subsequent events that do not have a direct effect on the financial statements but for which disclosure may be required YES

Which of the following is true regarding the auditor's opinion on the effectiveness of internal control?

The auditor is attesting to the effectiveness of internal controls as of the end of the fiscal year.

Which of the following represents a correct statement regarding internal control testing?

The auditor uses control risk assessment and results of tests of controls to determine control risk which would then help determine planned detection risk and the related substantive tests for the financial statement audit.

Which of the following is a correct statement?

The auditor uses the control risk assessment and results of tests of controls to determine planned detection risk.

If the auditor determines that a subsequent event that affects the current period financial statements occurred after fieldwork was completed but before the audit report was issued, what date(s) may the auditor use on the report?

The date of the original last day of fieldwork only. NO The date of the subsequent event only. YES Dual dating with the date on which the last day of fieldwork occurred for accounts along with the date of the subsequent event just for the subsequent event. YES

Auditors may identify conditions during fieldwork that change or support a judgment about the initial assessment of fraud risks. Which of the following is not a condition which should alert an auditor that the initial assessment should be changed?

The subsidiary ledger agrees with the general ledger.

How must significant deficiencies and material weaknesses be communicated to those charged with governance?

Written communication is required.

A partial-period bank statement and the related copies of or digital access to cancelled checks, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the CPA firm's office, is called

a cutoff bank statement.

If the client's internal control for recording sales returns and allowances is evaluated as ineffective,

a larger sample may be needed to verify sales returns.

Authorizations can be either general or specific. Which of the following is notan example of a general authorization?

a sales manager's authorization for a sales return for a particular customer

Which of the following is a factor that relates to attitudes or rationalization to misappropriate assets?

a sense of superiority by executives

Sarbanes-Oxley requires management to issue an internal control report that includes two specific items. Which of the following is one of these two requirements?

a statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting

Which of the following is an account that is not affected by the sales and collection cycle?

accounts payable

With which of the following client personnel would it generally not be appropriate to inquire about commitments or contingent liabilities?

accounts receivable clerk

An auditor is reconciling the dollar amounts in the long-term debt footnotes to the information examined and supported in the audit files for long-term debt. Which audit objective is being satisfied?

accuracy and valuation

Which of the following is not a key control for sales and cash receipts?

active board of directors

Which of the following is not one of the subcomponents of the control environment?

adequate separation of duties

What type of opinion is issued when one or more material internal control weaknesses exist?

adverse opinion

A listing of the balances in the accounts receivable master file at the balance sheet date, including individual customer balances outstanding and a breakdown of each balance by the time passed between the date of the sale and the balance sheet date, is the

aged trial balance.

There is a direct relationship between the ________ transaction-related audit objective and the ________ balance-related audit objective.

all of the above

Several factors influence the auditor's choice of the types of test procedures to select, including

all of the above.

The Sarbanes-Oxley Act requires

all public companies to issue reports on internal controls effectiveness.

An auditor discovers that the company's bookkeeper unintentionally made an mistake in calculating the amount of the quarterly sales. This is an example of

an error.

The appropriate and sufficient evidence to be obtained from tests of details of balances must be decided on an

audit objective-by-audit objective basis.

An auditor has the responsibility to actively search for subsequent events that occur subsequent to the

balance sheet date, but prior to the audit report.

One type of shipping document is the ________, which is a written contract between the carrier and the seller in regard to the receipt and shipment of goods.

bill of lading

You are auditing Rodgers and Company. After performing substantive analytical procedures you conclude that, for the accounts tested, the client's balance appears reasonable. This may indicate that

certain tests of details of balances may be eliminated for those accounts.

The standard inquiry to the client's attorney should be prepared on

client's letterhead and signed by a company official.

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is to satisfy the audit objective of

completeness

In many audits, no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern.

completeness

Which of the following audit procedures would not likely detect a client's decision to pledge or factor accounts receivable?

confirmation of receivables

Internal controls

consist of policies and procedures designed to provide reasonable assurance that the company achieves its objectives and goals.

A ________ indicates a reduction in the amount due from a customer because of returned goods or an allowance.

credit memo

What event initiates a transaction in the sales and collection cycle?

customer order for goods or services

The audit procedure which requires the auditor to record the last check number used on the last day of the year and subsequently trace to the outstanding checks and the cash disbursements records to verify dates of the transactions is performed to satisfy the audit objective of

cutoff

The letter of management representation obtained from an audit client should be

dated as of the audit report date.

To address heightened risks of fraud, the auditor can do all of the following except

decrease the amount of substantive tests.

The test of details of balances procedure that requires the auditor to foot the outstanding check and electronic payment list and deposits in transit and to compare the total with the cash general ledger balance is an attempt to satisfy which audit objective?

detail tie-in

Which of the following would be a subsequent discovery of facts which would notrequire a response by the auditor?

discovery of management's intent to increase selling prices in the future

Which of the following types of receivables would not deserve the special attention of the auditor?

each of the above would receive special attention.

Which of the following is a factor that relates to incentives or pressures to commit fraudulent financial reporting?

excessive pressure for management to meet debt repayment requirements

Confirmation of accounts receivable selected from the trial balance is the most common test of details of balances for the ________ of accounts receivable.

existence and accuracy.

If the auditor finds extensive control test deviations and significant misstatements while performing substantive tests of transactions and substantive analytical procedures,

extensive tests of details of balances will need to be performed.

Which of the following misstatements is most likely to be uncovered during an audit of a client's bank reconciliation?

failure to record in the cash account a collection of a customer payment by the bank on the client's behalf

A positive confirmation is more reliable evidence than a negative confirmation because

follow-up procedures are performed if a response is not received from the debtor.

The net realizable value of accounts receivable is equal to:

gross accounts receivable less allowance for uncollectible accounts.

For financial statement audits, auditors need to understand controls that are relevant to the audit in order to

identify and assess the risks of material misstatements.

When assessing risks affecting cash,

if a business defers preparing bank reconciliations for long periods, the value of the control is reduced and may affect the auditor's assessment of control risk for cash.

Because cash is the most desirable asset for people to steal, it has a higher

inherent risk.

Which of the following is not one of the five classes of transactions included in the sales and collection cycle?

interest income

The auditor designs and performs a combination of tests of controls and substantive procedures to obtain reasonable assurance that the financial statements are fairly stated when control risk

is assessed below the maximum.

Listing all bank transfers made a few days before and after the balance sheet date and tracing each to the accounting records for proper recording is a useful approach to test for

kiting.

Which of the following activities would be least likely to strengthen a company's internal control?

maintaining insurance for fire and theft

Once auditors determine that entity level controls are designed and placed in the operation, they

make a preliminary assessment of controls for each transaction-related audit objective for each major type of transaction.

Which of the following groups has the responsibility for identifying and deciding the appropriate accounting treatment for recording or disclosing contingent liabilities of the company?

management

Which of the following is not a factor that relates to opportunities to commit fraudulent financial reporting?

management's set of ethical values

A petty cash fund would least likely be used to pay for which of the following items?

monthly interest expense

If a potential loss on a contingent liability is remote, the liability usually is

neither accrued nor disclosed in footnotes.

Auditing standards make ________ distinction(s. between the auditor's responsibilities for searching for errors and fraud.

no

The general cash account is considered a significant account in almost all audits

no matter the ending cash balance is material or immaterial.

When the auditor suspects that fraud may be present, auditing standards require the auditor to

obtain additional evidence to determine whether material fraud has occurred.

If no material differences are found using analytical procedures, and the auditor concludes that misstatements are not likely to have occurred,

other substantive tests may be reduced.

Which of the following items would not normally appear on bank reconciliations?

outstanding deposits

Transaction-related audit objectives would most likely be performed in which phase of the audit process?

perform tests of controls and substantive tests of transactions

If there is collusion among management, the chance a normal audit would uncover such fraud is

pretty low.

Which of the following is not a business function within the "Sales" class of transactions?

processing and recording sales returns and allowances

The accurate recording of sales transactions concerns all of the following except for

proper credit approval before shipping.

An auditor is performing a credit analysis of customers with balances over 60 days due and assessing allowance for bad accounts. She is most likely obtaining evidence for which audit related objective?

realizable value

The piece of paper that accompanies the customer's payment is the

remittance advice.

When using the probability threshold for evaluating accounting treatment of contingencies, the likelihood of the occurrence of the event is classified as

remote, reasonably possible, or probable.

Auditing standards specifically require auditors to identify ________ as a potential fraud risk in most audits.

revenue recognition

Which of the following would not be considered further audit procedures?

risk assessment procedures

Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal controls, represent the auditor's

risk assessment procedures.

The two primary classes of transactions in the sales and collection cycle are

sales and cash receipts.

The document used to indicate to the customer the amount of a sale and payment due date is the

sales invoice.

To test for fictitious sales, i.e. recorded sales for which there were no actual shipments, the auditor vouches from the

sales journal to the shipping documents.

Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction?

selling of goods for credit

A ________ exists if one or more control deficiencies exist that are less severe than a material weakness, but are important enough to merit attention by those responsible for oversight of the company's financial reporting.

significant deficiency

Which of the following audit procedures are used to determine whether all six transaction-related audit objectives have been achieved for each class of transactions?

substantive tests of transactions

Which of the following tests commonly occur together?

substantive tests of transactions and tests of controls

The understatement of sales and accounts receivable is best uncovered by

substantive tests of transactions for shipments made but not recorded.

In order to promote audit efficiency the auditor considers cost in selecting audit tests to perform. Which of the following audit tests would be the most costly?

tests of details of balances

What type of the following test is used to obtain the most audit evidence?

tests of details of balances

Which audit tests involve physical examination and confirmation?

tests of details of balances

When the auditor identifies risk at the assertion level,

the auditor may need to obtain audit evidence that is more reliable and relevant.

When auditing financial instruments,

the auditor relies on statements and reports provided by brokerage firms to test purchases and sales as long as controls were deemed effective.

When assessing fraud risk,

the auditor's assessment of fraud risk should be ongoing throughout the audit.

If an attorney refuses to provide the auditor with information about material existing lawsuits or unasserted claims,

the auditors must modify their audit report to reflect scope limitation in regard to the lack of available evidence.

Which of the following best describes the purpose of control activities?

the policies and procedures that help ensure that necessary actions are taken to address risks to the achievement of the entity's objectives

The positive (as opposed to the negative) form of receivables confirmation may be preferred when

there is reason to believe that a substantial number of accounts may be in dispute.

Which of the following most likely would be detected by a review of a client's sales cutoff?

unrecorded sales for the year