Exam 2 Auditing and Systems

1. Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness? A.Comparing a sample of shipping documents to related sales invoices. B.Reviewing standard bank confirmations for indications of cash manipulations. C.Confirming a sample of recorded receivables by direct communication with the debtors. D.Observing the entity's distribution of payroll checks.

A. Comparing a sample of shipping documents to related sales invoices.

5. Which of the following types of audit evidence is the least reliable? A.Prenumbered purchase order forms prepared by the entity. B.Test counts of inventory performed by the auditor. C.Bank statements obtained from the entity. D.Correspondence from the entity's attorney about litigation.

A.Prenumbered purchase order forms prepared by the entity.

An auditor's primary consideration regarding an entity's internal control is whether they A.) Reflect management's philosophy and operating style. B.) Prevent management override. C.) Relate to the control environment D.) Affect the financial statement assertions.

Affect the financial statement assertions

Which of the following is a misappropriation of assets? A.) Management estimates bad debt expense as 2 percent of sales when it actually expects bad debts equal to 10 percent of sales. B.) An employee of a consumer electronics store steals 12 CD players. C.) Investing cash and earning at a 3 percent rate of return as opposed to paying off a loan with an interest rate of 7 percent. D.) Classifying inventory held for resale as supplies.

An employee of a consumer electronics store steals 12 CD players.

Evidence as to the design of internal control and its operating effectiveness should be considered __________ the date specified in the assessment. A.) Before B.) Near C.) Close to D.) As of E.) After

As Of

If the financial reporting risks for a location are low and the entity has good entity-level controls, management may rely on which of the following for its assessment? A.) Documentation and test controls over specific risks. B.) Self-assessment processes in conjunction with entity-level controls. C.) Documentation and test entity-level controls over the entire entity. D.) Selective control test at that location.

B.) Self-assessment processes in conjunction with entity-level controls.

Which of the following audit techniques would most likely provide an auditor with the most assurance about the effectiveness of the operation of a control? A.) Inquiry of entity personnel. B.) Observation of entity personnel C.) Reperformance of the control personnel D.) Walkthrough

C. Reperformance of the control personnel.

SOC1, Type 2 Reports by the service organization's auditor typically A.) Provide reasonable assurance that their financial statements are free of material misstatements. B.) Ensure that the entity will not have any misstatements in areas related to the service organization's activities. C.) Assess whether the service organization's controls are suitably designed and operating effectively. D.) Ensure that the entity is billed correctly.

C.) Assess whether the service organization's controls are suitably designed and operating effectively.

The audit committee should be composed of directors who are not ______ of the organization. A.) Aware B.) Customers C.)Auditors D.) Employees E.) Visitors

D. Employees

If employees lack _________________, they may be ineffective in performing their duties. A.) Supervision B.) Incentive C.) Bank Statement D.) Skills E.) Fraud

D. Skills

Omissions of amounts or disclosures in considered a(n) ________________. A.) Misappropriation B.) Fraud C.) Illegal act D.) Error E.) Stealing

Error

Mistakes in data processing can easily result in ________________________. A.) Misappropriations B.) Illegal Acts C.) Fraud D.) Stealing E.) Errors

Errors

Financial statements can be misstated due to errors, _______________, or noncompliance with laws or regulations. A.) Changes in accounting regulations B.) Fraud C.) Changes in auditing regulations D.) Personal preferences

Fraud

In ______________, the financial statements are intentionally misleading. A.) Illegal act B.) Fraud C.) Misappropriation D.) Stealing E.) Errors

Fraud

When is a duty to disclose fraud to parties other than the entity's senior management and its audit committee most likely to exist? A.) In response to inquires from a successor auditor. B.) When the amount is material C.) When the fraud results from misappropriation of assets rather than fraudulent financial reporting. D.) When a line manager rather than a lower-level employee commits the fraudulent act.

In response to inquiries from a successor auditor.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements? A.) Turnover of senior accounting personnel is low. B.) Management places substantial emphasis on meeting earnings projections. C.) Insiders recently purchased additional shares of the entity's stock. D.) The rate of change in the entity's industry is slow.

Management Places substantial emphasis on meeting earnings projections.

The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor A.) Assesses the accounting principles used and evaluates the overall financial statement presentation. B.) Obtains reasonable assurance about whether the financial statements are free of material misstatement. C.) Is responsible for expressing an opinion on the financial statements, which are the responsibility of management. D.) Realizes that some matters, either individually or in the aggregate, are important, while other matters are not important.

Obtains reasonable assurance about whether the financial statements are free of material misstatement.

Organizational structure provides a basis for planning, directing, and controlling _________. A.) Customers B.) Auditors C.) Employees D.) Exams E.) Operations

Operations

Auditors should use a __________ approach to assess controls. A.) Top-Down B.) Bottom-Up C.) Middle D.) Negative E.) Medium

TOP-DOWN

8. The assurance bucket is filled with all of the following types of evidence except A.the audit report. B.test of controls. C.tests of details. D.substantive analytical procedures.

The Auditor Report

The Sarbanes-Oxley Act of 2002 requires management to include a report on the effectiveness of ICFR in the entity's annual report. It also requires auditors to report on the effectiveness of ICFR. Which of the following statements concerning these requirements is false? A.) The auditor should evaluate whether internal controls over financial reporting are designed and operating effectively. B.) Management's report should state its responsibility for establishing and maintaining an adequate internal control system. C.) The auditor should provide recommendations for improving internal control in the audit report. D.) Management should identify material weaknesses in its report.

The auditor should provide recommendations for improving internal control in the audit report.

Auditing Standards require auditors to make certain inquiries of management regarding fraud. Which of the following inquiries is required? A.) Whether management has any knowledge of fraud that has been perpetrated on or within the entity. B.) Whether management has even intentionally violated the securities laws. C.) Management's attitude about hiring ethical employees. D.) Management's attitudes toward regulatory authorities.

Whether management has any knowledg of fraud that has been perpetrated on or within the entity.

If the financial reporting risks for a location are low and the entity has good entity-level controls, management may rely on which of the following for its assessment? A.) Selective control test at that location. B.) Documentation and test entity-level controls over the entire entity. C.) Documentation and test controls over specific risks. D.) Self-assessment processes in conjunction with entity-level controls.

D.) Self-assessment processes in conjunction with entity-level controls.

Significant deficiencies and material weaknesses must be communicated to an entity's audit committee because they represent A.) Material fraud or illegal acts perpetrated by high-level management. B.) Disclosures of information that significantly contradict the auditor's going concern assumption. C.) Potential manipulation or falsification of accounting records. D.) Significant deficiencies in the design or operation of internal control.

D.) Significant deficiencies in the design or operation of internal control.

3. Which of the following statements concerning audit evidence is correct? A.To be appropriate, audit evidence should be either persuasive or relevant but need not be both. B.An entity's general ledger may be sufficient audit evidence to support the financial statements. C.The difficulty and expense of obtaining audit evidence concerning an account balance are a valid basis for omitting the test. D.The measure of the reliability of audit evidence lies in the auditor's judgment.

D.The measure of the reliability of audit evidence lies in the auditor's judgment.

9. The current file of the auditor's working papers should generally include A.copies of bond and note indentures. B.a flowchart of the accounting system. C.organization charts. D.a copy of the financial statements.

D.a copy of the financial statements.

11. An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n) A.audit control account. B.supporting schedule. C.working trial balance. D.lead schedule.

D.lead schedule.

7. An auditor would be least likely to use confirmations in connection with the examination of A.stockholders' equity. B.long-term debt. C.inventory held in a third-party warehouse. D.refundable income taxes.

D.refundable income taxes.

The substantive analytical procedure known as trend analysis is best described by A.development of a model to form an expectation using financial data, nonfinancial data, or both to test account balances or changes in account balances between accounting periods. B.the comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data. C.the comparison of common-size financial statements over time. D.the examination of changes in an account over time.

D.the examination of changes in an account over time.

A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a A.) Material weakness. B.) Deficiency in design. C.) Significant deficiency. D.) Deficiency in OPERATION.

Deficiency in OPERATION

To enhance the control environment, management develops job _________________. A.) Duplicates B.) Misstatements C.) Labels D.) Descriptions E.) Names

Descriptions

_________________ is another term for misappropriations of assets. A.) Error B.) Overstatement C.) Unintentional D.) Understatement E.) Fraud

Fraud

Risk of material misstatement refers to a combination of which two components of the audit risk model? A.) Inherent risk and control risk B.) Audit risk and control risk C.) Control risk and detection risk D.) Audit risk and inherent risk

Inherent Risk and Control Risk

Which of the following concepts are pervasive in the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? A.) Control risk B.) Internal control C.) Expected misstatement D.) Materiality and Audit Risk

Materiality and Audit Risk

_________________ should develop a statement of ethical values. A.) Senior management B.) Auditors C.) All employees D.) Internal auditors E.) Staff

Senior Management

In auditing a public company, Natalie, an auditor for N. M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue? A.) An unqualified report. B.) A disclaimer of opinion. C.) An exculpatory opinion. D.) An adverse report.

A. UNQUALIFIED OPINION

Which of the following is correct concerning required auditor communications about fraud? A.) Fraud that involves Senior Management should be reported directly by the auditor to the audit committee regardless of the amount involved. B.) Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. C.) Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor. D.) The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities.

A.) Fraud that involves Senior Management should be reported directly by the auditor to the audit committee regardless of the amount involved.

The highest-quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by A.) Observation by the auditor of the employees performing control activities. B.) Inquiries of employees who apply control activities. C.) Inspection of a flowchart of duties performed and available personnel. D.) Inspection of documents prepared by a third party but which contain the initials of those applying entity controls

A.) Observation by the auditor of the employees performing control activities.

Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent A.) Significant deficiencies in the design or operation of the internal control. B.) Material fraud or illegal acts perpetrated by high-level management. C.) Disclosures of information that significantly contradict the auditor's going concern assumption. D.) Manipulation or falsification of accounting records or documents from which financial statements are prepared.

A.) Significant deficiencies in the design or operation of the internal control.

Monitoring is a major component of the COSO Internal Control—Integrated Framework. Which of the following is not correct in how the company can implement the monitoring component? A.) The independent auditor can serve as part of the entity's control environment and continuous monitoring. B.) Monitoring can be an ongoing process. C.) Monitoring can be conducted as a separate evaluation. D.) Monitoring and other audit work conducted by internal audit staff can reduce external audit costs.

A.) The independent auditor can serve as part of the entity's control environment and continuous monitoring.

10. The permanent file section of the working papers that is kept for each audit client most likely contains A.narrative descriptions of the entity's accounting system and control procedures. B.a schedule of time spent on the engagement by each individual auditor. C.correspondence with the entity's legal counsel concerning pending litigation. D.review notes pertaining to questions and comments regarding the audit work performed.

A.narrative descriptions of the entity's accounting system and control procedures.

Internal control is a process designed to provide reasonable assurance regarding the achievement of which objective? A.) Effectiveness and efficiency of operations. B.) Reliability of financial reporting C.) Compliance with applicable laws and regulations. D.) All of these are correct

All of these are correct

The __________ committee is especially important as it exercises oversight responsibility over the financial statements. A.) Audit B.) Human resource C.) Benefit D.) Social E.) Investment

Audit

After obtaining an understanding of an entity's internal control system, an auditor may set control risk at high for some reason because he or she A.) Determines that the pertinent internal control components are not well documented. B.) Believes that internal controls are unlikely to be effective. C.) Identifies internal controls that are likely to prevent material misstatements. D.) Performs tests of controls to restrict detection risk to an acceptable level.

B.) Believes that internal controls are unlikely to be effective.

4. Which of the following presumptions is least likely to relate to the reliability of audit evidence? A.The more effective internal control, the more assurance it provides about the accounting data and financial statements. B.An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost. C.Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity D.The independent auditor's direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly.

B.An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost.

12. The primary objective of final analytical procedures is to A.Obtain evidence from details tested to corroborate particular assertions. B.Assist the auditor in assessing the validity of the conclusions reached on the audit. C.Satisfy doubts when questions arise about an entity's ability to continue in existence. D.Identify areas that represent specific risks relevant to the audit.

B.Assist the auditor in assessing the validity of the conclusions reached on the audit.

6. Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence? A.Bank statements obtained from the entity. B.Computations made by the auditor. C. Prenumbered entity sales invoices. D. Vendors' invoices included in the entity's files.

B.Computations made by the auditor.

2. In testing the existence assertion for an asset, an auditor ordinarily works from the A.supporting documents to the accounting records. B.accounting records to the supporting documents. C.potentially unrecorded items to the financial statements. D.financial statements to the potentially unrecorded items.

B.accounting records to the supporting documents.

Which of the following statements about internal control is correct? A.) A properly maintained internal control system reasonably ensures that collusion among employees cannot occur. B.) The establishment and maintenance of internal control is an important responsibility of the internal auditor. C. The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system. D.) An exceptionally strong internal control system 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 an internal control system.

A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to A.) trace a transaction from every class of transactions from origination through the entity's information system. B.) tour the organization's facilities and locations before beginning any audit work. C.) trace a transaction from each major class of transactions from origination through the entity's information system until it is reflected in the entity's financial reports. D.) trace a transaction from each major class of transactions from origination through the entity's information system.

C.) (LA MAS LARGA) trace a transaction from each major class of transactions from origination through the entity's information system until it is reflected in the entity's financial reports.

In auditing ICFR for a public company, Emily finds that the entity has a significant subsidiary located in a foreign country. Emily's accounting firm has no offices in that country, and the entity has thus engaged another reputable firm to conduct the audit of internal control for that subsidiary. The other auditor's report indicates that there are no material weaknesses in the foreign subsidiary's ICFR. What should Emily do? A.) Disclaim an opinion because she cannot rely on the opinion of another auditor in dealing with a significant subsidiary. B.) Qualify the opinion because she is unable to conduct the testing herself, and this constitutes a significant scope limitation. C.) Accept the other auditor's opinion after evaluating the auditor's work, and make reference to the other auditor's report in her audit opinion. D.) Accept the other auditor's opinion and express an unqualified opinion, making no reference to the other auditor's report in her audit opinion.

C.) Accept the other auditor's opinion after evaluating the auditor's work, and make reference to the other auditor's report in her audit opinion.

Regardless of the assessed level of control risk, an auditor would perform some A.) Test of controls to determine the effectiveness of internal controls. B.) Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk. C.) Substantive procedures to restrict detection risk for significant transaction classes. D.) Analytical procedures to verify the design internal control

C.) Substantive procedures to restrict detection risk for significant transaction classes.

Which of the following statements concerning control deficiencies is true? A.) All significant deficiencies are material weaknesses. B.) An auditor must immediately report material weaknesses and significant deficiencies discovered during an audit to the PCAOB. C.) The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit. D.) All control deficiencies are significant deficiencies.

C.) The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit.

Which of the following is not a factor that might affect the likelihood that a control deficiency could result in a misstatement in an account balance? A.) The nature of the financial statement accounts, disclosures, and assertions involved. B.) The interaction or relationship of the control with other controls. C.) The financial statement amounts exposed to the deficiency. D.) The susceptibility of the related assets or liability to loss or fraud.

C.) The financial statement amounts exposed to the deficiency.

When auditors report on the effectiveness of internal control "as of" a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the additional evidence to gather for the remaining period? A.) The length of the remaining period. B.) The specific controls tested prior to the "as of" date and the results of those tests. C.) The walkthrough of the control system conducted at interim. D.) Any significant changes that occurred in internal control subsequent to the interim date.

C.) The walkthrough of the control system conducted at interim.

Assessing control risk below high involves all of the following except A.) performing tests of controls B.) Identifying specific controls to rely on C.) concluding that controls are ineffective D.) analyzing the achieved level of control risk after performing tests of controls.

C.) concluding that controls are ineffective

Which of the following is an example of fraudulent financial reporting? A.) An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses. B.) Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales. C.) An employee steals inventory, and the shrinkage is recorded as a cost of goods sold. D.) An employee borrows small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales.

Management's evaluation process of internal control __________ with the management report on internal control-the first step of the audit process. A.) Stails B.) Concludes C.) Begins D.) Starts E.) Occurs

Concludes

Which of the following controls would most likely be tested during an interim period? A.) Controls over the period-end financial reporting process. B.) Controls over transactions that involve a high degree of subjectivity. C.) Controls that operate on a continuous basis. D.) Controls over non-routine transactions.

Controls that operate on a continous basis

Entity-level controls can have a pervasive effect on the entity's ability to meet the control criteria. Which one of the following is not an entity-level control? A.) Controls to monitor the INVENTORY taking process. B.) Controls to monitor results of operations. C.) Management's risk assessment process.

Controls to Monitor the INVENTORY taking process.

Efficient planning of the evaluation of internal control requires __________ the financial statement audit. A.) Duplicating B.) Coordination with C.) Ignoring D.) Replacing E.) Outsourcing

Coordination with

Annalisa, an auditor for N. M. Neal & Associates, is prevented by the management of Lileah Company from auditing controls over inventory. Lileah is a public company. Management explains that controls over inventory were recently implemented by a highly regarded public accounting firm that the entity hired as a consultant and insists that it is a waste of time for AnnaLisa to evaluate these controls. Inventory is a material account, but procedures performed as part of the financial statement audit indicate the account is fairly stated. AnnaLisa found no material weaknesses in any other area of the entity's internal control relating to financial reporting. What kind of report should AnnaLisa issue on the effectiveness of Lileah's internal control? A.) An adverse report. B.) An unqualified report. C.) An exculpatory opinion. D.) A disclaimer of opinion.

D. DISCLAIMER OF OPINION