audit quizzes and hw

Which of the following situations is not an example of an inherent limitation of internal control? Management's failure to enforce control policies surrounding access to inventory allows employees to steal assets. A fraud scheme whereby an employee orders personal goods and his supervisor, who is in on the scheme, signs the checks to pay for those goods. A lack of physical controls over the safeguarding of assets allows an employee to steal company assets. A programming error in the design of an automated control allows an employee to give himself an unauthorized pay increase.

A lack of physical controls over the safeguarding of assets allows an employee to steal company assets.

A customer number on a sales invoice was transposed and, as a result, charged to the wrong customer. By the time the error was found, the original customer was no longer in business. Occurrence Completeness Cut-Off Posting & Summarization Accuracy

Accuracy

Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud? An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements as a whole. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements.

Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.

Which of the following will most likely indicate the existence of related parties? Borrowing money at a rate significantly below the market rate Writing down obsolete inventory prior to year-end An unexplained increase in gross margin Failing to correct deficiencies in the client's internal control

Borrowing money at a rate significantly below the market rate

Auditing standards require the auditor to consider materiality early in the audit. Which statement(s) regarding preliminary materiality is(are) true? I. Preliminary materiality may change during the engagement. II. Preliminary materiality is the maximum amount by which the auditor believes the financials could be misstated and still not affect the decisions of reasonable users. Both I and II I only II only Neither I or II

Both I and II

The internal control framework used by most U.S. companies is the ________ framework. AICPA FASB SEC PCAOB COSO

COSO

A nonexistent part number was included in the description of goods on a shipping document. Therefore, no charge was made for those goods. Completeness Accuracy Posting & Summarization Cut-off Occurrence

Completeness

In what order should the following steps occur? A. Set preliminary judgment of materiality and performance materiality. B. Understand the clients business and industry. C. Perform preliminary analytical procedures. D. Accept the client and perform initial audit planning. B, D, A, C B, A, C, D D, C, B, A D, B, C, A

D, B, C, A

Which of the following procedures would a CPA most likely perform during the planning stage of the audit? Confirm a sample of accounts receivable Evaluate the reasonableness of management's allowance for doubtful accounts. Evaluate the significance of uncorrected misstatements. Determine areas where there is a higher risk of material misstatement.

Determine areas where there is a higher risk of material misstatement.

Which of the following is not a primary consideration when assessing inherent risk? Existence of related parties Effectiveness of internal controls Nature of client's business Susceptibility to misappropriation of assets

Effectiveness of internal controls

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. Employees who authorize transactions should have recording responsibility for these transactions. Employees who open cash receipts should record the amounts in the subsidiary ledgers. Employees who have temporary or permanent custody of an asset should account for that asset.

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

A conceptually logical approach to the auditor's evaluation of internal control consists of the following four steps: I. Determining the internal controls that should prevent or detect errors and fraud. II. Identifying control deficiencies to determine their effect n the nature, timing, or extent of auditing procedures to be applied and suggestions to be made to the client. III. Determining whether the necessary internal control procedures are prescribed and are being followed satisfactorily. IV. Considering the types of errors and fraud that can occur. III, IV, I, and II I, II, III, and IV I, III, IV, and II IV, I, III, and II

IV, I, III, and II

Substantive analytical procedures are most likely to be used to test which of the following accounts? Treasury Stock Interest Income Cash Accounts Payable

Interest Income

Dan, CPA, has been engaged to audit Modern Home, a manufacturing company that specializes in furniture. Which of the following matters related to the year under audit would most likely result in an increase of inherent risk? Modern Home recently engaged in a complex derivative transaction. Modern Home purchased expensive new equipment in the current year. Modern Home experienced an increase in working capital. The furniture industry has experienced an overall increase in demand.

Modern Home recently engaged in a complex derivative transaction.

Which of the following controls would be most effective in detecting a failure to record cash received from customers paying on their accounts? A person in accounting reconciles the bank deposit to the cash receipts journal. Monthly statements are sent to customers and any discrepancies are resolved by someone independent of cash handling and accounting. Deposits of cash received are made daily. Transactions recorded in the cash receipts journal are posted on a real-time basis to the accounts receivable master file.

Monthly statements are sent to customers and any discrepancies are resolved by someone independent of cash handling and accounting.

Which of the following is the primary basis used to decide materiality for a profit-oriented entity? Net assets All of the above Net income before taxes Net sales

Net income before taxes

A computer operator picked up a computer-based data file for sales of the wrong week and processed them through the system a second time. Accuracy Cut-off Posting & Summarization Completeness Occurrence

Occurrence

A customer order was filled and shipped to a former customer that had already filed bankruptcy. Accuracy Cut-off Occurrence Posting & Summarization Completeness

Occurrence

The accounting system will not post a sales transaction to the sales journal without a valid bill of lading number. This control is most relevant to which transaction-related objective for sales? Posting and Summarization Accuracy Occurrence Completeness

Occurrence

Which of the following statements is most correct with concerning the quantification of sampling risk? Sampling risk can be quantified only when probabilistic selection techniques are used to select the sample. None of the above is correct. Sampling risk cannot be quantified. Sampling risk can be quantified only when nonprobabilistic selection techniques are used to select the sample.

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

Which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the entity's financial statements? Monthly bank reconciliations ordinarily include several large outstanding checks. The entity's management places no emphasis on meeting publicized earnings projections. Cash transactions are electronically processed and recorded, leaving no paper audit trail. Significant differences between the physical inventory count and the accounting records are not investigated.

Significant differences between the physical inventory count and the accounting records are not investigated.

To support the auditor's initial assessment of control risk below maximum, the auditor performs procedures to determine that internal controls are operating effectively. Which of the following audit procedures is the auditor performing? Tests of controls Tests of details of balances Substantive tests of transactions Tests of trends and ratios

Tests of controls

A client decides not to record an auditor's proposed adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation? The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements. The financial statements are free from material misstatement, but disclosure of the proposed adjustment is required in the notes to the financial statements. The financial statements do not conform with GAAP and therefore the auditor should withdraw from the engagement. The financial statements contain unadjusted misstatements that will result in a qualified opinion.

The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.

The auditor determines that the Crestfalls Company occupies the 3rd floor of an office building for which it pays no rent. The most likely explanation is The landlord had weak internal controls over rent invoices The landlord is a related party to Crestfalls Crestfalls is likely committing fraud The landlord delayed rent to pay less IRS tax

The landlord is a related party to Crestfalls

You are determining the significance of the following: you set a 5% risk of assessing control risk too low and your computation of the upper deviation risk is 7%. What could you conclude? There is a 95% chance the deviation rate is the population is less than 5%. There is a 95% chance the deviation rate in the population exceeds 95%. There is a 5% chance the deviation rate in the population exceeds 7%. There is a 5% chance the deviation rate in the population is less than 7%.

There is a 5% chance the deviation rate in the population exceeds 7%.

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 have no impact on the planned tests of details of balances They are likely to be performed prior to the client's end of the fiscal year. They are likely to be used only in the audit of internal control. They are likely to eliminate the need for tests of details of balances.

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

Which audit procedure is most effective in testing credit sales for overstatement? Vouch a sample of recorded sales from the sales journal to shipping documents. Trace a sample of postings from the sales journal to the sales account in the general ledger. Test the closing of the sales journals to the general ledger accounts. Foot the accounts receivable aging report.

Vouch a sample of recorded sales from the sales journal to shipping documents.

How must significant deficiencies and material weaknesses be communicated to those charged with governance? Written communication is required for material weaknesses, but oral communication is allowed for significant deficiencies. Oral communication is required. Written communication is required. Either oral or written communication is acceptable.

Written communication is required.

Which of the following does not increase the need for sufficient appropriate audit evidence? a lower acceptable audit risk an increase in the assessed control risk a decrease in the assessed inherent risk a lower acceptable level of detection risk

a decrease in the assessed inherent risk

The primary objective of performing tests of controls is to obtain sufficient appropriate audit evidence to afford a reasonable basis for the auditor's opinion, without the need for additional evidence. knowledge and understanding of the client's prescribed procedures and methods. a reasonable degree of assurance that the client's internal controls are operating effectively on a consistent basis throughout the year. assurances that informative disclosures in the financial statements are reasonably adequate.

a reasonable degree of assurance that the client's internal controls are operating effectively on a consistent basis throughout the year.

What type of report is issued when one or more material internal control weaknesses exist? unqualified opinion qualified opinion adverse opinion disclaimer of opinion

adverse opinion

When designing the audit program and the particular audit tests, the auditor should keep in mind that the audit program is broken down into two parts-the risk assessment procedures and the tests of details of balances. analytical procedures performed during substantive testing are generally more focused and more extensive than those done as part of planning. auditing standards require that the tests contained in the audit program must be approved by the PCAOB. the tests of controls will not vary depending on assessed control risk.

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

As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the assurances provided by audit procedures to a lower level. extent of audit procedures, by perhaps using larger sample sizes. timing of audit procedures, by perhaps performing them at year-end rather than an interim date. nature of audit procedures to more effective procedures.

assurances provided by audit procedures to a lower level.

Proper segregation of functional responsibilities calls for separation of authorization, payment, and recording authorization, recording, and custody. authorization, execution, and reporting authorization, execution, and payment.

authorization, recording, and custody.

One type of shipping document is the ____________, which is a written contract between the carrier and the seller of the receipt and shipment of goods. purchase order sales order bill of lading sales invoice

bill of lading

The primary emphasis by auditors is on controls over classes of transactions. both A and B, because they vary from client to client account balances. both A and B, because they are equally important

classes of transactions.

a successor auditors inquiries of the predecessor auditor should include questions regarding

communications to management and those charges with governance regarding significant deficiencies in internal controls

When designing audit procedures, tracing of source documents to the customer's subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion? existence cutoff valuation completeness

completeness

Management implements internal controls to ensure that all required footnote disclosures are correctly worded and with the right numbers. Auditors test those controls to provide evidence supporting the ________ presentation. completeness and accuracy completeness and valuation rights and obligations and existence occurrence and accuracy

completeness and accuracy

Which type of evidence is not used by the auditor to obtain an understanding of the design and implementation of internal control? observation inquiry confirmation inspection

confirmation

What event initiates a transaction in the sales and collection cycle? identification of a new customer receipt of cash delivery of the product to a customer customer request for goods or services

customer request for goods or services

Which deficiency exists if a necessary control is missing or not properly implemented? control design significant operating

design

Narratives, flowcharts, and internal control questionnaires are three common methods of documenting the auditor's understanding of a client's organizational structure. testing the internal controls. designing the audit manual and procedures. documenting the auditor's understanding of internal controls.

documenting the auditor's understanding of internal controls.

As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to increase the performance materiality in the accounts. increase inherent risk in the accounts. find smaller misstatements. find larger misstatements.

find smaller misstatements.

For financial statement audits, auditors need to understand controls that are relevant to the audit in order to assess inherent risk. detect fraud. perform preliminary analytical procedures. identify and assess the risks of material misstatements.

identify and assess the risks of material misstatements.

A five-step approach can be used to identify deficiencies, significant deficiencies, and material weaknesses. The first step in this approach is consider the possibility of compensating controls. identify the absence of key controls. determine potential misstatements that could result. identify existing controls.

identify existing controls.

If the auditor decides to assess control risk at the moderate level in a private company audit, when in previous years the auditor set control risk at the maximum level, then tests of controls for the current year would be unchanged from prior planned settings. reduced in number. increased in number. not performed.

increased in number.

One of the causes of nonsampling risk is ineffective audit procedures. choosing the wrong sample size. inadequate sample size. exceptions being found in the sample.

ineffective audit procedures.

Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to materials misstatements in these types of accounts is defined as sampling risk. audit risk. detection risk. inherent risk.

inherent risk.

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. parallel. equal. direct.

inverse.

When a compensating control exists, the absence of a key control could cause a material loss, so it must be tested using substantive procedures. is magnified and must be removed from the sampling process and examined in its entirety. is no longer a concern because there is no longer a significant deficiency or material weakness. is still a major concern to the auditor.

is no longer a concern because there is no longer a significant deficiency or material weakness.

The most serious shortcoming of the haphazard sample selection method is it is not subject to statistical sampling methods. it is difficult to remain completely unbiased in the selection. it is time consuming to use. it is costly to use.

it is difficult to remain completely unbiased in the selection.

Some companies have customers send payment directly to an address maintained by a bank. This is called a(n) ___________ system. lockbox ACH transfer bitcoin direct deposit

lockbox

Auditors often identify less significant internal control-related issues, as well as opportunities for the client to make operational improvements in the Type 1 report. adverse opinion. Section 404 report. management letter.

management letter.

Which of the following procedures would a CPA least likely perform during the planning stage of the audit

perform inquiries of outside legal counsel regarding pending litigation

The amount(s) set by the auditor at less than the materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole is referred to as performance materiality the materiality range the error range tolerable materiality

performance materiality

When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be tracing. vouching. performing a walkthrough. testing controls.

performing a walkthrough.

An advantage of using statistical sampling techniques is that such techniques eliminate the need for judgmental decisions. define the values of precision and reliability required to provide audit satisfaction. quantify sampling risk. have been established in the courts to be superior to judgmental sampling.

quantify sampling risk.

An auditor's decision either to apply analytical procedures as substantive tests or to perform substantive tests of transactions and account balances usually is determined by the timing of tests performed after the balance sheet date. relative effectiveness and efficiency of the tests. availability of data aggregated at a high level. auditor's familiarity with industry trends.

relative effectiveness and efficiency of the tests.

A sample in which the characteristics of the sample are the same as those of the population is a(n) attributes sample. variables sample. random sample. representative sample.

representative sample.

Auditing standards _____________ that the basis used to determine the preliminary judgment about materiality be documented in the audit files. do not allow permit require strongly encourage

require

To test fro recorded sales for which there were no actual shipments, the auditor vouches from the sales journal to the shipping documents. sales journal to the accounts receivable subsidiary ledger. bill of lading to the sales journal. bill of lading to the supporting customer order and sales order.

sales journal to the shipping documents.

In systematic sample selection, the population size is divided by the number of sample items desired in order to determine the tolerable exception rate. computed upper exceptions rate. mean. sampling interval.

sampling interval.

Which of the following is the risk that an auditor will reach an incorrect conclusion because a sample is not representative of the population? sampling risk detection risk nonsampling risk audit risk

sampling risk

Tracing shipping documents to sales invoices provides evidence that shipments to customers were recorded as sales. shipments to customers were properly invoiced. sales ordered by customers were shipped. sales billed to customers were actually shipped.

shipments to customers were properly invoiced.

An effective procedure to test for unfilled shipments is to trace from the shipping documents to the sales journal. sales journal to the accounts receivable ledger. sales journal to the shipping documents. sales journal to the general ledger sales account.

shipping documents to the sales journal.

When a population is divided into sub-populations, usually by dollar size, and larger samples are taken from the sub-population with the larger sizes, ________ is being used. sampling with probability proportional to size stratified sampling block sampling haphazard sampling

stratified sampling

The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process. To minimize this risk, the auditor relies primarily on substantive tests. statistical analysis. internal control. tests of controls.

substantive tests.

In which of the following circumstances would an auditor of an issuer be least likely to reevaluate established materiality levels

the client released third quarter results before the sec prescribed deadline

The risk of material misstatement refers to inherent risk. inherent risk and audit risk. control risk and acceptable audit risk. the combination of inherent risk and control risk.

the combination of inherent risk and control risk.

The PCAOB places responsibility for the reliability of internal controls over the financial reporting process on the CFO and the independent auditors. the audit committee of the board of directors. the company's board of directors. the management of the company.

the management of the company.

An auditor should examine minutes of the board of directors' meetings at the date of the management letter through the date of the audit report at the date of the engagement letter through the date of the financial statements

through the date of the audit report