Bisk Chapter 3

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

A bank lockbox system

Regarding internal control related matters identified in an audit of financial statements, the auditor should include in the written communication of significant deficiencies and material weaknesses a. A description of the significant deficiencies and material weaknesses and an analysis of their effects, including the magnitude expressed as a percentage of the applicable accounts b. A description of the significant deficiencies and material weaknesses and an explanation of their effect on the auditor's overall risk assessment c. Not include suggestions for remedial action on the deficiencies as this may tend to overshadow the reporting of the deficiencies d. A description of the significant deficiencies and material weaknesses and an explanation of their potential effects

A description of the significant deficiencies and material weaknesses and an explanation of their potential effects

Management's emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when a. Internal auditors have direct access to the entity's board of directors. b. A significant portion of management compensation is represented by stock options. c. External policies established by parties outside the entity affect accounting policies. d. The audit committee is active in overseeing the entity's financial reporting policies.

A significant portion of management compensation is represented by stock options.

Which of the following situations most likely could lead to an embezzlement scheme? a. The accounts receivable bookkeeper receives a list of payments prepared by the cashier and personally makes entries in the customers' accounts receivable subsidiary ledger. b. Each vendor invoice is matched with the related purchase order and receiving report by the vouchers payable bookkeeper who personally approves the voucher for payment. c. Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement. d. Vouchers and supporting documentation are examined and then canceled by the treasurer who personally mails the checks to vendors.

Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement

Which of the following internal control procedures is not usually performed in the vouchers payable department? a. Matching the vendor's invoice with the related receiving report b. Approving vouchers for payment by having an authorized employee sign the vouchers c. Indicating the asset and expense accounts to be debited d. Accounting for unused prenumbered purchase orders and receiving reports

Accounting for unused prenumbered purchase orders and receiving reports

In an audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure a. Reflects management's philosophy and operating style b. Affects management's financial statement assertions c. Provides adequate safeguards over access to assets d. Enhances management's decision-making processes

Affects management's financial statement assertions

Which of the following statements is correct concerning an auditor's required communication of significant deficiencies and material weaknesses identified during an audit of financial statements? a. A significant deficiency previously communicated during the prior year's audit that remains uncorrected causes a scope limitation. b. An auditor should perform tests of controls on significant deficiencies before communicating them to the client. c. An auditor's written communication on deficiencies in internal control should include a restriction on the use of the communication. d. An auditor should communicate significant deficiencies after tests of controls, but before commencing substantive tests.

An auditor's written communication on deficiencies in internal control should include a restriction on the use of the communication

Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities? a. An independent trust company that has no direct contact with the employees who have record keeping responsibilities has possession of the securities. b. The internal auditor verifies the marketable securities in the entity's safe each year on the balance sheet date. c. The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to the general ledger. d. A designated member of the board of directors controls the securities in a bank safe-deposit box.

An independent trust company that has no direct contact with the employees who have record keeping responsibilities has possession of the securities.

An auditor's tests of controls for completeness for the revenue cycle usually include determining whether a. Each receivable is collected subsequent to the year-end. b. An invoice is prepared for each shipping document. c. Each invoice is supported by a customer purchase order. d. Each credit memo is properly approved.

An invoice is prepared for each shipping document.

The authority to accept incoming goods in receiving should be based on a(an) a. Vendor's invoice b. Materials requisition c. Bill of lading d. Approved purchase order

Approved purchase order

Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud? a. Distributing paychecks directly to department employees b. Setting the pay rate for department employees c. Hiring employees and authorizing them to be added to payroll d. Approving a summary of hours each employee worked during the pay period

Approving a summary of hours each employee worked during the pay period

Which of the following internal control procedures is not usually performed in the treasurer's department? a. Verifying the accuracy of checks and vouchers b. Controlling the mailing of checks to vendors c. Approving vendors' invoices for payment d. Canceling payment vouchers when paid

Approving vendors' invoices for payment

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable? a. Are assets that collateralize notes payable critically needed for the entity's continued existence? b. Are two or more authorized signatures required on checks that repay notes payable? c. Are the proceeds from notes payable used for the purchase of noncurrent assets? d. Are direct borrowings on notes payable authorized by the board of directors?

Are direct borrowings on notes payable authorized by the board of directors?

Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions? a. Are requests for major repairs approved at a higher level than the department initiating the request? b. Are prenumbered purchase orders used for equipment and periodically accounted for? c. Are requests for purchases of equipment reviewed for consideration of soliciting competitive bids? d. Are procedures in place to monitor and properly restrict access to equipment?

Are procedures in place to monitor and properly restrict access to equipment?

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases? a. Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher? b. Are purchase requisitions prenumbered and independently matched with vendor invoices? c. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions? d. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

Which of the following is true regarding significant deficiencies and material weaknesses in an audit of financial statements? a. Auditors must search for them. b. Auditors must communicate them to management and those charged with governance. c. Auditors must communicate them to those charged with governance. d. They must be disclosed in the notes to the financial statements.

Auditors must communicate them to management and those charged with governance.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? a. Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables. b. Claims received from customers for goods returned may be intentionally recorded in other customers' accounts. c. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. d. The failure to prepare shipping documents may cause an overstatement of inventory balances.

Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the a. Human resources function from the controllership function b. Administrative controls from the internal accounting controls c. Authorization of transactions from the custody of related assets d. Operational responsibility from the record keeping responsibility

Authorization of transactions from the custody of related assets

Proper segregation of functional responsibilities in an effective internal control structure calls for separation of the functions of a. Authorization, payment, and recording b. Authorization, recording, and custody c. Custody, execution, and reporting d. Authorization, execution, and payment

Authorization, recording, and custody

An auditor most likely would not rely on controls if the payroll department supervisor is responsible for a. Examining authorization forms for new employees b. Comparing payroll registers with original batch transmittal data c. Authorizing payroll rate changes for all employees d. Hiring all subordinate payroll department employees

Authorizing payroll rate changes for all employees

Which of the following factors should an auditor consider in evaluating the severity a deficiency in internal control to determine if it should be communicated to management and those charged with governance, i.e., that it is a significant deficiency or a material weakness? I. Magnitude of the potential misstatement II. Likelihood of the misstatement a. I only b. II only c. Both I and II d. Neither I nor II

Both I and II

Which of the following types of evidence would an auditor most likely examine to determine whether internal control policies and procedures are operating as designed? a. Gross margin information regarding the client's industry b. Confirmations of receivables verifying account balances c. Client records documenting the use of computer programs d. Anticipated results documented in budgets or forecasts

Client records documenting the use of computer programs

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the a. Collection of receivables b. Purchase of merchandise inventory c. Payment of accounts payable d. Sale of long-term debt

Collection of receivables

Which of the following is an inherent limitation of internal controls? a. Judgmental sampling b. Collusion c. Segregation of duties d. Employee peer review

Collusion

The overall attitude and awareness of an entity's board of directors concerning the importance of internal control usually is reflected in its a. Computer-based controls b. System of segregation of duties c. Control environment d. Safeguards over access to assets

Control environment

Which of the following is not a component of an entity's internal control? a. Control risk b. Control activities c. The information and communication systems d. The control environment

Control risk

Which of the following procedures most likely would give the greatest assurance that securities held as investments are safeguarded? a. There is no access to securities between the year-end and the date of the auditor's security count. b. Proceeds from the sale of investments are received by an employee who does not have access to securities. c. Investment acquisitions are authorized by a member of the Board of Directors before execution. d. Custody of investment securities is assigned to an outside agent such as a brokerage house, and access to securities requires the signatures and presence of two designated officials.

Custody of investment securities is assigned to an outside agent such as a brokerage house, and access to securities requires the signatures and presence of two designated officials.

The objectives of the internal control for a production cycle are to provide assurance that transactions are properly executed and recorded, and that a. Production orders are prenumbered and signed by a supervisor. b. Custody of work in process and of finished goods is properly maintained. c. Independent internal verification of activity reports is established. d. Transfers to finished goods are documented by a completed production report and a quality control report.

Custody of work in process and of finished goods is properly maintained.

Which of the following flowcharts indicates that new equipment transactions and the old equipment file have been used to prepare equipment labels, prepare a printed equipment journal, and generate a new equipment file? (See Bisk PG 221, won't let me insert photo)

D

When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the a. Unpaid voucher b. Debit memo c. Vendor invoice d. Credit memo

Debit memo

Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of employing dishonest individuals and a. Protect employees who make unintentional errors from possible monetary damages resulting from their errors. b. Deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts. c. Facilitate an independent monitoring of the receiving and depositing of cash receipts. d. Force employees in positions of trust to take periodic vacations and rotate their assigned duties.

Deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts.

Which of the following should an auditor do when control risk is assessed at the maximum level? a. Perform fewer substantive tests of details. b. Perform more tests of controls. c. Document the assessment. d. Document the control structure more extensively.

Document the assessment.

An audit client failed to maintain copies of its procedures manuals and organizational flowcharts. What should the auditor do in an audit of financial statements? a. Issue a qualified opinion on the basis of a scope limitation. b. Document the auditor's understanding of internal controls. c. Assess control risk at the maximum level. d. Restrict the auditor's responsibility to assess the effectiveness of controls in the audit engagement letter.

Document the auditor's understanding of internal controls.

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.

Employees involved in the credit-granting function are separated from the sales function.

An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about the a. Methods of assigning production tasks to employees b. Appropriate prices the entity should charge for its products c. Efficiency of management's decision-making process d. Entity's ability to process and summarize financial data

Entity's ability to process and summarize financial data

For effective internal control, the Accounts Payable Department generally should a. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed b. As certain that each requisition is approved as to price, quantity, and quality by an authorized employee c. Obliterate the quantity ordered on the Receiving Department copy of the purchase order d. Establish the agreement of the vendor's invoice with the receiving report and purchase order

Establish the agreement of the vendor's invoice with the receiving report and purchase order

Which of the following is a management control method that most likely could improve management's ability to supervise company activities effectively? a.Monitoring compliance with internal control requirements imposed by regulatory bodies b. Limiting direct access to assets by physical segregation and protective devices c. Establishing budgets and forecasts to identify variances from expectations d. Supporting employees with the resources necessary to discharge their responsibilities

Establishing budgets and forecasts to identify variances from expectations

The objective of tests of details of transactions performed as tests of controls is to a. Monitor the design and use of entity documents such as pre-numbered shipping forms b. Determine whether internal controls have been implemented c. Detect material misstatements in the account balances of the financial statements d. Evaluate whether internal control procedures operated effectively

Evaluate whether internal control procedures operated effectively

Which of the following is an inherent limitation in internal control? a. Incompatible duties b. Lack of segregation of duties c. Faulty human judgment d. Lack of an audit committee

Faulty human judgment

Which of the following factors would most likely be considered an inherent limitation to an entity's internal control? a. The complexity of the information processing system b. Human judgment in the decision making process c. The ineffectiveness of the board of directors d. The lack of management incentives to improve the control environment

Human judgment in the decision making process

Which of the following statements is correct concerning the use of prior audit evidence regarding the operating effectiveness of controls? a. If the auditor plans to rely on controls that have changed since they were last tested, the auditor should test those controls at least once every three years. b. If the auditor uses prior audit evidence for several controls, the auditor should test a sufficient portion of them in each audit so that each is tested every third audit. c. If the auditor plans to rely on controls that have not changed since they were last tested, the auditor should test those controls at least every other year. d. If the auditor plans to rely on controls that mitigate a significant risk, those controls should be tested at least every other year.

If the auditor uses prior audit evidence for several controls, the auditor should test a sufficient portion of them in each audit so that each is tested every third audit

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control? a. Incompatible duties b. Managementoverride c. Mistakes in judgment d. Collusion among employees

Incompatible duties

After testing a client's internal control activities, an auditor discovers a material weakness in the operation of a client's internal controls. Under these circumstances the auditor most likely would a. Issue a disclaimer of opinion about the internal controls as part of the auditor's report b. Increase the assessment of control risk and increase the extent of substantive tests c. Issue a qualified opinion of this finding as part of the auditor's report d. Withdraw from the audit because the internal controls are ineffective

Increase the assessment of control risk and increase the extent of substantive tests

Which of the following most likely would be an internal control procedure designed to detect errors and fraud concerning the custody of inventory? a. Periodic reconciliation of work in process with job cost sheets b. Segregation of functions between general accounting and cost accounting c. Independent comparisons of finished goods records with counts of goods on hand d. Approval of inventory journal entries by the storekeeper

Independent comparisons of finished goods records with counts of goods on hand

An auditor's written communication regarding significant deficiencies and material weaknesses identified during a financial statement audit should a. Include a brief description of the tests of controls performed in searching for significant deficiencies and material weaknesses b. Indicate that the purpose of the auditor's consideration of internal control was to express an opinion on the financial statements but not to express an opinion on the effectiveness of the entity's internal control c. Include a paragraph describing management's assertion concerning the effectiveness of internal control d. Indicate that the deficiencies should be disclosed in the annual report to the entity's shareholders

Indicate that the purpose of the auditor's consideration of internal control was to express an opinion on the financial statements but not to express an opinion on the effectiveness of the entity's internal control

Which of the following is not a component of internal control? a. Control environment b. Control activities c. Inherent risk d. Monitoring

Inherent risk

An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate? a. Observation and inspection of records b. Confirmation and reperformance c. Inquiry and inspection of records d. Analytical procedures and reperformance

Inquiry and inspection of records

For the most effective internal control, monthly bank statements should be received directly from the banks and reviewed by the a. Cash disbursements accountant b. Cash receipts accountant c. Controller d. Internal auditor

Internal auditor

When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that a. Internal control policies and procedures may be ineffective due to mistakes in judgment and personal carelessness. b. Adequate safeguards over access to assets and records should permit an entity to maintain proper accountability. c. Establishing and maintaining internal control is an important responsibility of management. d. The cost of an entity's internal control should not exceed the benefits expected to be derived.

Internal control policies and procedures may be ineffective due to mistakes in judgment and personal carelessness

Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control procedure that provides for a. Segregation of duties of employees in the accounts payable department b. Authorization by the board of directors of significant equipment acquisitions c. Investigation of variances within a formal budgeting system d. Independent verification of invoices for disbursements recorded as equipment acquisitions

Investigation of variances within a formal budgeting system

In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also a. Reviews the monthly bank reconciliation b. Returns the checks to accounts payable c. Is denied access to the supporting documents d. Is responsible for mailing the checks

Is responsible for mailing the checks

Which of the following actions should the auditor take in response to discovering a deviation from the pre- scribed control procedure? a. Make inquiries to understand the potential consequence of the deviation b. Assume that the deviation is an isolated occurrence without audit significance c. Report the matter to the next higher level of authority within the entity d. Increase sample size of tests of controls

Make inquiries to understand the potential consequence of the deviation

When obtaining an understanding of an entity's internal control, an auditor should concentrate on the implementation of the procedures because a. The procedures may be operating effectively but may not be documented. b. Management may implement procedures whose costs exceed their benefits. c. The procedures may be so inappropriate that no reliance is contemplated by the auditor. d. Management may establish appropriate procedures but not enforce compliance with them.

Management may establish appropriate procedures but not enforce compliance with them

A deficiency in internal control exists when misstatements of the financial statements may occur and not be prevented, detected, or corrected on a timely basis by a. Outside consultants who issue a special-purpose report on internal control b. Management or employees in the normal course of performing their assigned functions c. Management when reviewing interim financial statements and reconciling account balances d. An independent auditor during the testing of controls phase of the consideration of internal control

Management or employees in the normal course of performing their assigned functions

Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement? a. The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques b. Management's disregard of its responsibility to maintain an adequate internal control environment c. The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions d. Management's refusal to permit the CPA to perform substantive tests before the year-end

Management's disregard of its responsibility to maintain an adequate internal control environment

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that a. Specific internal control activities are not operating as designed. b. The collective effect of the control environment may not achieve the control objectives. c. Tests of controls may fail to identify activities relevant to assertions. d. Material misstatements may exist in the financial statements.

Material misstatements may exist in the financial statements.

In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the Operating effectiveness of policies and procedures; Design of policies and procedures a. Yes; Yes b. No; Yes c. Yes; No d. No; No

No; Yes

Which of the following are considered control environment factors? Detection risk; Personnel policies and practices a. Yes; Yes b. Yes; No c. No; Yes d. No; No

No; Yes

Which of the following procedures would an auditor most likely perform to test controls relating to man- agement's assertion about the completeness of cash receipts for cash sales at a retail outlet? a. Observe the consistency of the employees' use of cash registers and tapes b. Inquire about employees' access to recorded but undeposited cash c. Trace the deposits in the cash receipts journal to the cash balance in the general ledger d. Compare the cash balance in the general ledger with the bank confirmation request

Observe the consistency of the employees' use of cash registers and tapes

In determining the effectiveness of an entity's policies and procedures relating to the existence or occurrence assertion for payroll transactions, an auditor most likely would inquire about and a. Observe the segregation of duties concerning personnel responsibilities and payroll disbursement b. Inspect evidence of accounting for prenumbered payroll checks c. Recompute the payroll deductions for employee fringe benefits d. Verify the preparation of the monthly payroll account bank reconciliation

Observe the segregation of duties concerning personnel responsibilities and payroll disbursement

A client maintains a large data center where access is limited to authorized employees. How may an auditor best determine the effectiveness of this control activity? a. Inspect the policy manual establishing this control activity. b. Ask the chief technology officer about known problems. c. Observe whether the data center is monitored. d. Obtain a list of current data center employees.

Observe whether the data center is monitored.

Which of the following procedures concerning accounts receivable would an auditor most likely perform to obtain audit evidence to support the operating effectiveness of a control? a. Observing an entity's employee prepare the schedule of past due accounts receivable b. Sending confirmation requests to an entity's principal customers to verify the existence of accounts receivable c. Inspecting an entity's analysis of accounts receivable for unusual balances d. Comparing an entity's uncollectible accounts expense to actual uncollectible accounts receivable

Observing an entity's employee prepare the schedule of past due accounts receivable

Audit evidence concerning segregation of duties ordinarily is best obtained by a. Performing tests of transactions that corroborate management's financial statement assertions b. Observing the employees as they apply control procedures c. Obtaining a flowchart of activities performed by available personnel d. Developing audit objectives that reduce control risk

Observing the employees as they apply control procedures

Evidence concerning the proper segregation of duties for receiving and depositing cash receipts ordinarily is obtained by a. Completing an internal control questionnaire that describes the control activities b. Observing the employees who are performing the control activities c. Performing substantive tests to verify the details of the bank balance d. Preparing a flowchart of the duties performed and the entity's available personnel

Observing the employees who are performing the control activities

Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control activities are suitably designed to prevent or detect material misstatements? a. Reperforming the activities for a sample of transactions b. Performing analytical procedures using data aggregated at a high level c. Vouching a sample of transactions directly related to the activities d. Observing the entity's personnel applying the activities

Observing the entity's personnel applying the activities

What is the most likely course of action that an auditor would take after determining that performing substantive tests on inventory will take less time than performing tests of controls? a. Assess control risk at the minimum level b. Perform both tests of controls and substantive tests on inventory c. Perform only substantive tests on inventory d. Perform only tests of controls on inventory

Perform only substantive tests on inventory

Which of the following internal control procedures most likely would be used to maintain accurate inventory records? a. Perpetual inventory records are periodically compared with the current cost of individual inventory items b. A just-in-time inventory ordering system keeps inventory levels to a desired minimum c. Requisitions, receiving reports, and purchase orders are independently matched before payment is approved d. Periodic inventory counts are used to adjust the perpetual inventory records

Periodic inventory counts are used to adjust the perpetual inventory records

Which of the following internal control procedures most likely would justify a reduced assessed level of control risk concerning property, plant and equipment acquisitions? a. Periodic physical inspection of property, plant and equipment by the internal audit staff b. Comparison of current year property, plant and equipment account balances with prior year actual balances c. The review of prenumbered purchase orders to detect unrecorded trade-ins d. Approval of periodic depreciation entries by a supervisor independent of the accounting department

Periodic physical inspection of property, plant and equipment by the internal audit staff

Proper segregation of duties reduces the opportunities to allow persons to be in positions to both a. Journalize entries and prepare financial statements b. Record cash receipts and cash disbursements c. Establish internal controls and authorize transactions d. Perpetrate and conceal errors and fraud

Perpetrate and conceal errors and fraud

An auditor generally tests the segregation of duties related to inventory by a. Personal inquiry and observation b. Test counts and cutoff procedures c. Analytical procedures and invoice recomputation d. Document inspection and reconciliation

Personal inquiry and observation

Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries? a. Personnel b. Treasurer c. Controller d. Payroll

Personnel

Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity? a. Inquiry of client personnel b. Inspection of documents and reports c. Observation of client personnel d. Preparation of system flowcharts

Preparation of system flowcharts

Sound internal control procedures dictate that immediately upon receiving checks from customers by mail, a responsible employee should a. Add the checks to the daily cash summary b. Verify that each check is supported by a prenumbered sales invoice c. Prepare a duplicate listing of checks received d. Record the checks in the cash receipts journal

Prepare a duplicate listing of checks received

An auditor should obtain sufficient knowledge of an entity's accounting system to understand the a. Safeguards used to limit access to computer facilities b. Process used to prepare significant accounting estimates c. Procedures used to assure proper authorization of transactions d. Policies used to detect the concealment of fraud

Process used to prepare significant accounting estimates

Which of the following controls would be most effective in assuring that recorded purchases are free of material errors? a. The Receiving Department compares the quantity ordered on purchase orders with the quantity received on receiving reports. b. Vendors' invoices are compared with purchase orders by an employee who is independent of the Receiving Department. c. Receiving reports require the signature of the individual who authorized the purchase. d. Purchase orders, receiving reports, and vendors' invoices are independently matched in preparing vouchers.

Purchase orders, receiving reports, and vendors' invoices are independently matched in preparing vouchers.

Sound internal control procedures dictate that defective merchandise returned by customers should be presented initially to the a. Accounts receivable supervisor b. Receiving clerk c. Shipping department supervisor d. Sales clerk

Receiving clerk

Which of the following procedures most likely would not be an internal control procedure designed to reduce the risk of errors in the billing process? a. Comparing control totals for shipping documents with corresponding totals for sales invoices b. Using computer programmed controls on the pricing and mathematical accuracy of sales invoices c. Matching shipping documents with approved sales orders before invoice preparation d. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger

Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger

Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both a. Journalize cash receipts and disbursements and prepare the financial statements b. Monitor internal controls and evaluate whether the controls are operating as intended c. Adopt new accounting pronouncements and authorize the recording of transactions d. Record and conceal fraudulent transactions in the normal course of assigned tasks

Record and conceal fraudulent transactions in the normal course of assigned tasks

n obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would a. Analyze the liquidity and turnover ratios of the inventory b. Perform analytical procedures designed to identify cost variances c. Review the entity's descriptions of inventory policies and procedures d. Perform test counts of inventory during the entity's physical count

Review the entity's descriptions of inventory policies and procedures

Which of the following best represents a key control for ensuring sales are properly authorized when assessing control risks for sales? a. The separation of duties between the billing department and the cash receipts approval department b. The use of an approved price list to determine unit selling price c. Copies of approved sales orders sent to the shipping, billing, and accounting departments d. Sales orders are sent to the credit department for approval

Sales orders are sent to the credit department for approval

In obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated to a. Determine whether the control procedures have been implemented b. Perform procedures to understand the design of the internal control policies c. Document the understanding of the entity's internal control d. Search for significant deficiencies in the operation of the entity's internal control

Search for significant deficiencies in the operation of the entity's internal control

Which of the following events most likely would indicate the existence of related parties? a. Granting stock options to key executives at favorable prices b. High turnover of senior management and members of the board of directors c. Failure to correct internal control weaknesses on a timely basis d. Selling real estate at a price significantly different from appraised value

Selling real estate at a price significantly different from appraised value

Tracing shipping documents to prenumbered sales invoices provides evidence that a. No duplicate shipments or billings occurred. b. Shipments to customers were properly invoiced. c. All goods ordered by customers were shipped. d. All prenumbered sales invoices were accounted for.

Shipments to customers were properly invoiced.

An auditor is determining if internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices. The auditor most likely would select a sample of transactions from the population represented by the a. Cash receipts file b. Shipping document file c. Customer order file d. Sales invoice file

Shipping document file

To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the a. Sales order file b. Customer order file c. Shipping document file d. Sales invoice file

Shipping document file

Which of the following documents are examples of audit evidence generated by the client? a. Customer purchase orders and bank statements b. Shipping documents and receiving reports c. Vendor invoices and packing slips d. Bills of lading and accounts receivable confirmations

Shipping documents and receiving reports

Mailing disbursement checks and remittance advices should be controlled by the employee who a. Matches the receiving reports, purchase orders, and vendors' invoices b. Signs the checks last c. Prepares the daily voucher summary d. Agrees the check register to the daily check summary

Signs the checks last

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is a. Supported by a vendor's invoice b. Stamped "paid" by the check signer c. Prenumbered and accounted for d. Approved for authorized purchases

Stamped "paid" by the check signer

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is a. Stamped paid by the check signer b. Returned to the vouchers payable department c. Supported by a vendor's invoice and purchase order d. Prenumbered and accounted for

Stamped paid by the check signer

When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate? a. Test the operating effectiveness of such controls in the current audit b. Document that reliance and proceed with the original audit strategy c. Inquire of management as to the effectiveness of the controls d. Report the reliance in the report on internal controls

Test the operating effectiveness of such controls in the current audit

Which of the following represents an inherent limitation of internal controls? a. Bank reconciliations are not performed on a timely basis. b. The CEO can request a check with no purchase order. c. Customer credit checks are not performed. d. Shipping documents are not matched to sales invoices.

The CEO can request a check with no purchase order.

Which of the following describes a weakness in accounts payable procedures? a. The accounts payable clerk files invoices and supporting documentation after payment. b. The accounts payable clerk manually verifies arithmetic on the vendor invoice. c. The accounts payable system compares the receiving report to the vendor invoice. d. The accounts payable manager issues purchase orders.

The accounts payable manager issues purchase orders.

Which of the following factors would least likely affect the extent of the auditor's consideration of the client's internal controls? a. The amount of time budgeted to complete the engagement b. The size and complexity of the client c. The nature of specific relevant controls d. The auditor's prior experience with client operations

The amount of time budgeted to complete the engagement

Which of the following events occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit? a. The entity announced that the internal audit function would be eliminated after the balance sheet date. b. The audit committee chairperson unexpectedly resigned during the year under audit. c. The chief financial officer waived approvals on all checks to one vendor to expedite payment. d. The frequency of accounts payable check runs was changed from biweekly to weekly.

The chief financial officer waived approvals on all checks to one vendor to expedite payment.

Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls? a.The industry and the business and regulatory environments in which the client operates b. The degree to which information technology is used in the accounting function c. The relationship between management, the board of directors, and external stakeholders d. The degree to which the auditor intends to use internal audit personnel to perform substantive tests

The degree to which information technology is used in the accounting function

Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be conducted? a. The entity has no formal written code of conduct. b. The integrity of the entity's management is suspect. c. Procedures requiring segregation of duties are subject to management override. d. Management fails to modify prescribed controls for changes in conditions.

The integrity of the entity's management is suspect.

Which of the following is a control procedure that most likely could help prevent employee payroll fraud? a. The personnel department promptly sends employee termination notices to the payroll supervisor. b. Employees who distribute payroll checks forward unclaimed payroll checks to the absent employees' supervisors. c. Salary rates resulting from new hires are approved by the payroll supervisor. d. Total hours used for determination of gross pay are calculated by the payroll supervisor.

The personnel department promptly sends employee termination notices to the payroll supervisor.

Which of the following factors is most relevant when an auditor considers the client's organizational struc- ture in the context of control risk? a. Management's attitude toward information processing and accounting departments b. The organization's recruiting and hiring practices c. Physical proximity of the accounting function to upper management d. The suitability of the client's lines of reporting

The suitability of the client's lines of reporting

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? a. Merchandise received is not promptly reconciled to the outstanding purchase order file. b. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value. c. The write off of receivables by personnel who receive cash permits them is appropriation of cash. d. Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.

The write off of receivables by personnel who receive cash permits them is appropriation of cash.

Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme? a. There are significant unexplained variances between standard and actual labor cost. b. Payroll checks are disbursed by the same employee each payday. c. Employee time cards are approved by individual departmental supervisors. d. A separate payroll bank account is maintained on an imprest basis.

There are significant unexplained variances between standard and actual labor cost.

Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be performed? a. Management fails to modify prescribed internal controls for changes in information technology. b. Internal control activities requiring segregation of duties are rarely monitored by management. c. Management is dominated by one person who is also the majority stockholder. d. There is a substantial risk of intentional misapplication of accounting principles.

There is a substantial risk of intentional misapplication of accounting principles.

Which of the following is least likely to indicate the existence of a material weakness in internal control? a. Fraud on the part of senior management b. Previously issued financial statements were restated to reflect the correction of a material misstatement due to error or fraud c. Those charged with governance exercise ineffective oversight of the entity's financial reporting and internal control d. There is substantial doubt about the entity's ability to continue as a going concern

There is substantial doubt about the entity's ability to continue as a going concern

Which of the following statements should not be included in a written communication regarding significant deficiencies and material weaknesses identified in an audit of financial statements? a. The auditor's consideration of internal control was not designed to identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. b. There were no significant deficiencies identified during the audit. c. A material weakness is 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. d. The purpose of the auditor's consideration of internal control was to express an opinion on the financial statements, but not to express an opinion on the effectiveness of the entity's internal control.

There were no significant deficiencies identified during the audit

Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments? a. Accounts receivable b. Credit c. Accounts payable d. Treasurer

Treasurer

When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the a. Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records. b. Securities are registered in the name of the trust company, rather than the entity itself. c. Interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities. d. Trust company places the securities in a bank safe-deposit vault under the custodian's exclusive control.

Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.

Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed? a. The investment committee of the board of directors periodically reviews the investment decisions dele- gated to the treasurer. b. Two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box. c. The internal auditor and the controller independently trace all purchases and sales of marketable securities from the subsidiary ledgers to the general ledger. d. The chairman of the board verifies the marketable securities which are kept in a bank safe-deposit box, each year on the balance sheet date.

Two company officials have joint control of marketable securities, which are kept in a bank safe- deposit box.

Which of the following internal control procedures most likely would prevent direct labor hours from being charged to manufacturing overhead? a. Periodic independent counts of work in process for comparison to recorded amounts b. Comparison of daily journal entries with approved production orders c. Use of time tickets to record actual labor worked on production orders d. Reconciliation of work-in-process inventory with periodic cost budgets

Use of time tickets to record actual labor worked on production orders

An auditor is concerned about a policy of management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor's concern? a. Matching purchase orders to accounts payable b. Verifying that approved spending limits are not exceeded c. Tracing sales orders to the revenue account d. Reviewing minutes of board meetings

Verifying that approved spending limits are not exceeded

Which of the following procedures represents a weakness in internal controls for payroll? a. The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department. b. The accounting department wires transfers funds to the payroll bank account. The transfer is based on totals from the payroll department summary. c. The payroll department prepares checks using a signature plate. The treasurer supervises the process before payroll checks are distributed. d. The payroll department prepares checks. The chief financial officer signs the payroll checks.

he payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department.