Chp 10 (exam 2)

An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to A. Provide the data necessary to prepare a proof of cash. B. Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation. C. Request that a cutoff bank statement and related checks be sent to the auditor. D. Detect kiting activities that may otherwise not be discovered.

B. Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation.

Basic to a proper control environment are the quality and integrity of personnel who must perform the prescribed procedures. Which is not a factor in providing for competent personnel? A. Hiring practices. B. Segregation of duties. C. Performance evaluations. D. Training programs.

B. Segregation of duties.

Which of the following factors is most relevant when an auditor considers the client's organizational structure in the context of the risks of material misstatement? A. Physical proximity of the accounting function to upper management. B. The suitability of the client's lines of reporting. C. Management's attitude toward information processing and accounting departments. D. The organization's recruiting and hiring practices.

B. The suitability of the client's lines of reporting.

Which of the following is not a valid concept of internal control? A. The recorded accountability for assets should be compared with the existing assets at reasonable intervals and appropriate action should be taken if there are differences. B. When one person is responsible for all phases of a transaction, there should be a clear designation of that person's responsibility. C. Controls integrated into the information system may appropriately be applied on a test basis in some circumstances. D. Procedures designed to detect errors and fraud should be performed by persons other than those in a position to perpetrate fraud.

B. When one person is responsible for all phases of a transaction, there should be a clear designation of that person's responsibility.

Which of the following components of internal control would be considered the foundation for the other components? A. Risk assessment. B. Control activities. C. Control environment. D. Information and communication.

C. Control environment.

Which of the following is not a component of internal control? A. Information system. B. The control environment. C. Control risk. D. Monitoring of controls.

C. Control risk

Which of the following is a component of internal control? A. Operating effectiveness. B. Organizational structure. C. Risk assessment. D. Financial reporting.

C. Risk assessment.

A company issued bonds for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditor's best course of action is to A. Request a statement from the bond trustee as to the amount of the bonds issued and outstanding. B. Confirm the results of the issuance with the underwriter or investment banker. C. Trace the cash received from the issuance to the accounting records. D. Verify that the net cash received is credited to an account entitled "bonds payable."

C. Trace the cash received from the issuance to the accounting records.

Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization? A. Replacing personnel every 3 or 4 years. B. Disclosing lack of segregation of duties to the external auditors during the annual review. C. Requiring accountants to pass a yearly background check. D. Allowing for greater management oversight of incompatible activities.

D. Allowing for greater management oversight of incompatible activities.

An auditor is concerned with controls designed to safeguard assets that are relevant to the reliability of financial reporting. Adequate safeguards over access to and use of assets means protection from A. Losses such as those arising from setting a product price too low and subsequently realizing operating losses from the product's sale. B. Only those losses arising from fraud. C. Any management decision that would unprofitably use company resources. D. Losses arising from access by unauthorized persons.

D. Losses arising from access by unauthorized persons.

A small private entity may use less formal means to ensure that internal control objectives are achieved. For example, extensive accounting procedures, sophisticated accounting records, or formal controls are least likely to be needed if A. The entity is involved in complex transactions. B. The entity is subject to legal or regulatory requirements also found in larger entities. C. Financial reporting objectives have been established. D. Management is closely involved in operations.

D. Management is closely involved in operations.

Which of the following would an auditor most likely consider in evaluating the control environment of an audit client? A. The number of CPAs in the accounting department. B. Overall employee satisfaction with assigned duties. C. Management review of monthly financial statements. D. Management's operating style.

D. Management's operating style.

Control activities constitute one of the five components of internal control described in the COSO model. Control activities do not encompass A. An internal auditing function. B. Physical controls. C. Information processing. D. Performance reviews.

A. An internal auditing function.

Which of the following sets of information does an auditor usually confirm on one form? A. Cash in bank and collateral for loans. B. Accounts receivable and accrued interest receivable. C. Accounts payable and purchase commitments. D. Inventory on consignment and contingent liabilities.

A. Cash in bank and collateral for loans.

The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to A. Corroborate information regarding deposit and loan balances. B. Provide the data necessary to prepare a proof of cash. C. Detect kiting activities that may otherwise not be discovered. D. Request information about contingent liabilities and secured transactions.

A. Corroborate information regarding deposit and loan balances.

When auditing a client's statement of cash flows, an auditor will rely primarily upon A. Cross-referencing to balances and transactions considered in connection with the audit of the other financial statements. B. Analysis of significant ratios of prior years as compared to the current year. C. Determination of the amount of cash at year-end. D. The standard bank confirmation.

A. Cross-referencing to balances and transactions considered in connection with the audit of the other financial statements.

Which of the following activities by small business clients best demonstrates management integrity in the absence of a written code of conduct? A. Emphasizing ethical behavior through oral communication and management example. B. Documenting internal control procedures using flowcharts rather than narratives. C. Developing and maintaining formal descriptions of accounting procedures. D. Reporting regularly to the board of directors about operations and finances.

A. Emphasizing ethical behavior through oral communication and management example.

The control environment may decrease the effectiveness of control activities when A. Management has substantial incentives for meeting earnings projections. B. The internal auditor reports directly to the audit committee. C. The audit committee actively oversees the financial reporting process. D. The board of directors is independent of management.

A. Management has substantial incentives for meeting earnings projections.

Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts? A. Preliminary judgments about materiality levels. B. The amount of bad debt write-offs in the prior year. C. The size of the intercompany receivable balance. D. The auditor's allowable risk of assessing control risk is too low.

A. Preliminary judgments about materiality levels.

Each of the following types of controls is considered to be an entity-level control, except those A. Regarding the company's annual stockholder meeting. B. Addressing policies over significant risk management practices. C. Relating to the control environment. D. Pertaining to the company's risk assessment process.

A. Regarding the company's annual stockholder meeting.

Internal control is a function of management, and effective control is based upon the concept of charge and discharge of responsibility and duty. Which of the following is one of the overriding principles of internal control? A. Responsibility for the performance of each duty must be fixed. B. Responsibility for accounting and financial duties should be assigned to one responsible officer. C. Responsibility for the accounting duties must be borne by the audit committee of the company. D. Responsibility for accounting activities and duties must be assigned only to employees who are bonded.

A. Responsibility for the performance of each duty must be fixed.

Assuming a low assessed risk of material misstatement, which of the following audit procedures would be least likely to be performed? A. Search for unrecorded cash receipts. B. Obtaining a client representation letter. C. Confirmation of accounts receivable. D. Physical inspection of a sample of inventory.

A. Search for unrecorded cash receipts.

Which of the following is not a principal objective of the auditor in the audit of revenues? A. To verify cash deposited during the year. B. To verify that earned revenue has been recorded and recorded revenue has been earned. C. To identify and interpret significant trends and variations in the amounts of various categories of revenue. D. To obtain an understanding of internal control and assess the risks of material misstatement, with particular emphasis on the use of accrual accounting to record revenue.

A. To verify cash deposited during the year.

Which of the following components of internal control includes development and use of training policies that communicate prospective roles and responsibilities to employees? A. Risk assessment process. B. Control environment. C. Monitoring of controls. D. Control activities.

B. Control environment.

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. Record and conceal fraudulent transactions in the normal course of assigned tasks. C. Monitor internal controls and evaluate whether the controls are operating as intended. D. Adopt new accounting pronouncements and authorize the recording of transactions.

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

A proper segregation of duties requires that an individual A. Authorizing a transaction maintain custody of the asset that resulted from the transaction. B. Recording a transaction not compare the accounting record of the asset with the asset itself. C. Maintaining custody of an asset be entitled to access the accounting records for the asset. D. Authorizing a transaction records it.

B. Recording a transaction not compare the accounting record of the asset with the asset itself.

Internal control has five components: the control environment, risk assessment, information and communication, monitoring, and control activities. Control activities relevant to an audit may be categorized as policies and procedures that pertain to A. Making a commitment to competence. B. Reviewing actual performance. C. Developing a proper organizational structure. D. Maintaining effective human resource policies.

B. Reviewing actual performance.

The standard AICPA form directed to financial institutions requests all of the following except A. Due date of a direct liability. B. The principal amount paid on a direct liability. C. Description of collateral for a direct liability. D. The interest rate of a direct liability.

B. The principal amount paid on a direct liability.

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may A. Not believe that the bank is obligated to verify confidential information to a third party. B. Sign and return the form without inspecting the accuracy of the client's bank reconciliation. C. Be unaware of all the financial relationships that the bank has with the client. D. Not have access to the client's cutoff bank statement.

C. Be unaware of all the financial relationships that the bank has with the client.

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 write-up work. B. Employment of temporary personnel to aid in the segregation of duties. C. Direct participation by the owner of the business in the recordkeeping activities of the business. D. Delegation of full, clear-cut responsibility to each employee for the functions assigned to each.

C. Direct participation by the owner of the business in the recordkeeping activities of the business.

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

C. Establishing budgets and forecasts to identify variances from expectations.

Which of the following is a factor in the control environment? A. Information processing. B. Performance reviews. C. Management's philosophy and operating style. D. Segregation of duties.

C. Management's philosophy and operating style.

Which of the following procedures is an auditor most likely to include in the planning phase of a financial statement audit? A. Perform cutoff tests of the entity's sales and purchases. B. Evaluate the reasonableness of the entity's accounting estimates. C. Obtain an understanding of the entity's risk assessment process. D. Identify specific controls designed to prevent fraud.

C. Obtain an understanding of the entity's risk assessment process.

Many of the Granada Corporation's convertible bondholders have converted their bonds into stock during the year under audit. The independent auditor should review the Granada Corporation's statement of cash flows and related disclosures to ascertain that they show A. Nothing relating to the conversion because it does not affect cash. B. The issuance of the stock and reduction in convertible debt. C. Only the cash used to reduce the convertible debt. D. Only the cash provided by the issuance of stock.

C. Only the cash used to reduce the convertible debt.

Which of the following statements about internal control is correct? A. The establishment and maintenance of internal control are important responsibilities of the internal auditor. B. Exceptionally effective internal control is enough for the auditor to eliminate substantive procedures on a significant account balance. C. The cost-benefit relationship is a primary criterion that should be considered in designing internal control. D. Internal control should provide reasonable assurance that collusion among employees cannot occur.

C. The cost-benefit relationship is a primary criterion that should be considered in designing internal control.

Although substantive procedures may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because A. 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. B. Substantive procedures rarely guarantee the accuracy of the records if only a sample of the transactions has been tested. C. The records may be accurate even though they are maintained by a person who performs incompatible functions. D. Substantive procedures relate to the entire period under audit, but tests of controls ordinarily are confined to the period during which the auditor is on the client's premises.

C. The records may be accurate even though they are maintained by a person who performs incompatible functions.

It is important for the auditor to consider the competence of the audit client's employees, because their competence bears directly and importantly upon the A. Comparison of recorded accountability with assets. B. Timing of the tests to be performed. C. Relationship of the costs of internal control and its benefits. D. Achievement of the objectives of internal control.

D. Achievement of the objectives of internal control.

Transaction authorization within an organization may be either specific or general. An example of specific transaction authorization is the A. Setting of automatic reorder points for material or merchandise. B. Establishment of sales prices for products to be sold to any customer. C. Establishment of requirements to be met in determining a customer's credit limits. D. Approval of a detailed construction budget for a warehouse.

D. Approval of a detailed construction budget for a warehouse.

Proper segregation of functional responsibilities to achieve effective internal control calls for separation of the functions of A. Custody, execution, and reporting. B. Authorization, execution, and payment. C. Authorization, payment, and recording. D. Authorization, recording, and custody.

D. Authorization, recording, and custody.

The best evidence regarding year-end bank balances is documented in the A. Interbank transfer schedule. B. Bank deposit lead schedule. C. Cutoff bank statement. D. Bank reconciliations.

D. Bank reconciliations.

An auditor should test bank 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 year end. B. Any unusual payments to or receipts from related parties occurred. C. The last checks recorded before year end were actually mailed by year end. D. Cash balances were overstated because of kiting.

D. Cash balances were overstated because of kiting.

Which of the following best describe the interrelated components of internal control? A. Organizational structure, management philosophy, and planning. B. Risk assessment process, backup facilities, responsibility accounting, and natural laws. C. Assignment of authority and responsibility, management philosophy, and organizational structure. D. Control environment; risk assessment process; control activities; the information system, including related business processes; and monitoring of controls.

D. Control environment; risk assessment process; control activities; the information system, including related business processes; and monitoring of controls.

An auditor would most likely be concerned with controls that provide reasonable assurance about the A. Decision to make expenditures for certain advertising activities. B. Efficiency of management's decision-making process. C. Appropriate prices the entity should charge for its products. D. Entity's ability to initiate, authorize, record, process, and report financial data.

D. Entity's ability to initiate, authorize, record, process, and report financial data.

On the last day of the fiscal year, the cash disbursements clerk drew a company check on bank A and deposited the check in the company account bank B to cover a previous theft of cash. The disbursement has not been recorded. The auditor will best detect this form of kiting by A. Examining the composition of deposits in both bank A and B subsequent to year end. B. Comparing the detail of cash receipts as shown by the cash receipts records with the detail on the confirmed duplicate deposit tickets for three days prior to and subsequent to year end. C. Preparing from the cash disbursements book a summary of bank transfers for one week prior to and subsequent to year end. D. Examining paid checks returned with the bank statement of the next accounting period after year end.

D. Examining paid checks returned with the bank statement of the next accounting period after year end.

Proper segregation of duties reduces the opportunities to allow persons to be in positions both to A. Journalize entries and prepare financial statements. B. Record cash receipts and cash disbursements. C. Establish internal control and authorize transactions. D. Perpetrate and conceal fraud and error.

D. Perpetrate and conceal fraud and error.

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows? A. Confirm the amounts included in the statement of cash flows with the entity's financial institution. B. Reconcile the cutoff bank statement to the proof of cash to verify the accuracy of the year-end cash balance. C. Vouch a sample of cash receipts and disbursements for the last few days of the current year. D. Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts.

D. Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts.

To establish illegal "slush funds," corporations may divert cash received in normal business operations. An auditor would encounter the greatest difficulty in detecting the diversion of proceeds from A. Purchase returns. B. Dividends. C. C.O.D. sales. D. Scrap sales.

D. Scrap sales.

When counting cash on hand, the auditor must exercise control over all cash and other negotiable assets to prevent A. Deposits in transit. B. Theft. C. Irregular endorsement. D. Substitution.

D. Substitution.

An independent auditor asked a client's internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure? A. The account was closed, so the balance was zero. B. The internal auditor did not sign the form. C. The form was prepared by the internal auditor. D. The form was mailed by the controller.

D. The form was mailed by the controller.

Which of the following are considered control environment elements? 1. Detection risk? 2. commitment to competence?

No, Yes

Which of the following factors are included in an entity's control environment? 1. Audit Committee Participation 2. Integrity and Ethical Values 3. Org Structure

No, Yes, Yes

The standard AICPA form to financial institutions requesting information on direct liabilities on loans asks for the following information 1. the principal amt paid 2. description of collateral 3. date thru which interest is paid

No, yes, yes

Which of the following are considered control environment factors? 1. Detection Risk 2. HR policies and practices

no, yes