Audit Exam 3 Final
False
Kiting is an audit procedure used to test the accuracy of the cash receipts. (T/F)
False
Level 1 inputs are more risky and difficult to audit than Level 3 inputs to a valuation model. (T/F)
B
Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of A. Authorization, execution, and payment. B. Authorization, recording, and custody. C. Custody, execution, and reporting. D. Authorization, payment, and recording.
D
SOC 1, Type 2 reports by the service organization's auditor typically A. ensure that the entity will not have any misstatements in areas related to the service organization's activities. B. ensure that the entity is billed correctly. C. provide reasonable assurance that their financial statements are free of material misstatements. D. assess whether the service organization's controls are suitably designed and operating effectively.
True
Tests of controls must be performed if control risk is set at a lower level. (T/F)
A
The Sarbanes-Oxley Act of 2002 requires management to include a report on the effectiveness of ICFR in the entity's annual report. It also requires auditors to report on the effectiveness of ICFR. Which of the following statements concerning these requirements is false? A. The auditor should provide recommendations for improving internal control in the audit report. B. The auditor should evaluate whether internal controls over financial reporting are designed and operating effectively. C. Management's report should state its responsibility for establishing and maintaining an adequate internal control system. D. Management should identify material weaknesses in its report.
A
The auditor should ordinarily mail confirmation requests to all banks with which the entity has conducted any business during the year, regardless of the year-end balance, since A. The confirmation form also seeks information about indebtedness to the bank. B. This procedure will detect kiting activities that would otherwise not be detected. C. The mailing of confirmation forms to all such banks is required by generally accepted auditing standards. D. This procedure relieves the auditor of any responsibility with respect to nondetection of forged checks.
True
The auditor's use of analytical procedures for auditing cash is limited. (T/F)
B.
Which of the following cash transfers results in a misstatement of cash at December 31? (insert table)
D
"The auditor should presume that there is a fraud risk involving improper revenue recognition...." is stated in which authoritative standard? A. PCAOB AS 15 Audit Evidence B. PCAOB AS 3 Audit Documentation C. PCAOB AS 8 Audit Risk D. PCAOB AS 2110 Identifying and Assessing Risks of Material Misstatement
A
A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a A. deficiency in operation. B. significant deficiency. C. material weakness. D. deficiency in design.
True
A cutoff bank statement is used to verify the propriety of the reconciling items shown on the bank reconciliation. (T/F)
D
A deficiency that implies that there is a reasonable possibility of misstatement in the financial statements that is significant but not material is A. An insignificant deficiency. B. A material weakness. C. A probable deficiency. D. A significant deficiency.
False
A major control that directly affects the audit of cash is the bank reconciliation prepared by the auditor. (T/F)
False
A negative confirmation requests that customers respond whether they agree or not with the amount due to the entity stated in the confirmation. (T/F)
True
A positive confirmation requests that customers respond whether they agree or not with the amount due to the entity stated in the confirmation. (T/F)
D
A primary purpose of the proof of cash is to A. Prevent fraud. B. Reconcile actual cash receipts and disbursements to budgeted receipts and disbursements. C. Investigate variances from expected cash balances. D. Ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account.
B
A procedure that would most likely be used by an auditor in performing tests of control activities that involve segregation of functions but which leave no transaction trail is A. Inspection. B. Observation. C. Reperformance. D. Reconciliation.
A
A substantive strategy differs from a reliance strategy in that a substantive strategy includes A. Increased implementation of detailed tests of transactions and balances. B. Extra tests of controls. C. Increased emphasis on verbal representations from management. D. Setting control risk at a minimum level.
D
AU-C 265 defines a _____________ as a deficiency, or combination of deficiencies, in internal control, that is less severe than a material weakness yet important enough to merit attention by those charged with governance. A. Significant Weakness B. Material Deficiency C. Control Deficiency D. Significant Deficiency
B
An auditor testing long-term investments would ordinarily use substantive analytical procedures to ascertain the reasonableness of the: A. classification between current and noncurrent portfolios. B. completeness of recorded investment income. C. valuation of marketable equity securities. D. existence of unrealized gains or losses in the portfolio.
A
Auditors are more concerned with the occurrence assertion for revenues than the completeness assertion because A. Entities are more likely to overstate than understate revenues. B. Entities are more likely to understate than overstate revenues. C. It is difficult to determine when services have been performed. D. The allowance for doubtful accounts often is understated.
True
Channel stuffing is an improper practice used to boost sales by inducing distributors to buy more inventory than they can promptly resell. (T/F)
C
Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables A. Valuation. B. Classification. C. Existence. D. Completeness.
B
If fraud is suspected, auditors may complete all of the following procedures except: A. Testing for kiting. B. Footing the bank reconciliation and the outstanding checks listing. C. Performing a proof of cash. D. Performing extended bank reconciliation procedures, including detailed examination of reconciling items.
D
In a properly designed internal control system, the same employee may be permitted to A. Receive and deposit checks and also approve write-offs of customer accounts. B. Approve vouchers for payment and also sign checks. C. Reconcile the bank statements and also receive and deposit cash. D. Sign checks and also cancel supporting documents.
D
In auditing a public company, Natalie, an auditor for N. M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue? A. An exculpatory opinion. B. A disclaimer of opinion. C. An adverse report. D. An unqualified report.
A
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of A. valuation and allocation. B. rights and obligations. C. completeness. D. existence.
B
In general, revenue is recognized when A. Goods are shipped. B. It is earned and realized. C. It is recorded in the sales journal. D. It is received in cash.
C
Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent A. Disclosures of information that significantly contradict the auditor's going concern assumption. B. Material fraud or illegal acts perpetrated by high-level management. C. Significant design flaws in internal controls or poor implementation of internal controls. D. Manipulation or falsification of accounting records or documents from which financial statements are prepared.
B
Smith is engaged in the audit of a cable TV firm that services a rural community. All receivable balances are small, customers are billed monthly, and internal control is effective. To determine the existence of the accounts receivable balances at the balance sheet date, Smith would most likely A. Send positive confirmation requests. B. Send negative confirmation requests. C. Examine evidence of subsequent cash receipts instead of sending confirmation requests. D. Use statistical sampling instead of sending confirmation requests.
D
To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except the: A. Cutoff bank statement. B. Year-end bank statement. C. Bank confirmation. D. General ledger.
C
Valuations based on management's best judgment that involve management's assumptions about unobservable inputs and how the market would price the asset or liability is the definition of which type of Fair Value Measurement? A. Level 1 measurements B. Level 2 measurements C. Level 3 measurements D. None of the above.
A
When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the A. Extent of tests of details. B. Level of inherent risk. C. Extent of tests of controls. D. Level of detection risk.
True
When auditing a public company, the auditor must form an opinion on the effectiveness of internal control over financial reporting, or issue a disclaimer in the event of a scope limitation. (T/F)
D
When tracing a sample of shipping documents from throughout the year to the details of the sales invoices and to the sales journal and customers' accounts receivable subsidiary ledger, the auditor is testing the _____________ assertion. A. Classification B. Cutoff C. Existence D. Completeness
A
A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to A. trace a transaction from each major class of transactions from origination through the entity's information system until it is reflected in the entity's financial reports. B. trace a transaction from every class of transactions from origination through the entity's information system. C. tour the organization's facilities and locations before beginning any audit work. D. trace a transaction from each major class of transactions from origination through the entity's information system.
B
AAA & Associates recently finished auditing LinktheEarth Corporation's internal control over financial reporting. AAA found a number of material weaknesses in the entity's internal control. LinktheEarth's management remediated all of the weaknesses that AAA found. However, the auditors did not have sufficient time to retest the controls. What report should AAA issue with regards to internal control over financial reporting at year-end? A. Unqualified report. B. Adverse report. C. Qualified report. D. Disclaimer on opinion.
False
According to AU-C 265 and PCAOB AS 1305 (Formerly AS 5), the three categories of deficiencies in internal control are: Control Deficiency, Significant Weakness, Material Deficiency. (T/F)
D
An aged trial balance of accounts receivable is normally used by the auditor to A. Verify the existence of recorded receivables. B. Ensure that all accounts are promptly credited. C. Evaluate the results of tests of controls. D. Evaluate the provision for bad debts.
D
An auditor ordinarily sends a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance. One purpose of this procedure is to: A. provide the data necessary to prepare a proof of cash. B. detect kiting activities that may otherwise not be discovered. C. request that a cutoff bank statement and related checks be sent to the auditor. D. seek information about loans from the banks.
C
An auditor ordinarily should send a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance, because this procedure A. Provides for confirmation regarding compensating balance arrangements. B. Detects kiting activities that may not otherwise be discovered. C. Seeks information about indebtedness to the bank. D. Verifies securities held by the bank in safekeeping.
B
An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to assess the assertion of A. Authorization and accuracy. B. Completeness. C. Cutoff. D. Occurrence.
C
An auditor should trace interbank transfers for the last part of the audit period and first part of the subsequent period to detect whether A. The cash receipts journal was held open for a few days after the year-end. B. The last checks recorded before the year end were actually mailed by the year-end. C. Cash balances were overstated because of kiting. D. Any unusual payments to or receipts from related parties occurred.
A
An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of A. Valuation or allocation. B. Completeness. C. Existence or occurrence. D. Rights and obligations.
B
An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily to A. Verify the cash balance reported on the bank confirmation inquiry form. B. Verify reconciling items on the entity's bank reconciliation. C. Detect lapping. D. Detect kiting.
B
An auditor would most likely verify the interest earned on bond investments by: A. confirming the bond interest rate with the issuer of the bonds. B. recomputing the interest earned on the basis of face amount, interest rate, and period held. C. testing the controls over cash receipts. D. vouching the receipt and deposit of interest checks.
C
As one of the year-end audit procedures, the auditor instructed the entity's personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the entity's treasurer had signed the request, it was mailed to the bank 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
As the acceptable level of detection risk increases, an auditor may change the A. Assessed level of control risk from a lower level to a higher level. B. Assurance provided by tests of controls by using a larger sample size than planned. C. Timing of substantive procedures from year-end to an interim date. D. Nature of substantive procedures from less effective to more effective procedures.
D
Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Which of the following statements is true regarding the auditor's use of confirmations? A. A combination of the two confirmation types can be used, with the positive form used for trade receivables and the negative form for other receivables. B. The positive confirmation form must always be used to confirm all balances regardless of size. C. The positive confirmation form should be used when controls related to receivables are satisfactory and the negative confirmation form should be used when controls related to receivables are unsatisfactory. D. A combination of the two confirmation types can be used, with the positive form used for large balances and the negative form used for small balances.
D
Auditors sometimes use ratios as audit evidence. For example, an unexplained increase in the ratio of gross profit to sales may suggest which of the following possibilities? A. Fictitious purchases. B. Fictitious sales. C. Selling and general expenses erroneously being recorded as merchandise purchases. D. Unrecorded sales.
A
Customers having substantial year-end past due balances fail to reply after second request confirmation forms have been mailed directly to them. Which of the following is the most appropriate audit procedure? A. Examine shipping documents. B. Review collections during the year being examined. C. Intensify the study of the entity's system of internal control with respect to receivables. D. Increase the balance in the allowance for uncollectible accounts.
AU-C 265 defines a _____________ as a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis. A. Significant Weakness B. Material Deficiency C. Control Deficiency D. Material Weakness
D
B
Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by A. Engaging a CPA to perform monthly bookkeeping. B. Direct participation by the owner of the business in the recordkeeping activities of the business. C. Employment of temporary personnel to aid in the separation of duties. D. Delegation of full, clear-cut responsibility to each employee for the functions assigned to each.
A
Entity-level controls can have a pervasive effect on the entity's ability to meet the control criteria. Which one of the following is not an entity-level control? A. Controls to monitor the inventory taking process. B. Controls to monitor results of operations. C. Management's risk assessment process. D. The period-end financial reporting process.
C
FASB ASC Topic 820 defines Fair Value as: A. The value at which the FASB determines transactions should be recorded based on common industry standards. B. The "fair" price at which related parties record transactions if the true value is known. C. The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. D. Only the quoted market prices of assets and liabilities.
B
For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by A. Reperformance and corroboration. B. Observation and inquiry. C. Inspection and vouching. D. Confirmation and recomputation.
True
For private clients, the auditor has 60 days following the audit report release date to issue written communication on internal controls according to AU-C 265. (T/F)
D
If the objective of a test of details is to detect the overstatement of sales, the auditor should trace transactions from the A. Cash receipts journal to the sales journal. B. Sales journal to the cash receipts journal. C. Shipping documents to the accounting records. D. Accounting records to the shipping documents.
B
In an audit of financial statements of a private company in accordance with generally accepted auditing standards, an auditor is required to A. Perform tests of controls to evaluate the effectiveness of the entity's accounting system. B. Document the auditor's understanding of the entity's internal control. C. Determine whether procedures are suitably designed to prevent or detect material misstatements. D. Identify specific internal control activities relevant to management's financial statement assertions.
B
Management philosophy and operating style most likely would have a significant influence on an entity's control environment when A. The internal audit function reports directly to management. B. Management is dominated by one individual. C. Accurate management job descriptions delineate specific duties. D. The audit committee actively oversees the financial reporting process.
C
Monitoring is a major component of the COSO Internal Control—Integrated Framework. Which of the following is not correct in how the company can implement the monitoring component? A. Monitoring can be an ongoing process. B. Monitoring and other audit work conducted by internal audit staff can reduce external audit costs. C. The independent auditor can serve as part of the entity's control environment and continuous monitoring. D. Monitoring can be conducted as a separate evaluation.
A
On receiving the cutoff bank statement, the auditor should vouch: A. checks dated before year-end listed as outstanding on the year-end bank reconciliation to the cutoff statement. B. checks dated after year-end to outstanding checks listed on the year-end bank reconciliation and to the cutoff statement. C. deposits listed on the cutoff statement to deposits in the cash receipts journal. D. deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal.
True
The cash account is affected by all of the entity's business processes. (T/F)
D
The cashier of Brooke Company covered a shortage in the cash working fund with cash obtained on December 31 from a local bank by cashing, but not recording, a check drawn on the company's out-of-town bank. How would the auditor discover this manipulation? A. Confirming all December 31 bank balances. B. Counting the cash working fund at the close of business on December 31. C. Preparing independent bank reconciliations as of December 31. D. Preparing and detail testing a bank transfer schedule.
Negative
The confirmation below is an example of which type of confirmation? (Question #58)
C
The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because A. Many customers merely sign and return the confirmation without verifying its details. B. Recipients usually respond only if they disagree with the information on the request. C. Customers may not be inclined to report understatement errors in their accounts. D. Auditors typically select many accounts with low recorded balances to be confirmed.
False
The general cash account is normally the principal account used to disburse payroll. (T/F)
C
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. Batch processing of checks. D. Separation of cash receipts from cash disbursements.
D
The main goal of auditing internal control is A. To allow the auditor to fix any internal control deficiencies. B. To form an opinion on the ability of internal controls to prevent fraud. C. To assure management that internal control is preventing all material misstatements on the financial statements. D. To evaluate the effectiveness of controls over all relevant financial statement disclosures in the financial statements.
C
The primary evidence regarding year-end bank balances is documented in the: A. outstanding check listing. B. bank deposit lead schedule. C. standard bank confirmations. D. interbank transfer schedule.
B
The primary purpose of sending a standard confirmation request to financial institutions with which the entity has done business during the year is to A. Detect kiting activities that may otherwise not be discovered. B. Corroborate information regarding deposit and loan balances. C. Provide the data necessary to prepare a proof of cash. D. Request information about contingent liabilities and secured transactions.
C
To obtain an understanding of significant processes and relevant subprocesses, auditors would be least likely to use which of the following techniques? A. Reviewing management documentation. B. Inquiry. C. Scanning. D. Transaction walkthroughs.
A
To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would A. Request the senders to mail the original forms to the auditor or the auditor may follow up with a telephone call to verify the response. B. Examine subsequent cash receipts for the accounts in question. C. Consider the e-mail responses to the confirmations to be exceptions. D. Mail second requests to the e-mail respondents.
A
Tracing a sample of remittance advices to entries in the cash receipts journal tests which of the following assertions for cash? A. Completeness. B. Authorization. C. Occurrence. D. Cutoff.
B
Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fund maintained on an imprest basis? A. Reimbursement vouchers are not prenumbered. B. Reimbursement of the fund from the general cash account occurs twice or more each week. C. The custodian occasionally uses the cash fund to cash employee checks. D. The custodian endorses reimbursement checks.
D
Vouching copies of sales invoices to shipping documents will provide evidence that A. All shipments to customers were billed. B. The accounts receivable ledger is complete. C. All shipments to customers were recorded as receivables. D. All billed sales were shipped.
D
When communicating internal control-related matters noted in an audit of a nonpublic company, an auditor's report issued on significant deficiencies should indicate that A. Errors or fraud may occur and not be detected because there are inherent limitations in any internal control system. B. The issuance of an unqualified opinion on the financial statements may depend on corrective follow-up action. C. The deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions. D. The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.
A
Which of the following audit procedures is the most appropriate when internal control over cash is weak or when an entity requests an investigation of cash transactions? A. Proof of cash. B. Bank reconciliation. C. Cash confirmation. D. Evaluate ratio of cash to current liabilities.
C
Which of the following audit tests would be regarded as a test of controls? A. Tests of the specific items making up the balance in a given general ledger account. B. Tests comparing inventory pricing to vendors' invoices. C. Tests of the signatures on canceled checks to the board of directors' authorizations. D. Tests of the additions to property, plant, and equipment by physical inspections.
A
Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees? A. A bank lockbox system. B. Prenumbered remittance advices. C. Monthly bank reconciliations. D. Daily deposit of cash receipts.
B
Which of the following is false? A. Regardless of the achieved 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. B. The absence of misstatements in financial statements is considered convincing evidence that existing controls are effective. C. The audit of internal control is intended to draw conclusions about the effectiveness of internal control over financial reporting as of a specific date. D. The auditor is required by AS5 to evaluate the implications of the financial statement audit for the effectiveness of internal control over financial reporting.
C
Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff? A. Excessive sales discounts. B. Unauthorized goods returned for credit. C. Unrecorded sales for the year. D. Lapping of year-end accounts receivable.
C
Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting between intercompany banks? A. Review the composition of authenticated deposit slips. B. Review subsequent bank statements received directly from the banks. C. Prepare a schedule of bank transfers. D. Prepare year-end bank reconciliations.
D
Which of the following most likely would give the most assurance concerning the valuation assertion for accounts receivable? A. Tracing amounts in the subsidiary ledger to details on shipping documents. B. Comparing receivable turnover ratios to industry statistics for reasonableness. C. Inquiring about receivables pledged under loan agreements. D. Assessing the allowance for uncollectible accounts for reasonableness.
B
Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control is suitably designed to prevent or detect material misstatements? A. Vouching a sample of transactions directly related to the controls. B. Observing the entity's personnel applying the controls. C. Scanning the journals produced by the internal control system. D. Performing analytical procedures using data aggregated at a high level.
D
Which of the following sets of duties would ordinarily be considered basically incompatible in terms of effective internal control? A. Preparation of monthly statements to customers and maintenance of the accounts receivable subsidiary ledger. B. Posting to the general ledger and approval of additions and terminations relating to the payroll. C. Custody of unmailed signed checks and maintenance of expense subsidiary ledgers. D. Collection of receipts on account and maintaining accounts receivable records.
A
Which of the following statements concerning control deficiencies is true? A. The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit. B. All significant deficiencies are material weaknesses. C. An auditor must immediately report material weaknesses and significant deficiencies discovered during an audit to the PCAOB. D. All control deficiencies are significant deficiencies.
D
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 endorses the checks. B. The cashier prepares the daily deposit. C. The cashier makes the daily deposit at a local bank. D. The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
D
A high detection risk strategy includes all of the following except: A. Interim testing. B. Reduced testing of transactions. C. Heavy reliance on analytical procedures as substantive procedures. D. Audit work only completed at year-end.
B
According to PCAOB AS 5 addressing Internal Controls deficiencies, a deficiency in ______ exists when (a) a control necessary to meet the control objective is missing or (b) an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met. A. Efficiency B. Design C. Operation D. Effectiveness
C
After obtaining an understanding of internal controls and assessing control risk of an entity, an auditor decided not to perform tests of controls for purposes of the audit. The auditor most likely decided that A. The available evidential matter obtained through tests of controls would not support an increased level of control risk. B. A reduction in the assessed level of control risk is justified for certain financial statement assertions. C. It would be inefficient to perform tests of controls that would result in a reduction in planned substantive procedures. D. The assessed level of inherent risk exceeded the assessed level of control risk.
B
Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be invoiced that are not shipped. The inadequate control activities could cause an A. Understatement of revenues, receivables, and inventory. B. Overstatement of revenues and receivables and an understatement of inventory. C. Understatement of revenues and receivables and an overstatement of inventory. D. Overstatement of revenues, receivables, and inventory.
B
An "integrated audit" as stated in Section 404 of the Sarbanes-Oxley Act means A. The auditor must consider the integrated thoughts and ideas of everyone on the audit staff. B. The auditor must conduct two audits, one on the effectiveness of internal control and one on the financial statements, in an integrated way. C. The auditor must integrate the same objectives whether auditing internal control or auditing the financial statements. D. Two independent CPA firms must work together on the audit.
D
Audit evidence concerning proper segregation of duties ordinarily is best obtained by A. Preparation of a flowchart of duties performed by available personnel. B. Inquiring whether control activities operated consistently throughout the period. C. Reviewing job descriptions prepared by the Personnel Department. D. Direct personal observation of the employees who apply the control activities.
B
Auditors are most likely to gather audit evidence solely using substantive procedures A. If transactions are recurring. B. For nonrecurring, unusual transactions. C. If control risk is very low. D. If the entity has a well-designed automated system.
What is channel stuffing? A. A company records revenue before delivery terms can be arranged. B. A company records revenue on goods that will be shipped overseas. C. A company induces distributors to buy substantially more inventory than they can promptly resell. D. A company alters the terms and conditions of recorded sales to entice customers to accept delivery of goods.
C
D
Examples of entity-level controls include A. Management's risk assessment process. B. Controls to monitor results of operations. C. The period-end financial reporting process. D. All of these are examples of entity-level controls.
B
For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve A. employee overtime wages. B. write-offs of customer accounts. C. cash disbursements. D. credit granted to customers.
D
In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified? A. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers. B. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances. C. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers. D. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
D
Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because A. a majority of recipients usually lack the willingness to respond objectively. B. some recipients may report incorrect balances that require extensive follow-up. C. negative confirmations do not produce evidence that is statistically quantifiable. D. the auditor cannot infer that all nonrespondents have verified their account information.
B
Tests designed to detect credit sales made after the end of the year that have been recorded in the current year provide assurance about management's assertion of A. Classification. B. Cutoff. C. Occurrence. D. Authorization and accuracy.
C
The highest-quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by A. inquiries of employees who apply control activities. B. inspection of a flowchart of duties performed and available personnel. C. observation by the auditor of the employees performing control activities. D. inspection of documents prepared by a third party but which contain the initials of those applying entity controls.
C
Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs? A. Employees responsible for authorizing sales and bad debt write-offs are denied access to cash. B. Shipping documents and sales invoices are matched by an employee who does not have authority to write-off bad debts. C. Employees involved in the credit-granting function are separated from the sales function. D. Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.
D
Which of the following controls would most likely be tested during an interim period? A. Controls over nonroutine transactions. B. Controls over the period-end financial reporting process. C. Controls over transactions that involve a high degree of subjectivity. D. Controls that operate on a continuous basis.
D
Which of the following internal controls would be most likely to deter the lapping of collections from customers? A. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries. B. Authorization of write-offs of uncollectible accounts by a supervisor independent of the credit approval function. C. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries. D. Segregation of duties between receiving cash and posting the accounts receivable ledger.
A
Which of the following procedures would ordinarily be expected to best reveal improper cutoff of sales at the balance sheet date? A. Compare shipping documents with sales records. B. Apply gross profit rates to inventory disposed of during the period. C. Trace payments received subsequent to the balance sheet date. D. Send accounts receivable confirmation requests.
C
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 makes the daily deposit at a local bank. B. The cashier prepares the daily deposit. C. The cashier posts the receipts to the accounts receivable subsidiary ledger cards. D. The cashier endorses the checks.
A
While substantive procedures may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because A. The records may be accurate even though they are maintained by persons having incompatible functions. B. Substantive procedures relate to the entire period under audit, but compliance tests ordinarily are confined to the period during which the auditor is on the entity's premises. C. Substantive procedures rarely guarantee the accuracy of the records if only a sample of the transactions has been tested. D. Many computerized procedures leave no audit trail of who performed them, so substantive procedures may necessarily be limited to inquiries and observation of office personnel.