ACCT 4080 Chp 10-17

Shown below (1 through 5) are the five types of tests which auditors use to determine whether financial statements are fairly stated. Which three are substantive tests? 1.risk assessment procedures 2.tests of controls 3.substantive tests of transactions 4.substantive analytical procedures 5.tests of details of balances

3, 4, and 5

Which of the following is the correct definition of "control deficiency"?

A control deficiency exists if the design or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis.

Which of the following is most correct for audits of non-public companies?

An audit of internal control is not required.

Which of the following is an accurate statement regarding the risk assessment process of phase I of the audit process for the sales and collection cycle?

Auditors must perform substantive tests related to assertions deemed to have significant risks.

Which of the following best describes the test data approach?

Auditors process their own test data using the client's computer system and application program.

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

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

A 95 percent confidence level in statistical sampling means there is more than a 5 percent sampling risk which the auditor needs to address in the sampling design.

False

A medium-sized, nonpublic company has few effective controls and significant inherent risks. The auditor in this situation should emphasize tests of details and balances and substantive tests of transactions; no substantive analytical procedures should be performed in this situation by the auditor.

False

A misstatement of an expense account usually also results in an equal misstatement of accounts receivable.

False

Although systematic sample selection is easy to use, its primary disadvantage is that it is not a probabilistic sampling method.

False

Auditors use substantive analytical procedures and tests of details of balances to satisfy planned control risk.

False

Control risk is generally set at minimum for most private companies.

False

Deficiencies in internal controls may cause significant losses, delay financial reporting, but cannot result in material misstatements in the financial statements.

False

Enterprise resource planning (ERP) systems integrate limited aspects of an organization's business activities and transactions into one accounting information system.

False

If all transaction-related audit objectives are met, the auditor does not need to perform substantive test of balances to meet the realizable value audit objective.

False

If auditors determine that there is not a significant risk of material improper revenue recognition, no documentation of this decision is required.

False

If internal controls are tested and are considered effective, the auditor generally will increase both substantive tests of transactions and tests of details of balances.

False

If the fraud perpetrated by senior management is a material weakness, the auditor's report on internal control over financial reporting will contain a qualified opinion.

False

In a small business, the daily involvement of the owner in the business is not sufficient to overcome significant deficiencies or material weaknesses in internal controls.

False

It is inappropriate for the auditor to make written suggestions to management to improve business performance upon completion of the audit.

False

Most accrued liabilities can be identified by the existence of vendors' invoices for the obligation.

False

One technique to smooth income is to increase the value of inventory and other assets of an acquired company at the time of the acquisition, resulting in lower earnings when the assets are later sold.

False

Presentation and disclosure objectives are primarily addressed in the tests of details of balances phase of the audit.

False

Sampling, not nonsampling risks, are important for tests of controls, substantive tests of transaction, and test of details of balances.

False

Statistical sampling eliminates any professional judgment for the auditor.

False

The COSO framework, updated in 2013, provides a rules-based approach that provides additional guidance on designing and implementing an effective system of internal controls.

False

The acquisition and payment cycle consists of one class of transactions.

False

The population standard deviation has a significant effect on the computed precision interval.

False

The upper limit of the interval estimate is also known as the confidence interval.

False

The use of monetary unit sampling is most appropriate when the auditor expects to find many errors and when a monetary result is desired.

False

When performing a proof of cash receipts, the auditor will test if the total cash receipts recorded in the cash receipts journal for a given period agree with the actual deposits made to the respective bank account for the same period. A difference found during this test generally signals to the auditor a potential weakness in internal controls.

False

Which of the following is an accurate statement regarding the misappropriation of assets?

Misappropriation of assets can easily increase in size over time and can lead to significant reputational harm.

For which of the following audit procedures would audit sampling not be appropriate?

Review sales transactions for large and unusual amounts.

Which of the following statements is most correct concerning the quantification of sampling risk?

Sampling risk can be quantified only when probabilistic selection techniques are used to select the sample.

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 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.

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.

Which of the following statements is correct when dealing with sampling for exception rates?

The term exception refers to both deviations from the client's control procedures and amounts that are not monetarily correct.

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.

A higher confidence factor increases the sample size, which increases the "confidence" that the sample is representative of the population.

True

A large portion of errors in IT systems result from data entry errors.

True

After the auditor is satisfied with the allowance for uncollectible accounts, it is easy to verify bad debt expense.

True

An adequate system flowchart should include the same characteristics required for system narratives.

True

An essential part of the auditor's responsibility in auditing cash receipts is to identify deficiencies in internal control that increase the likelihood of fraud.

True

An example of substantive testing and also a test of controls is using audit software to identify purchases where the vendor's invoice, the receiving report, and the purchase order did not match prior to payment of the vendor's invoice.

True

As Section 404 of the Sarbanes-Oxley Act requires management to assess and to document the design effectiveness of internal controls over financial reporting, management may have already prepared narratives and flowcharts which the auditor can the use in documenting their understanding of the design of such internal controls.

True

As a result of the Dodd-Frank federal financial reform legislation passed by Congress in 2010, only larger public companies (accelerated filers) are now required to obtain an audit report from their auditors on internal control over financial reporting.

True

Assume an important control is shipping documents being attached to invoices. An effective audit procedure for detecting exceptions to this control would be to examine a sample of shipping documents and determining whether each is attached to a duplicate sales invoice. Group of answer choices

True

At the completion of the tests of controls and substantive tests of transactions, auditors must analyze each exception to determine its cause and the implication of the exception on assessed control risk.

True

Audit data analytics can be used to test accuracy of invoices outstanding at the end of the year by matching these invoices to subsequent cash receipts after year-end.

True

Auditing standards require a written audit program.

True

Auditors base their statistical inferences on sampling distributions.

True

Auditors can state the conclusions drawn from a confidence interval using statistical inference in different ways.

True

Auditors may expand other substantive procedures to address the heightened risks of fraud.

True

Auditors perform both planning and substantive analytical procedures for the entire sales and collection cycle, not just accounts receivable

True

Auditors prefer to use probabilistic sample selection methods for nonstatistical sample applications involving tests of controls and substantive tests of transactions to improve the likelihood of selecting a representative sample.

True

Because of double-entry accounting, misstatement of an expense account usually also results in an equal misstatement of accounts payable.

True

Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements, attributes sampling is commonly used when testing the acquisitions and cash disbursements cycle.

True

Collusion and false documentation make detection of fraud by management a challenge.

True

Difference estimation frequently results in smaller sample sizes than any other variables sampling method.

True

Each client misstatement in accounts receivable must be analyzed to determine whether it was consistent with the original assessed level of control risk.

True

For each significant internal control deficiency identified by the auditor, he or she should design one or more tests of controls to assess the extent of the deficiency and its effect on the financial statements.

True

For integrated audits of large, publicly traded companies, the level of understanding of internal controls and the extent of testing of those controls need to be sufficient for the auditor to issue an opinion on the effectiveness of internal controls over financial reporting.

True

For most audits, revenue recognition is considered to be a significant risk.

True

Generalized audit software is used to test automated controls.

True

If an auditor wishes to rely on the work of internal auditors (IA), the auditor must obtain satisfactory evidence related to the IA's competence, integrity, and objectivity.

True

If control risk is assessed at maximum, only substantive tests of transactions will be used by the auditor, assuming the audit is of a smaller public company, a nonpublic company, or other type of entity.

True

If sales returns and allowances and write-off of uncollectible accounts receivable are significant, the assessed control risk must be considered for these two classes of transactions.

True

In IT systems, if general controls are effective, it increases the auditor's ability to rely on application controls to reduce control risk.

True

In an audit of a nonpublic company, the less control risk there is, the smaller the amount of planned substantive evidence that is required.

True

Inadequate controls over purchases and accounts payable can result in opportunities to embezzle from the organization.

True

It is equally acceptable under professional auditing standards for auditors to use either statistical or nonstatistical sampling methods.

True

LANs link equipment within a single or small cluster of buildings and are used within a company.

True

Management has a legal and a professional responsibility to be sure external financial information, and the information contained therein, are fairly presented in accordance with generally accepted accounting principles and International Financial Reporting Standards, when required.

True

Negative confirmations normally require a larger sample size than positive confirmations.

True

Once the auditor concludes that internal controls are operating effectively in the acquisition and the payment cycle, the verification of accounts payable should require little audit effort.

True

One factor that determines the amount of additional evidence required for tests of controls is the planned reduction in control risk.

True

One way to control sampling risk is to increase sample size.

True

Only tests of details of balances involve physical examination and confirmation.

True

Purchase returns and allowances and purchase discounts business functions are generally not significant in amount for most companies.

True

Realizable value is an essential balance-related audit objective for accounts receivable.

True

Sales returns and allowances are often ignored by auditors because they are often immaterial.

True

The PCAOB issued guidance in May 2017 to assist auditors of public companies implementing the new revenue recognition standard.

True

The accounts receivable balance-related audit objective net realizable value is not affected by assessed control risk for sales or cash receipts.

True

The audit procedure "Examine canceled check for authorized signature, proper endorsement, and cancellation by the bank" is used to test the occurrence objective for cash disbursements.

True

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

True

The auditor must do misstatement analysis to decide whether any modification of the audit risk model is needed.

True

The auditor's responsibilities for internal control include understanding and testing the audit client's internal controls over financial reporting.

True

The pressure to do "whatever it takes" to meet goals is one of the main reasons why financial statement fraud occurs.

True

The purpose of stratification is to permit auditors to emphasize certain aspects of a population and deemphasize others.

True

The receipt of a customer order from a customer is the starting point for the entire sales and collection cycle.

True

The risk of management override of controls exists in just about every audit. Therefore, auditors must perform certain features in every audit, including examining management's estimates, judgments, and assumptions that may indicate a potential for bias

True

The sales and collection cycle applies to businesses that sell goods to customers or provide services to customers.

True

The total of the unpaid individual account balances in the accounts payable master file should equal the total accounts payable balance in the general ledger.

True

The two main categories of fraud are fraudulent financial reporting and misappropriation of assets.

True

The two most common areas of fraud in payroll are the creation of fictitious employees and the overstatement of individual payroll hours.

True

To determine if the client has rights to the accounts receivable on the trial balance, the auditor should inquire of management if any receivables are pledged or factored.

True

To issue an unqualified opinion on internal control over financial reporting, there must be no identified material weaknesses and no restrictions on the scope of the audit.

True

Tolerable misstatement is inversely related to sample size.

True

When analytical procedures in the sales and collection cycle uncover unusual fluctuations, the auditor should make additional inquiries of management.

True

When customers purchase goods by credit card, the issuer of the credit card uses EFT to transfer funds into the company's bank account.

True

When the auditor receives inconsistent responses from management and others within the organization, the auditor should obtain additional audit evidence to resolve the inconsistency.

True

When the sample exception rate is greater than the tolerable exception rate in attributes sampling, one possible appropriate course of action is to increase sample size.

True

When using sampling methods, the auditor is focused on obtaining results in dollar terms.

True

The auditor has a balance-related audit objective to determine that accounts receivable are appropriately aggregated, and related financial statement disclosures are relevant and understandable. Which of the following audit procedures would the auditor not perform in connection with this audit objective?

Use audit software to foot and cross-foot the aged accounts receivable trial balance.

Which of the following controls can minimize the threat of theft of cash?

Use of cash registers.

Which is the best control to prevent invoicing customers for more than the actual quantity shipped?

Use the information from the packing slip to prepare the sales invoice.

Which of the following is not a key decision that needs to be made in the revenue cycle?

Which vendor should inventory be purchased from?

Most frauds are detected by

a tip.

The final step in the evaluation of the audit results is the decision to

accept the population as fairly stated or to require further action.

The auditor's principal objective when using a sample of tests of details of balances is whether the

account balance being audited is fairly stated.

Most tests of accounts receivable are based on what schedule, file, or listing?

aged accounts receivable trial balance Next

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

all of the above

Typical controls developed for manual systems which are still important in IT systems include

all of the above.

When designing the audit program and the particular audit tests, the auditor should keep in mind that

analytical procedures performed during substantive testing are generally more focused and more extensive than those done as part of planning.

For strongest segregation of duties, a sales representative should never be allowed to

approve a sale on credit.

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

assurance of elimination of business risk

To determine if a sample is truly representative of the population, an auditor would be required to

audit the entire population.

When making statistical inferences, the auditor must remember that

auditors can state the conclusions drawn from a confidence interval in different ways.

The allowance for sampling risk when no misstatements are found in the sample is

basic precision.

The auditor will issue an unqualified opinion on internal control over financial reporting when

both a and b

The auditor is reviewing the receivables listed on the aged trial balance for notes and related party receivables. Which balance-related audit objective is he trying to satisfy?

classification

Which balance-related audit objective cannot be assessed using monetary unit sampling?

completeness

Which of the following types of evidence is not available when using substantive tests of transactions?

confirmation

The most effective audit evidence gathered for accounts receivable is the

confirmation of accounts receivable.

Internal controls

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

The employee in charge of authorizing credit to the company's customers does not fully understand the concept of credit risk. This lack of knowledge would

constitute a deficiency in operation of internal controls.

For clients with highly sophisticated computerized accounting systems, auditors perform tests throughout the year to identify significant or unusual transactions. This approach is called ________ and is frequently used in integrated audits of financial statements and internal control for public companies.

continuous auditing

Without an effective ________, the other components of the COSO framework are unlikely to result in effective internal control, regardless of their quality.

control environment

Auditors are especially concerned with three aspects of internal control for the sales and collection cycle. Which of the following is not one of their major concerns?

controls over sales discounts

Regularly reviewing an accounts receivable aging report can help management do what?

determine whether changes are needed in the firm's credit policies

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

documenting the auditor's understanding of internal controls.

Customers that send their payments electronically directly to the billing company's bank are using

electronic funds transfer (EFT).

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 is least likely to uncover fraud?

external auditors

Which of the following is a form of earnings management in which revenues and expenses are shifted between periods to reduce fluctuations in earnings?

income smoothing

Rather than maintain an internal IT center, many companies outsource their basic IT functions such as payroll to an

independent computer service center.

Controls which are designed to assure that the information entered into the computer is authorized, complete, and accurate are called

input controls.

The purpose of tests of controls is to provide reasonable assurance that the

internal control procedures are functioning as intended.

In monetary unit sampling, the relationship between tolerable misstatement size and required sample size is

inverse

The reliance the auditor places on substantive tests in relation to the reliance placed on internal control varies in a relationship that is ordinarily

inverse

Simple random sampling

is a probabilistic sampling method.

The most serious shortcoming of the haphazard sample selection method is

it is difficult to remain completely unbiased in the selection.

The PCAOB places responsibility for the reliability of internal controls over the financial reporting process on

management

Stratified sampling is applicable to difference, mean-per-unit, and ratio estimation, but it is most commonly used with

mean-per-unit estimation.

When auditing a client who uses a database management system, the auditor is principally aware of elevated risk due to the fact that

multiple users can access and update data files.

Which of the following may represent the biggest challenge smaller public companies and nonpublic companies face in implementing effective internal control?

no adequate separation of duties

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when

no reply to a positive confirmation request is received.

Which of the following is the risk that audit tests will not uncover existing exceptions in a sample?

nonsampling risk

A company uses the method for tracking accounts receivable where customers pay according to individual sales invoices. This describes the ________ method.

open-invoice

An auditor is comparing the write-off of uncollectible accounts as a percentage of total accounts receivable with previous years. A possible misstatement this procedure could uncover is

overstatement or understatement of bad debt expense.

Which of the following is not one of the elements to prevent, deter, and detect fraud according to the AICPA?

performing analytical procedures

A monthly statement sent to customers serves a control purpose by

providing an opportunity for customers to verify the balance owed and activity on the account.

Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally

reduce the extent of tests of details of balances.

When choosing the appropriate acceptable risk of overreliance, the auditor needs to

rely on his/her professional judgment.

Auditing standards require that auditors document

results of the procedures performed to address the risk of management override of controls.

In using sampling distribution for attributes, which one of the following must be known to evaluate the sample results?

sample size

In the fraud triangle, fraudulent financial reporting and misappropriation of assets

share the same three conditions of the fraud triangle.

When dealing with revenue frauds,

side agreements can modify the terms of the sales transaction and should be analyzed carefully.

An important statistic to consider when using a statistical sampling audit plan is the population variability. The population variability is measured by the

standard deviation.

Which of the following audit tests is usually the least costly to perform?

substantive analytical procedures

When errors are found in a sample, auditors in practice generally assume

that the actual sample errors are representative of the population errors.

When assessing fraud risk,

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

When testing manual or automated controls,

the extent of testing depends on whether it is a manual or automated control.

The auditor's primary purpose in auditing the client's system of internal control over financial reporting is

to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements.

Auditors perform test of controls and substantive tests of transactions for several reasons. Which of the following is not one of those reasons

to use rate of occurrence tests in the tests of details of balances

The exception rate the auditor will permit in the population and still be willing to conclude that the control is operating effectively is the

tolerable exception rate.

By using an ERP to merge the billing, sales, and marketing functions, the firm may be able to

use customer's past purchase history to send information about related products and services the customer may be interested in.

Matching customer account numbers and inventory item numbers to the numbers in the customer and inventory master files is an example of a

validity check.

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

write-offs of customer accounts.