Exam 2 (chpt. 6, 7, 10 & 11)

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A form filed with the SEC when a company changes auditors is a: A. Form 8-K. B. Form 10-K. C. Form S-1. D. Form B-1.

Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatements due to: Errors Misappropriation of Assets Option A: Yes Yes Option B: Yes No Option C: No Yes Option D: No No A. Option A B. Option B C. Option C D. Option D

Individuals who commit fraud are ordinarily able to rationalize the act and also have an: Incentive Opportunity Option A: Yes Yes Option B: Yes No Option C: No Yes Option D: No No A. Option A B. Option B C. Option C D. Option D

Tests for unrecorded assets typically involve tracing from: A. Source documents to recorded journal entries. B. Source documents to observations. C. Recorded journal entries to documents. D. Recorded journal entries to observations.

The auditor faces a risk that the audit will not detect material misstatements in the financial statements. In regard to minimizing this risk, the auditor primarily relies on: A. Substantive procedures. B. Tests of controls. C. Internal control. D. Statistical analysis.

To best test existence, an auditor would sample from the: A. General Ledger to source documents. B. General Ledger to the financial statements. C. Source documents to the general ledger. D. Source documents to journals.

Tracing from source documents forward to ledgers is most likely to address which assertion related to posted entries: A. Completeness. B. Existence. C. Rights. D. Valuation.

Which measure of materiality (or both) considers quantitative considerations? Planning Evaluation Option A: Yes Yes Option B: Yes No Option C: No Yes Option D: No No A. Option A B. Option B C. Option C D. Option D

Which of the following is least likely to be considered a financial statement audit risk factor? A. Management operating and financing decisions are dominated by top management. B. A new client with no prior audit history. C. Rate of change in the entity's industry is rapid. D. Profitability of the entity relative to its industry is inconsistent.

Which of the following matters is generally included in an auditor's engagement letter? A. Limitations of the engagement. B. Factors to be considered in establishing preliminary judgments about materiality. C. Management's liability for illegal acts committed by its employees. D. The auditor's responsibility to obtain negative assurance relating to the occurrence of illegal acts.

Which of the following topics is not normally included in an engagement letter? A. The auditors' preliminary assessment of internal control. B. The auditors' estimate of the fee for the engagement. C. Limitations on the scope of the engagement. D. A description of responsibility for the detection of fraud.

Which of the following would heighten an auditor's concern about the risk of fraudulent financial reporting? A. Inability to generate positive cash flows from operations, while reporting large increases in earnings. B. Management's lack of interest in increasing the dividend paid on common stock. C. Large amounts of liquid assets that are easily convertible into cash. D. Inability to borrow necessary capital without obtaining waivers on debt covenants.

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? A) A bank lockbox system. B) Approval of all disbursements by an individual independent of cash receipts. C) Monthly bank cutoff statements. D) Prenumbered remittance advices.

A) A bank lockbox system.

The Parmalat fraud case involved: A) A fraudulent cash confirmation. B) Kiting of funds between banks in India and banks in Pakistan. C) A bank reconciliation performed by the client that systematically understated cash. D) Major unrecorded disbursements for equipment.

A) A fraudulent cash confirmation.

Hall Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The best person or persons to make periodic reviews of the investment activity would be: A) An investment committee of the board of directors. B) The chief operating officer. C) The corporate controller. D) The treasurer.

A) An investment committee of the board of directors. The investment committee of the board of directors is not involved in the routine of making buy and sell decisions and can therefore review the transactions objectively. On the other hand, the chief operating officer, the controller, and the treasurer may be closely associated on a daily basis with the financial executive responsible for the investment decisions.

By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor will generally be able to detect: A) An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation. B) A cash sale which was not recorded on the books and was stolen by a bookkeeper. C) An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank. D) A credit sale which has been recorded twice in the sales journal.

A) An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect: A) An unrecorded deposit made at the bank at the end of the month. B) A second payment of an account payable which had already been paid in full two months earlier. C) An embezzlement of cash receipts not recorded in the cash receipts journal before they had been deposited into the bank. D) A receivable collected that had previously been written off as uncollectible.

A) An unrecorded deposit made at the bank at the end of the month.

Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the: A) Check Clearing for the 21st Century Act. B) Public Company Accounting Oversight Board's Standard No. 2. C) Foreign Corrupt Practices Act. D) Sarbanes-Oxley Act.

A) Check Clearing for the 21st Century Act.

The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare the: A) Details of bank deposit slips with details of credits to customer accounts. B) Daily cash summaries with the sums of the cash receipts journal entries. C) Individual bank deposit slips with the details of the monthly bank statements. D) Dates uncollectible accounts are authorized to be written off with the dates the writeoffs are actually recorded.

A) Details of bank deposit slips with details of credits to customer accounts. Lapping will result in a delay in the recording of specific remittance credits in the financial records, but the checks will be deposited in the bank as they are received. Therefore, a comparison of the checks deposited to the credits to customer accounts will likely uncover the scheme.

For purposes of an audit of financial statements, electronic confirmation of cash balances: A) Is acceptable when properly controlled. B) Is acceptable, but only when combined with a non-electronic approach. C) Is only acceptable for immaterial accounts. D) Is not acceptable.

A) Is acceptable when properly controlled.

Which of the following is correct relating to kiting? A) It is ordinarily used to understate cash. B) It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment. C) It is a lapping approach performed using receivable accounts. D) It is seldom, if ever, used.

A) It is ordinarily used to understate cash.

Reconciliation of the bank account should not be performed by an individual who also: A) Processes cash disbursements. B) Has custody of securities. C) Prepares the cash budget. D) Reviews inventory reports.

A) Processes cash disbursements. The individual who reconciles the bank account should not be involved in the processing of cash receipts or disbursements. Therefore, answer (1) is correct. All of the other functions are compatible with reconciliation responsibilities.

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500 imprest petty cash fund? A) Reimbursement occurs twice each week. B) Reimbursement vouchers are not prenumbered. C) The custodian occasionally uses the cash fund to cash employee checks. D) The custodian endorses reimbursement checks.

A) Reimbursement occurs twice each week.

Which of the following is not a universal rule for achieving internal control over cash? A) Separate recordkeeping from accounting for cash to the extent possible. B) Deposit each day's cash receipts intact. C) Separate cash handling from record keeping. D) Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks.

A) Separate recordkeeping from accounting for cash to the extent possible.

62. If the independent auditors decide that the work performed by the internal auditors may have a bearing on their own procedures, they should consider the internal auditors': A. Competence and objectivity. B. Efficiency and experience. C. Independence and review skills. D. Training and supervisory skills.

A. Competence and objectivity.

20. The definition of internal control developed by the Committee of Sponsoring Organizations (COSO) includes controls related to the reliability of financial reporting, the effectiveness and efficiency of operations, and: A. Compliance with applicable laws and regulations. B. Effectiveness of prevention of fraudulent occurrences. C. Safeguarding of entity equity. D. Incorporation of ethical business practice standards.

A. Compliance with applicable laws and regulations.

54. A situation in which the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect material misstatements on a timely basis is referred to as a: A. Control deficiency. B. Material weakness. C. Reportable condition. D. Significant deficiency.

A. Control deficiency.

37. Which of the following is least likely to be considered a risk assessment procedure relating to internal control? A. Counting marketable securities at year-end. B. Inquiries of client personnel. C. Inspecting documents and reports. D. Observing the application of specific controls.

A. Counting marketable securities at year-end.

45. The report of a service auditor may provide assurance on whether: controls implemented: operating efectiveness A. Option A B. Option B C. Option C D. Option D

A. Option A

76. When performing an audit of internal control under PCAOB requirements, auditors evaluate control: Design Effectiveness/ Operating Effectiveness A. Option A yy B. Option B yn C. Option C ny D. Option D nn

A. Option A yy

36. Which of the following is an advantage of describing internal control through the use of a standardized questionnaire? A. Questionnaires highlight weaknesses in the system. B. Questionnaires are more flexible than other methods of describing internal control. C. Questionnaires usually identify situations in which internal control weaknesses are compensated for by other strengths in the system. D. Questionnaires provide a clearer and more specific portrayal of a client's system than other methods of describing internal control.

A. Questionnaires highlight weaknesses in the system.

23. Which of the following is not ordinarily considered a factor indicative of increased financial reporting risk when an auditor is considering a client's risk assessment policies? A. Salaried sales personnel. B. Implementation of a new information system. C. Rapid growth of the organization. D. Corporate restructuring.

A. Salaried sales personnel.

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31, 20X0. By this procedure, the auditor would be most likely to learn of which of the following?

An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.

To determine that sales transactions have been recorded in the proper accounting period, the auditors perform a cutoff review. Which of the following best describes the overall approach used when performing a cutoff review?

Analyze transactions occurring within a few days before and after year end.

. Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement? A. Lack of understanding of the potential client's internal auditors' computer-assisted audit techniques. B. Management's disregard for internal control. C. The existence of related party transactions. D. Management's attempt to meet earnings per share growth rate goals.

A successor auditor has accepted an engagement that was previously performed by a predecessor auditor and, prior to accepting the engagement, has communicated with the predecessor. When the successor believes that the predecessor has performed satisfactory previous audits, which of the following is correct? A. A second communication is required and must include details of previous audits. B. Ordinarily the successor auditors may be able to accept the opening balances of the current year with a minimum of verification work. C. Absent ongoing litigation, a predecessor must provide all working papers requested by the predecessor. D. The client should be informed of the need to perform a detailed audit of all opening balances.

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of: A. Accuracy. B. Completeness. C. Control. D. Existence.

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity, should: A. Engage financial experts familiar with the nature of the business entity. B. Obtain a knowledge of matters that relate to the nature of the entity's business. C. Refer a substantial portion of the audit to another CPA who will act as the principal auditor. D. First inform management that an unqualified opinion cannot be issued.

Auditors must assess fraud risk on every audit and respond to the risks that are identified. Which of the following is not a procedure required to further address the fraud risk of management override of internal control? A. Reviewing accounting estimates for biases. B. Examining physical controls over assets. C. Evaluating the business rationale for significant unusual transactions. D. Examining journal entries and other adjustments for evidence of fraud.

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts? A. Purchase returns and allowances. B. Allowance for doubtful accounts. C. Common stock. D. Noncontrolling interest of a subsidiary purchased during the year.

Preliminary arrangements agreed to by the auditors and the client should be reduced to writing by the auditors. The best place to set forth these arrangements is in: A. A memorandum to be placed in the permanent section of the auditing working papers. B. An engagement letter. C. A client representation letter. D. A confirmation letter attached to the constructive services letter.

The auditors' understanding established with a client should be established through a(an) A. Oral communication with the client. B. Written communication with the client. C. Written or oral communication with the client. D. Completely detailed audit plan.

When planning an audit, an auditor should: A. Consider whether the extent of substantive procedures may be reduced based on the results of the internal control questionnaire. B. Make preliminary judgments about materiality levels for audit purposes. C. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them. D. Prepare a preliminary draft of the management representation letter.

Which of the following is least likely to be required on an audit? A. Evaluate the business rationale for significant, unusual transactions. B. Make a legal determination of whether fraud has occurred. C. Review accounting estimates for biases. D. Test appropriateness of journal entries and adjustments.

Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting? A. Low turnover of senior management. B. Extreme degree of competition within the industry. C. Capital structure including various operating subsidiaries. D. Sales goals in excess of any of the preceding three years.

Which of the following statements is accurate about "fraud risk factors" considered when conducting an audit? A. Factors whose presence indicates that fraud exists. B. Factors whose presence often have been observed in circumstances where frauds have occurred. C. Factors whose presence will require modification to planned audit procedures. D. Factors obtained during the audit which lead to required communications with the audit committee.

Which of the following statements is correct regarding the auditor's determination of materiality? A. The planning level of materiality should normally be the larger of the amount considered for the balance sheet versus the income statement. B. The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts. C. Auditors may use various rules of thumb to arrive at an evaluation level of materiality, but not for determining the planning level of materiality. D. The amount used for the planning should equal that used for evaluation.

The auditors use a bank cutoff statement to compare: A) Deposits in transit on the year-end cash general ledger account to deposits in the cash receipts journal. B) Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. C) Deposits listed on the cutoff statement to disbursements in the cash disbursements journal. D) Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank statement.

B) Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

Which of the following is a frequent control over cash disbursements? A) Checks should be signed by the controller and at least one other employee of the company. B) Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations. C) Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation. D) Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement.

B) Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.

Kiting would least likely be detected by: A) Analyzing details of large cash deposits around year-end. B) Comparing customer remittance advices with recorded disbursements in the cash disbursements journal. C) Preparing a four-column bank reconciliation for all major cash accounts. D) Preparing a schedule of interbank transfers by using the client's records and bank statements around year-end.

B) Comparing customer remittance advices with recorded disbursements in the cash disbursements journal.

A practical and effective audit procedure for the detection of lapping is: A) Preparing an interbank transfer schedule. B) Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank. C) Tracing recorded cash receipts to postings in customers' ledger cards. D) Preparing a proof of cash.

B) Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank.

B) Kiting.

An auditor may obtain information on the December 31 month-end balance per bank in which of the following? Dec 31 Bank Statement Schedule of Bank (Cash) Transfer A) Yes Yes B) Yes No C) No Yes D) Yes No A) Option A B) Option B C) Option C D) Option D

B) Option B

In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to miscellaneous revenue. Select the most effective method for detecting this type of error. A) Foot the cash receipts journal for October. B) Send a bank confirmation as of year-end. C) Prepare a bank reconciliation as of year-end. D) Prepare a bank transfer schedule as of year-end.

B) Send a bank confirmation as of year-end.

To provide assurance that each voucher is submitted and paid only once, the auditors 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.

B) Stamped "paid" by the check signer. The auditors will determine whether each voucher is stamped "paid" by the check signer to avoid a situation in which supporting documents are used a second time to elicit a second payment

The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except: A) Date due 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.

Which of the following is not a control that generally is established over cash receipts? A) To prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel. B) To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks. C) To insure accuracy of the accounts receivable records, the records should be reconciled monthly to the accounts receivable controlling account. D) To prevent theft of cash, receipts should be deposited daily.

B) To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks.

Which of the following cash transfers is most likely to result in a misstatement of cash at December 31, 19X7? Bank Transfer Schedule Disbursement Receipt Recorded Paid by Recorded Paid by in books bank in books bank A) 12/31/X7 1/4/X8 12/31/X7 12/31/X7 B) 1/4/X8 1/5/X8 12/31/X7 1/4/X8 C) 12/31/X7 1/5/X8 12/31/X7 1/4/X8 D) 1/4/X8 1/11/X8 1/4/X8 1/4/X8 A) Transfer A B) Transfer B C) Transfer C D) Transfer D

B) Transfer B

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: A) Board of Directors. B) Treasurer. C) Controller. D) Executive Committee.

B) Treasurer.

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that: A) Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. B) Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. C) The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. D) Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

B) Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

The best way to verify the amounts of dividend revenue received during the year is: A) Recomputation. B) Verification by reference to dividend record books. C) Confirmation with dividend-paying companies. D) Examination of cash disbursements records.

B) Verification by reference to dividend record books. Comparing the recorded amount of dividend revenue with dividend record books (published by investment advisory services) provides evidence of the amount of dividend revenue that should have been received during the year. It is virtually impossible to confirm the receipt of dividends with the company paying those dividends.

Internal control over cash receipts is weakened when an employee who receives customer mail receipts also: A) maintains a petty cash fund. B) records credits to individual accounts receivable. C) prepares bank deposit slips for all mail receipts. D) prepares initial cash receipts records.

B) records credits to individual accounts receivable.

The least crucial element of internal control over cash is: A) separation of cash record keeping from custody of cash. B) separation of cash receipts from preparing deposits. C) canceling the supporting documents for disbursements. D) preparation of the monthly bank reconciliation.

B) separation of cash receipts from preparing deposits.

43. Which of the following is correct with respect to control deficiencies discovered during an audit? A. Auditors must communicate and recommend corrections relating to all material weaknesses in internal control to management. B. All material weaknesses in internal control should be reported to the audit committee. C. All such matters must be communicated to the audit committee and regulatory agencies. D. All control deficiencies are also significant deficiencies.

B. All material weaknesses in internal control should be reported to the audit committee.

34. Which of the following is not a responsibility that should be assigned to a company's internal audit department? A. Evaluating internal control. B. Approving disbursements. C. Reporting on the effectiveness of operating segments. D. Investigating potential merger candidates.

B. Approving disbursements.

24. The Sarbanes-Oxley Act of 2002 requires that the audit committee: A. Annually reassess control risk using information from the CPA firm. B. Be directly responsible for the appointment, compensation and oversight of the work of the CPA firm. C. Require that the company's CPA firm rotate the partner in charge of the audit. D. Review the level of management compensation.

B. Be directly responsible for the appointment, compensation and oversight of the work of the CPA firm.

17. This organization developed a set of criteria that provide management with a basis to evaluate controls not only over financial reporting, but also over the effectiveness and efficiency of operations and compliance with laws and regulations: A. Foreign Corrupt Practices Corporation. B. Committee of Sponsoring Organizations. C. Cohen Commission. D. Financial Accounting Standards Board.

B. Committee of Sponsoring Organizations.

5. Which of the following is least likely to be evidence of operating effectiveness of controls? A. Cancelled supporting documents. B. Confirmations of accounts receivable. C. Records documenting usage of computer programs. D. Signatures on authorization forms.

B. Confirmations of accounts receivable.

21. Which statement is correct concerning the relevance of various types of controls to a financial statement audit? A. An auditor may ordinarily ignore the consideration of controls when a substantive audit approach is used. B. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant. C. Controls over safeguarding assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant. D. All controls are ordinarily relevant to an audit.

B. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant.

29. During financial statement audits, the auditors' consideration of their clients' internal control is integral to both assess the risk of material misstatement and to: A. Assess inherent risk. B. Design further audit procedures. C. Assess compliance with the Foreign Corrupt Practices Act. D. Provide a reasonable basis for an opinion on compliance with applicable laws.

B. Design further audit procedures.

25. When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed level of control risk will: A. Be less than the preliminary assessed level of control risk. B. Equal the preliminary assessed level of control risk. C. Equal the actual control risk. D. Be less than the actual control risk.

B. Equal the preliminary assessed level of control risk.

58. Controls are not designed to provide assurance that: A. Transactions are executed in accordance with management's authorization. B. Fraud will be eliminated. C. Access to assets is permitted only in accordance with management's authorization. D. The recorded accountability for assets is compared with the existing assets at reasonable intervals.

B. Fraud will be eliminated.

66. 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.

B. Human judgment in the decision making process.

59. The scope of substantive procedures as compared to the scope of tests of controls generally vary: A. In a parallel manner. B. Inversely. C. Directly. D. Equally.

B. Inversely.

14. The effectiveness of controls is not generally tested by: A. Inspection of documents and reports. B. Performance of analytical procedures. C. Observation of the application of accounting policies and procedures. D. Inquiries of appropriate client personnel.

B. Performance of analytical procedures.

47. After considering the client's internal control the auditors have concluded that it is well designed and is functioning as anticipated. Under these circumstances the auditors would most likely: A. Cease to perform further substantive procedures. B. Reduce substantive procedures in areas where the internal control was found to be effective. C. Increase the extent of anticipated analytical procedures. D. Perform all tests of controls to the extent outlined in the preplanned audit program.

B. Reduce substantive procedures in areas where the internal control was found to be effective.

22. Which of the following is not a component of the control environment? A. Integrity and ethical values. B. Risk assessment. C. Commitment to competence. D. Organizational structure.

B. Risk assessment.

73. The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United States: A. All companies. B. SEC registrants. C. Only those companies included in the Fortune 500. D. All nonpublic companies.

B. SEC registrants.

56. Well-designed internal control that is functioning effectively is most likely to detect a fraud arising from: A. The fraudulent action of several employees. B. The fraudulent action of an individual employee. C. Informal deviations from the official organization chart. D. Management fraud.

B. The fraudulent action of an individual employee.

39. Which of the following is not a factor that is considered a part of the client's overall control environment? A. The organizational structure. B. The information system. C. Management philosophy and operating style. D. Board of directors.

B. The information system.

60. Which of the following is least likely to be a factor that might indicate to an auditor that an identified risk of misstatement requires special audit consideration? A. Complex calculations are involved. B. The rate of technological change is moderate in the industry. C. The potential for fraud seems high. D. Various subjective methods of application of a key accounting policy exist.

B. The rate of technological change is moderate in the industry.

49. The independent auditors might consider the procedures performed by the internal auditors because: A. They are employees whose work must be reviewed during substantive testing. B. They are employees whose work might affect the independent auditors' work. C. Their work impacts upon the cost/benefit tradeoff in evaluating inherent limitations. D. Their degree of independence may be inferred by the nature of their work.

B. They are employees whose work might affect the independent auditors' work.

15. On financial statement audits, it is required that the auditors obtain an understanding of internal control, including: A. Its operating effectiveness. B. Whether it has been implemented (placed in operation). C. Performing tests of controls for all material controls. D. Its ability to provide reasonable assurance.

B. Whether it has been implemented (placed in operation).

Determining that receivables are presented at net-realizable value is most directly related to which management assertion? A. Existence. B. Rights. C. Valuation. D. Presentation and disclosure.

In using the information on the statement of cash flows while obtaining an understanding of a profitable, growing company, which of the following would ordinarily be least surprising to an auditor? A. Decreases in accounts payable. B. Decreases in accounts receivable. C. Negative cash flows from investing. D. Negative operating cash flows.

The auditors who physically examine securities should insist that a client representative be present in order to: A) Detect fraudulent securities. B) Lend authority to the auditors' directives. C) Acknowledge the receipt of securities returned. D) Coordinate the return of securities to the proper locations.

C) Acknowledge the receipt of securities returned. Because of the liquidity of many securities, the auditor should insist that a client representative be present in order to acknowledge the receipt of securities returned. In the event of subsequent "disappearance" of a security the auditor will not be a suspect.

You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to: A) Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. B) Coordinate the count of cash with the cutoff of accounts payable. C) Coordinate the count of cash with the count of marketable securities and other negotiable assets. D) Count the cash immediately upon the return of the confirmation letters from the financial institution.

C) Coordinate the count of cash with the count of marketable securities and other negotiable assets. Unless all negotiable assets are verified at one time, an opportunity exists for a dishonest officer or employee to conceal a shortage by transferring it from one asset category to another a step ahead of the auditors. For example, marketable securities could be pledged as collateral for a loan. The cash thus obtained could be included with other cash being counted by the auditors. After the cash count, the cash derived from the securities could be removed and used to redeem the pledged securities which would then be available for counting by the auditors. Of course, this type of manipulation could hardly be carried on unless there were weaknesses in internal control. Answer (1) is incorrect because counting cash in advance of the balance sheet date does not relate to kiting. Answer (2) is not persuasive because accounts payable can not be substituted for cash as can negotiable assets. Answer (4) is not correct because there is no particular significance to the amount of cash on hand on the day the bank confirmation letters happen to be returned.

The auditor's count of the client's cash should be coordinated to coincide with the: A) Consideration of the internal controls with respect to cash. B) Close of business on the balance sheet date. C) Count of investment securities. D) Count of inventories.

C) Count of investment securities.

Which of the following is not a control over cash disbursements? A) Disbursements should be made by check. B) A check protecting machine should be used. C) Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse. D) Voided checks should be defaced and filed with paid checks.

C) Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse.

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting? A) Review composition of authenticated deposit slips. B) Review subsequent bank statements and canceled checks received directly from the banks. C) Prepare a schedule of bank transfers. D) Prepare year-end bank reconciliations.

C) Prepare a schedule of bank transfers.

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? A) The cashier prepares the daily deposit. B) The cashier makes the daily deposit at a local bank. C) The cashier posts the receipts to the accounts receivable subsidiary ledger. D) The cashier endorses the checks.

C) The cashier posts the receipts to the accounts receivable subsidiary ledger.

Which of the following is not one of the auditors' primary objectives in an examination of investments in securities? A) To determine whether securities are the property of the client. B) To determine whether securities actually exist. C) To determine whether all securities are in proper, secure, files at year-end. D) To determine whether securities are properly classified on the balance sheet.

C) To determine whether all securities are in proper, secure, files at year-end.

As compared to manual processing, electronic processing of cash transactions generally makes kiting: A) impossible to accomplish. B) easier to accomplish. C) more difficult to accomplish. D) neither easier, nor more difficult to accomplish.

C) more difficult to accomplish.

A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the: B) cashier. C) internal auditors. C) treasurer. D) chief accountant.

C) treasurer.

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: A) controller. B) executive committee. C) treasurer. D) board of directors.

C) treasurer.

The auditors who are engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: A) detect lapping. B) detect kiting. C) verify reconciling items on the client's bank reconciliation. D) verify the cash balance reported on the standard financial institution confirmation form.

C) verify reconciling items on the client's bank reconciliation.

27. The provisions of the Foreign Corrupt Practices Act apply to: A. All U.S. corporations. B. All U.S. corporations that engage in foreign operations. C. All corporations that must file under the Securities Exchange Act of 1934. D. All U.S. partnerships and corporations.

C. All corporations that must file under the Securities Exchange Act of 1934.

51. The auditors who become aware of an internal control significant deficiency are required to communicate this to the: A. Client's legal counsel. B. Compensation committee. C. Audit committee. D. Internal auditors.

C. Audit committee.

55. To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to the: A. Financial vice-president. B. Corporate controller. C. Audit committee. D. Corporate stockholders.

C. Audit committee.

1. Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee? A. Management's failure to renegotiate unfavorable long-term purchase commitments. B. Recurring operating losses that may indicate going concern problems. C. Evidence of a lack of objectivity by those responsible for accounting decisions. D. Management's current plans to reduce its ownership equity in the entity.

C. Evidence of a lack of objectivity by those responsible for accounting decisions.

42. The major components of internal control include all of the following, except: A. Risk assessment. B. The control environment. C. Internal auditing. D. Control activities.

C. Internal auditing.

74. An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses financial statements and: A. Compliance with laws. B. Internal control over asset safeguarding. C. Internal control over financial reporting. D. Suitable criteria.

C. Internal control over financial reporting.

4. After obtaining an understanding of internal control and arriving at a preliminary assessed level of control risk, an auditor decided to perform tests of controls. The auditor most likely decided that: A. Additional evidence to support a reduction in the assessed level of control risk is not available. B. An increase in the assessed level of control risk is justified for certain financial statement assertions. C. It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures. D. There were many internal control deficiencies that would allow misstatements to enter the accounting system.

C. It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures.

63. In the consideration of internal control, the auditor is basically concerned that it provides reasonable assurance that: A. Management can not override the system. B. Operational efficiency has been achieved in accordance with management plans. C. Misstatements have been prevented or detected. D. Controls have not been circumvented by collusion.

C. Misstatements have been prevented or detected.

38. Which of the following is least likely to be considered a risk assessment procedure? A. Analytical procedures. B. Inspection of documents. C. Observation of the counting of inventory. D. Observation of the performance of certain accounting procedures.

C. Observation of the counting of inventory.

77. When performing an internal control audit under PCAOB requirements, one or more material weaknesses in internal control that exist at year-end may result in what type of report(s):Qualified Adverse A. Option A yy B. Option B yn C. Option C ny D. Option D nn

C. Option C ny

2. In assessing the objectivity of a client's internal auditors, the CPA would be most likely to consider internal auditor: A. Education levels. B. Experience. C. Organizational status within the company. D. Training and supervisory skills.

C. Organizational status within the company.

31. Which of the following is not a primary procedure auditors use to obtain sufficient knowledge about the design of the relevant controls and to determine whether they have been implemented (placed in operation)? A. Previous experience with the entity. B. Inquiries of appropriate management personnel. C. Performance of substantive procedures. D. Inspection of document and records.

C. Performance of substantive procedures.

53. At least what level of probability of a material misstatement is required for a control deficiency to be considered a material weakness? A. More than remote. B. Probable. C. Reasonable possibility. D. Sufficient.

C. Reasonable possibility.

33. For effective internal control, which of the following functions should not be assigned to the company's accounting department? A. Reconciling accounting records with existing assets. B. Recording financial transactions. C. Signing payroll checks. D. Preparing financial reports.

C. Signing payroll checks.

Recording of sales made in the subsequent period.

Comparing recorded sales several days before and after the balance sheet date with shipping documents.

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices?

Completeness.

Which of the following statements regarding the audit of negotiable notes receivable is correct?

Confirmation in writing from the holder of the note is considered an acceptable alternative to inspection.

Recording fictitious accounts receivable.

Confirming a sample of accounts receivable.

A predecessor auditor is required to attempt to initiate communication with the successor auditor: Prior to the successor's Acceptance of the Engagement/ Subsequent to the successor's acceptance of the engagement. Option A: Yes/Yes Option B: Yes/No Option C: No/Yes Option D: No/No A. Option A B. Option B C. Option C D. Option D

A successor auditor is required to attempt communication with the predecessor auditor prior to A. Performing test of controls. B. Testing beginning balances for the current year. C. Making a proposal for the audit engagement. D. Accepting the engagement.

Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the: A. Adequacy of the preplanned audit program. B. Ability to establish consistency in application of accounting principles between years. C. Apparent scope limitation. D. Integrity of management.

The auditors will not ordinarily initiate discussion with the audit committee concerning the: A. Extent to which the work of internal auditors will influence the scope of the examination. B. Extent to which change in the company's organization will influence the scope of the examination. C. Details of potential problems which the auditors believe might cause a qualified opinion. D. Details of the procedures which the auditors intend to apply.

The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as: A. Account risk. B. Control risk. C. Detection risk. D. Inherent risk.

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting? A. Several members of management have recently purchased additional shares of the entity's stock. B. Several members of the board of directors have recently sold shares of the entity's stock. C. The entity distributes financial forecasts to financial analysts that predict conservative operating results. D. Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

The auditors should insist that a representative of the client be present during the physical examination of securities in order to: A) Lend authority of the auditor's directives. B) Detect forged securities. C) Coordinate the return of all securities to proper locations. D) Acknowledge the receipt of securities returned.

D) Acknowledge the receipt of securities returned.

In a manufacturing company which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date? A) Confirmation from the broker. B) Inspection of year-end brokers' statements. C) Vouching all changes during the year to brokers' advises and statements. D) Examination of paid checks issued in payment of securities purchased.

D) Examination of paid checks issued in payment of securities purchased.

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except: A) Cutoff bank statement. B) Year-end bank statement. C) Bank confirmation. D) General ledger.

D) General ledger.

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: A) Cutoff bank statement. B) Year-end bank statement. C) Bank confirmation. D) General ledger.

D) General ledger. The general ledger will not have information on the balance per bank. The cutoff bank statement, year-end bank statement and bank confirmation will all include information on the balance per bank.

In testing controls over cash disbursements, the auditors 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.

D) Is responsible for mailing the checks. When checks are signed they should not be returned to the accounting department. This control is used so as to avoid a situation in which the accounts payable department fabricates documents, and then collects the checks. Not returning the checks makes it more difficult for this sort of fraud in that the perpetrator must also establish a "safe" address for the check to be mailed to. Answer (1) is incorrect because control is stronger if individuals who are otherwise independent of the cash function prepare and review the monthly bank reconciliation. Answer (2) is incorrect because, as discussed, the checks should not be returned to accounts payable. Answer (3) is incorrect because the individual signing the checks needs access to the supporting documents so he or she can determine whether the expenditure is proper.

Which of the following is correct concerning "window dressing" for cash? A) A segregation of duties within the cash function effectively eliminates its occurrence. B) It generally involves manipulation of inventory. C) It is illegal, and an audit is designed to provide reasonable assurance of its detection. D) Many forms of it require no action by the auditors.

D) Many forms of it require no action by the auditors.

Your client left the cash receipts journal open after year-end for an extra day and included January 1 cash receipts in the 12/31/XX totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the year XX financial statements? A) Sales are understated. B) Accounts receivable are understated. C) Inventory is overstated. D) Net income is overstated.

D) Net income is overstated.

The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that: A) Recorded cash disbursement transactions are properly authorized. B) Proper cash purchase discounts have been recorded. C) Cash disbursements are for goods and services actually received. D) No discrepancies exist between the data on the checks and the data in the journal.

D) No discrepancies exist between the data on the checks and the data in the journal.

Which of the following is not a control that generally is established over cash transactions? A) Separating cash handling from record keeping. B) Centralizing the receipt of cash. C) Depositing each day's receipts intact. D) Obtaining a receipt for every disbursement.

D) Obtaining a receipt for every disbursement.

A company's decision to use the fair value option for valuation of marketable securities is most likely to affect which of the following assertions the most? A) Completeness. B) Existence. C) Fairness. D) Presentation and Disclosure.

D) Presentation and Disclosure.

Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? A) Cash confirmation. B) Bank reconciliation. C) Evaluation of ratio of cash to current liabilities. D) Proof of cash.

D) Proof of cash.

In order to avoid the misappropriation of company-owned financial investments, which of the following is the best course of action that can be taken by the management of a company with a large portfolio of financial investments? A) Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. B) Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. C) Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. D) Require that the safekeeping function for securities be assigned to a securities broker who will act as a custodial agent.

D) Require that the safekeeping function for securities be assigned to a securities broker who will act as a custodial agent.

Internal control over marketable securities is enhanced when: A) Securities are held by the cashier. B) Securities are registered in the name of the custodian. C) Detailed records of securities are maintained by the custodian of the securities. D) Securities are held under joint control of two or more officials.

D) Securities are held under joint control of two or more officials.

Which of the following is not confirmed on the standard form used for cash balances at financial institutions? A) Cash checking account balances. B) Cash savings account balances. C) Loans payable. D) Securities held for the client by the financial institution.

D) Securities held for the client by the financial institution.

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the best evidence on operating effectiveness? A) Select and examine receiving reports and test whether the related canceled checks are dated no earlier than the receiving reports. B) Select and examine receiving reports and test whether the related canceled checks are dated no later than the receiving reports. C) Select and examine canceled checks and test whether the related receiving reports are dated no earlier than the checks. D) Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.

D) Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.

72. Which of the following would be least likely to be included in an auditor's tests of controls? A. Inspection. B. Observation. C. Inquiry. D. Analytical procedures.

D. Analytical procedures.

3. In a financial statement audit performed following AICPA Professional Standards, how frequently must an auditor test operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely upon in the current year? A. Monthly. B. Each audit. C. At least every second audit. D. At least every third audit.

D. At least every third audit.

6. Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? A. Checklist. B. Flowchart. C. Questionnaire. D. Confirmation.

D. Confirmation.

57. The program flowcharting symbol representing a decision is a: A. Triangle. B. Circle. C. Rectangle. D. Diamond.

D. Diamond.

16. A significant deficiency: A. Differs from a material weakness in that it involves internal control over operations rather than internal control over financial reporting. B. Involves an amount of discovered misstatements greater than the amount used as the planning measure of materiality. C. Is identical to a material weakness except that it need not be communicated to those responsible for oversight of the company's financial reporting. D. Is less severe than a material weakness.

D. Is less severe than a material weakness.

52. A material weakness involves an amount that could result in a misstatement that is A. Smaller than inconsequential. B. Larger than inconsequential. C. Tolerable. D. Material.

D. Material.

10. A client's internal control appears strong, but the CPA has elected not to perform any tests of controls. The planned assessed level of control risk is at what level? A. Zero. B. Low. C. Moderate. D. Maximum.

D. Maximum.

78. When performing an internal control audit under PCAOB standards, one or more material weaknesses in internal control that exist at year-end may result in what type of report(s): Qualified Disclaimer A. Option A yy B. Option B yn C. Option C ny D. Option D nn

D. Option D nn

67. 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.

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

32. A control deficiency that is less severe than a material weakness, but important enough to merit attention by those responsible for oversight of the company's financial reporting is referred to as a(n): A. Control deficiency. B. Inherent limitation. C. Reportable deficiency. D. Significant deficiency.

D. Significant deficiency.

Which of the following is not among the criteria that ordinarily exist for revenue to be recognized?

Delivery has occurred or is scheduled to occur in the near future.

A client has $100,000 on deposit at year-end and owes the bank $250,000 on a note payable. The borrowing agreement calls for the client to maintain a minimum (compensating) balance of $40,000 on deposit during the life of the bank loan. On the balance sheet, the asset cash should be stated at $60,000, the excess of the deposit over the compensating balance. True False

False

A compensating balance agreement always requires that cash be reclassified as a noncurrent asset. True False

False

A proof of cash is an audit procedure that is performed on almost every engagement. True False

False

An audit plan includes a detailed listing of the audit procedures to be performed in the verification of items in the financial statements. True False

False

An improper bank reconciliation designed to conceal a cash shortage is more likely to overstate than understate the amount of outstanding checks. True False

False

Analytical procedures are seldom used for planning an audit engagement because they are substantive procedures. True False

False

Audit committees should be made up of the most qualified directors regardless of whether they are part of management of the company. True False

False

Auditors normally verify the amount of dividends earned on the client's security investments by writing directly to the companies which paid the dividends. True False

False

Auditors should never count a cash fund with the custodian present because the custodian might be able to influence the count. True False

False

Cash should be deposited weekly so it can be counted several times before being sent to the bank. True False

False

Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end. True False

False

For investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the fair value of the investments. True False

False

Good internal control over financial investments requires that the treasurer obtain certificates for all securities and keep them in the company safe. True False

False

In relation to its materiality, the audit of cash requires little audit time. True False

False

Lapping of accounts receivable by an employee is not possible when there is adequate segregation of duties with respect to cash disbursements. True False

False

Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily. True False

False

Marketable equity securities should be valued at cost. True False

False

Preliminary arrangements with clients should be set forth in the management letter. True False

False

Signed checks should be returned to the cash disbursements clerk for mailing. True False

False

The audit working paper known as a "proof of cash" is a means of proving that checks paid by the bank during the test period were not in excess of authorized cash receipts during that same test period. True False

False

The auditors should count small petty cash funds at year-end to make sure that balance is not understated on the financial statements. True False

False

The auditors' tests of controls are designed to substantiate the fairness of specific financial statement accounts. True False

False

The inspection of securities on hand should be coordinated with the verification of inventories because both involve counting and inspection and can conveniently be combined. True False

False

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable?

Have customers send payments directly to the company's depository bank.

Which of the following would most likely be detected by an auditor's review of the client's sales cutoff?

Inflated sales for the year.

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales?

Recording sales when the customer is likely to return the goods.

Failing to inform the auditors of pledged accounts receivable.

Reviewing standard confirmations from financial institutions.

Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely:

Send positive confirmation requests.

To determine that all sales have been recorded, the auditors would select a sample of transactions from the:

Shipping documents file.

Which of the following is an effective control over accounts receivable?

The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records.

Which of the following is an example of misappropriation of assets relating to sales?

Theft of cash register sales.

Which of the following audit procedures is most effective in testing credit sales for understatement?

Trace sample of initial sales slips through summaries to recorded general ledger sales.

Failing to record all sales transactions.

Tracing a sample of shipping documents to recorded sales transactions.

A cutoff bank statement provides assurance to the auditors that all checks outstanding at year-end were included in the list of outstanding checks in the year-end bank reconciliation. True False

True

A derivative is a financial instrument that derives its value from another financial instrument, an underlying asset, or indices. True False

True

A salesperson who uses a cash register to record over-the-counter sales should, at the end of each work day, turn over to a supervisor the cash register tape and a corresponding amount of cash. True False

True

An employee who prepares checks and submits them with supporting documents to the official authorized to sign checks should not be responsible for mailing the signed checks. True False

True

At least a portion of the auditors' consideration of internal control usually is performed at an interim date rather than at the balance sheet date. True False

True

Confirmation requests should be mailed by the auditors in envelopes bearing the auditors' return address. True False

True

Designating the cashier to be custodian of the petty cash fund is more acceptable from the standpoint of internal control than making the cashier responsible for maintenance of accounts receivable records. True False

True

The "lapping" of cash receipts is most likely to occur when one person has both responsibility for record keeping for cash receipts and custody of cash. True False

True

The completeness of recording of assets is generally verified by tracing from the source documents to the recorded entry. True False

True

The practice of "kiting" as a means of overstating cash is possible only if the client maintains two or more bank accounts. True False

True

The standard financial institution confirmation request used by the auditors is a means of obtaining documentary evidence about both assets and liabilities. True False

True

Verification of cash and other liquid assets on the same date may prevent substitution of one form of asset for another. True False

True

Vouching the acquisition of assets is an audit procedure that is often performed to establish the valuation of the assets. True False

True

Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable:

Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence.

As a part of the planning process, the auditors often prepare an audit plan, an audit program, and a time budget. a. Describe an audit plan and explain its purpose. b. Describe an audit program and explain its purpose. c. Describe a time budget and explain its purpose.

a. The audit plan is an overview of the engagement, outlining the nature and characteristics of the client and its environment and the overall audit strategy. The audit plan documents the major considerations in planning the engagement. b. The audit program is a detailed listing of audit procedures to be performed in the engagement. It is a tool for scheduling and controlling the work. c. The time budget includes an estimate of the time required for each audit task. It serves as a basis for the fee estimate, controls the audit work, and may be used to evaluate performance by the audit staff.

Engagement letters are used by most auditors in performing professional services. a. Describe the purpose of an engagement letter. b. List four items that are normally included in an engagement letter.

a. The purpose of an engagement letter is to establish a written contract between the auditors and the client. Thus, the letter tends to prevent misunderstandings between those two parties. b. Items that are normally included in an engagement letter include (only four required): • Name of the entity and statements to be examined. • Scope of services. • Description of responsibility for detecting fraud. • Obligations of the client's staff to prepare schedules. • Fee or method of determining fee. • Provision for client's acceptance signature. • Management's obligation to conclude about the materiality of misstatements not recorded.

For effective internal control, the billing function should be performed by the:

accounting department.

Accounts receivable that are pledged as collateral for loans should be reclassified as noncurrent assets.

Accounts with zero balances and accounts that have been written off as uncollectible are not confirmed by the auditors.

Credit approval should be obtained after the goods are shipped, but before the related sales invoice is prepared.

Inspection of notes receivable is adequate evidence of the existence of the notes.

Sales can be recorded in the sales journal directly from serially numbered purchase orders, thus eliminating the need for sales invoices to be serially numbered.

Since customers that cannot pay are ordinarily asked not to reply, mailing of confirmations is a test of collectibility of accounts receivable.

The accounts receivable section of the accounting department should open incoming mail and post collections to the customer's accounts.

The auditors should perform alternative auditing procedures on all negative confirmation requests that are not returned.

The best evidence of interest revenue on notes receivable is confirmation with the maker of the note.

When it is "impossible" to confirm accounts receivable, the auditors can never issue an unmodified opinion on the client's financial statements.

When merchandise is shipped, the shipping department completes a document known as a sales order.

There is a presumption that auditors will confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low.

nd accounts receivable are immaterial, or the use of confirmations would be ineffective.

The auditors have not been able to confirm a large account receivable, but they have satisfied themselves as to the proper amount of the receivable by means of alternative auditing procedures. The auditors' report on the financial statements should include:

neither a comment on the use of alternative auditing procedures nor an opinion qualification.

The confirmation of the client's trade accounts receivable is a means of obtaining evidential matter and is specifically considered to be a generally accepted auditing:

procedure

Smith Manufacturing Company's accounts receivable clerk has a friend who is also Smith's customer. The accounts receivable clerk, on occasion, has issued fictitious credit memorandums to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to:

require receiving reports to support all credit memorandums before they are approved.

A note receivable from an officer is considered a related party receivable.

Accounts receivable should be valued at their net realizable value.

Receivables judged to be uncollectible should be written off.

The auditors should mail confirmation requests, and the enclosed envelope for the customer's reply should be addressed to the auditors' office.

The auditors will generally confirm a proportionately larger sample of accounts with large balances than accounts with small balances.

The use of the positive (as opposed to the negative) form of receivables confirmation is indicated when:

there is reason to believe that a substantial number of accounts may be in dispute.

When a company has changed auditors, according to the Professional Standards: A. The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management. B. The predecessor must respond fully to all inquiries made by the successor auditor. C. The successor must discuss with the predecessor matters bearing on the engagement prior to accepting the engagement. D. The successor may choose not to attempt any communication with the predecessor auditor.

Which of the following is (are) considered a further audit procedure(s) that may be designed after assessing the risks of material misstatement? Substantive Tests of Details/ Analytical Procedures Option A: Yes Yes Option B: Yes No Option C: No Yes Option D: No No A. Option A B. Option B C. Option C D. Option D

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

Which of the following is correct concerning requirements about auditor communications about fraud? A. Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved. B. All fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. C. Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor through use of an "emphasis of a matter" paragraph added to the audit report. D. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.

Which of the following is least likely to be included in an auditor's inquiry of management while obtaining information to identify the risks of material misstatement due to fraud? A. Are all financial reporting operations at one location? B. Does it have knowledge of fraud or suspect fraud? C. Does it have programs to mitigate fraud risks? D. Has it reported to the audit committee the nature of the company's internal control?

Which of the following is not one of the assertions made by management about an account balance? A. Relevance. B. Existence. C. Valuation. D. Rights and obligations.

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? A) A bank lockbox system. B) Prenumbered remittance advices. C) Monthly bank reconciliations. D) Daily deposit of cash receipts.

A) A bank lockbox system. A bank lock box is a post office box controlled by a company's bank at which cash remittances from customers are received. With such a system the bank collects the remittances, immediately credits the cash to the company's bank account, and forwards the remittance advices to the company. Use of a bank lockbox system makes it extremely difficult for employees to divert cash receipts since those cash receipts are sent directly to the post office box controlled by the bank. Answer (2) is incorrect because remittance advices may be prenumbered, but since they come from various customers, they do not have one overall sequence for the client. Answers (3) and (4), bank reconciliations, and daily deposit of cash receipts, are controls, but controls that ordinarily are not as effective as a bank lockbox system.

Which of the following is the best audit procedure for the detection of lapping? A) Comparison of postings of cash receipts to accounts with the details of cash deposits. B) Confirmation of the cash balance. C) Reconciliation of the cash account balances. D) Preparing a proof of cash.

A) Comparison of postings of cash receipts to accounts with the details of cash deposits.

When a client engages in transactions involving derivatives, the auditor should: A) Develop an understanding of the economic substance of each derivative. B) Confirm with the client's broker whether the derivatives are for trading purposes. C) Notify the audit committee about the risks involved in derivative transactions. D) Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative.

A) Develop an understanding of the economic substance of each derivative.

Which of the following procedures would the auditors most likely perform to test controls relating to management'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 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.

A) Observe the consistency of the employees' use of cash registers and tapes. The use of cash registers and tapes helps assure that all sales of a retail store are recorded. Answer (2) is incorrect because the cash has already been recorded. Answer (3) is incorrect because the procedure only deals with recorded deposits and, therefore, the completeness assertion is not addressed as directly as in answer (1). Answer (4) is incorrect because one would not expect the cash balance in the general ledger to agree with the bank confirmation request due to items in transit and checks outstanding.

69. An auditor's purpose for performing tests of controls is to provide reasonable assurance that: A. Controls are operating effectively. B. The risk that the auditor may unknowingly fail to modify the opinion on the financial statements is minimized. C. Transactions are executed in accordance with management's authorization and access to assets is limited by a segregation of functions. D. Transactions are recorded as necessary to permit the preparation of the financial statements in conformity with generally accepted accounting principles.

A. Controls are operating effectively.

44. A service auditor's report on a service center should include a(n) A. Detailed description of the service center's internal control. B. Statement that the user of the report may assess control risk at the minimum level. C. Indication that no assurance is provided. D. Opinion on the operating effectiveness of the service center's internal control.

A. Detailed description of the service center's internal control.

40. Which of the following would be least likely to be considered a benefit of effective internal control? A. Eliminating all employee fraud. B. Restricting access to assets. C. Detecting ineffectiveness. D. Ensuring authorization of transactions.

A. Eliminating all employee fraud.

65. In assessing the competence of a client's internal auditor, an independent auditor most likely would consider the A. Internal auditor's compliance with professional internal auditing standards. B. Client's policies that limit the internal auditor's access to management salary data. C. Evidence supporting a further reduction in the assessed level of control risk. D. Results of ratio analysis that may identify unusual transactions and events.

A. Internal auditor's compliance with professional internal auditing standards.

48. The use of fidelity bonds protects a company from embezzlement loses and also: A. Minimizes the possibility of employing persons with dubious records in positions of trust. B. Reduces the company's need to obtain expensive business interruption insurance. C. Allows the company to substitute the fidelity bonds for various parts of internal control. D. Protects employees who made unintentional errors from possible monetary damages resulting from such errors.

A. Minimizes the possibility of employing persons with dubious records in positions of trust.

9. Which of the following must the auditor communicate to the audit committee? A. Significant deficiencies and material weaknesses. B. Only significant deficiencies. C. Only material weaknesses. D. Neither significant deficiencies nor material weaknesses.

A. Significant deficiencies and material weaknesses.

11. Which of the following would be least likely to be regarded as a test of a control? A. Tests of the additions to property by physical inspection. B. Comparisons of the signatures on cancelled checks to the authorized check signer list. C. Tests of signatures on purchase orders. D. Recalculation of payroll deductions.

A. Tests of the additions to property by physical inspection.

41. After documenting the client's prescribed internal control, the auditors will often perform a walk-through of each transaction cycle. An objective of a walk-through is to: A. Verify that the controls have been implemented (placed in operation). B. Replace tests of controls. C. Evaluate the major strengths and weaknesses in the client's internal control. D. Identify weaknesses to be communicated to management in the management letter.

A. Verify that the controls have been implemented (placed in operation).

To test the existence assertion for recorded receivables, the auditors would select a sample from the:

Accounts receivable subsidiary ledger.

There is a presumption that auditors will confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low.

And accounts receivable are immaterial, or the use of confirmations would be ineffective.

Which of the following would provide the most assurance concerning the valuation of accounts receivable?

Assess the allowance for uncollectible accounts for reasonableness

Which of the following would provide the most assurance concerning the valuation of accounts receivable?

Assess the allowance for uncollectible accounts for reasonableness.

The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes is: A. The auditors' preliminary estimate of the largest amount of misstatement that would be material to any one of the client's financial statements. B. The auditors' preliminary estimate of the smallest amount of misstatement that would be material to any one of the client's financial statements. C. The auditors' preliminary estimate of the amount of misstatement that would be material to the client's balance sheet. D. An amount that cannot be quantitatively stated since it depends on the nature of the item.

The first standard of field work recognizes that early appointment of the independent auditors has many advantages to the auditors and the client. Which of the following advantages is least likely to occur as a result of early appointment of the auditors? A. The auditors will be able to plan the audit work so that it may be done expeditiously. B. The auditors will be able to complete substantive procedures prior to year-end. C. The auditors will be able to better plan for the observation of the physical inventories. D. The auditors will be able to perform the examination more efficiently and will be finished at an early date after the year-end.

Which of the following is not an example of a likely adjustment in the auditors' overall audit approach when significant risk is found to exist? A. Apply increased professional skepticism about material transactions. B. Increase the assessed level of detection risk. C. Assign personnel with particular skill to areas of high risk. D. Obtain increased evidence about the appropriateness of management's selection of accounting principles.

Which statement is correct relating to a potential successor auditor's responsibility for communicating with the predecessor auditors in connection with a prospective new audit client? A. The successor auditors have no responsibility to contact the predecessor auditors. B. The successor auditors should obtain permission from the prospective client to contact the predecessor auditors. C. The successor auditors should contact the predecessors regardless of whether the prospective client authorizes contact. D. The successor auditors need not contact the predecessors if the successors are aware of all available relevant facts.

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally not be able to detect: A) An unrecorded deposit made at the bank at the end of the month. B) A second payment of an account payable which had already been paid in full two months earlier. C) An unrecorded check cashed during that month. D) A bank charge during the month not recorded on the books.

B) A second payment of an account payable which had already been paid in full two months earlier.

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department? A) Comparing the vendor's invoice with the receiving report. B) Canceling supporting documentation after payment. C) Verifying the mathematical accuracy of the vendor's invoice. D) Preparing the check for signature by an authorized person.

B) Canceling supporting documentation after payment.

On receiving the bank cutoff statement, the auditor should trace: A) Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. B) Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation. C) Deposits listed on the cutoff statement to deposits in the cash receipts journal. D) Checks dated subsequent to year end to the outstanding checks listed on the year-end bank reconciliation.

B) Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation.

71. Tests of controls are most likely to be performed when: A. Controls seem weak and must be properly documented. B. Inadequate substantive procedures exist to restrict audit risk to an acceptable level. C. The auditor wishes to assess control risk at the maximum. D. The client's control environment appears weak.

B. Inadequate substantive procedures

19. Which statement is correct concerning the definition of internal control developed by the Committee of Sponsoring Organizations (COSO)? A. Its applicability is largely limited to internal auditing applications. B. It is recognized in the Statements on Auditing Standards. C. It emphasizes the effectiveness and efficiency of operations over the reliability of financial reporting. D. It suggests that it is important to view internal control as an end product as contrasted to a process or means to obtain an end.

B. It is recognized in the Statements on Auditing Standards.

12. Which of the following is not considered one of the five major components of internal control? A. Risk assessment. B. Segregation of duties. C. Control activities. D. Monitoring.

B. Segregation of duties.

68. Which of the following is intended to detect deviations from prescribed controls? A. Substantive procedures specified by a standardized audit program. B. Tests of controls designed specifically for the client. C. Analytical procedures as set forth in an industry audit guide. D. Computerized analytical procedures tailored for the configuration of the computer equipment in use.

B. Tests of controls designed specifically for the client.

50. In the consideration of internal control, the operating effectiveness of controls is tested by: A. Flowcharts verification. B. Tests of controls. C. Substantive procedures. D. Decision tables.

B. Tests of controls.

30. Which of the following comes closest to outlining the auditors' responsibility for considering internal control in all financial statement audits? A. An understanding of the control environment, information and communication, risk assessment and monitoring is necessary; an understanding of control activities is only necessary for areas in which the auditor is performing tests of controls. B. The auditor must obtain an understanding of each of the five internal control components sufficient to assess the risks of material misstatement for the audit. C. When tests of controls have been performed, control risk must be assessed at a level less than the maximum. D. An understanding of the control environment is necessary, but no understanding of the other components is necessary unless control risk is to be assessed at a level less than the maximum.

B. The auditor must obtain an understanding of each of the five internal control components sufficient to assess the risks of material misstatement for the audit.

The auditors are planning an audit engagement for a new client in a business that is unfamiliar to the auditors. Which of the following would be the most useful source of information for the auditors during the preliminary planning stage when they are trying to obtain a general understanding of audit problems that might be encountered? A. Client manuals of accounts and charts of accounts. B. AICPA Industry Audit Guides. C. Prior-year working papers of the predecessor auditors. D. Latest annual and interim financial statements issued by the client.

The risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as: A. Account risk. B. Control risk. C. Detection risk. D. Inherent risk.

To test for unsupported entries in the journals, the direction of audit testing should be to the: A. Ledger entries. B. Journal entries. C. Original source documents. D. Financial statements.

Which of the following conditions identified during the audit increases the risk of employee fraud? A. Large amounts of cash in the bank. B. Existence of a mandatory vacation policy for employees performing key functions. C. Inventory items of small size, but high value. D. Presence of reconciling items on a client prepared year-end proof of cash.

Which of the following is not a general objective for the audit of asset accounts? A. Establishing existence of assets. B. Establishing proper valuation of assets. C. Establishing proper liabilities relating to assets. D. Establishing the completeness of assets.

Which of the following is not a required source of information for the auditors' assessment of fraud risk? A. Discussion among audit team members. B. Fraud risk factors. C. Results of tests of controls. D. Inquiry of management and others.

Which of the following is not an assertion that is made in the financial statements by management concerning each major account balance? A. Completeness. B. Rights and obligations. C. Legality. D. Valuation.

Which of the following procedures is not performed as a part of planning an audit engagement? A. Reviewing the working papers of the prior year. B. Performing analytical procedures. C. Confirmation of all major accounts. D. Designing an audit program.

Which of the following would be least likely to be considered an audit planning procedure? A. Use an engagement letter. B. Develop the overall audit strategy C. Perform the risk assessment. D. Develop the audit plan

While assessing the risks of material misstatement auditors identify risks, relate risk to what could go wrong, consider the magnitude of risks and A. Assess the risk of misstatements due to illegal acts. B. Consider the complexity of the transactions involved. C. Consider the likelihood that the risks could result in material misstatements. D. Determine materiality levels.

Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction in the books. Which of the following is most likely to be effective in detecting this fraud? A) Bank confirmation. B) Bank transfer schedule prepared using only the cash receipts and cash disbursements journals. C) Comparison of bank cutoff statement to the cash receipts and disbursements records. D) Receivable confirmation.

C) Comparison of bank cutoff statement to the cash receipts and disbursements records.

Which of the following statements is not correct? A) Cash is important to the audit process because of its vulnerability to misappropriation, despite the fact that the balance at the balance sheet date may be immaterial. B) Payroll cash account balances kept on an imprest basis are more easily controlled than others not so kept. C) Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date. D) Reviewing interbank transfers is important to the auditor because of the possibility that the client may be engaged in kiting.

C) Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date.

The financial management of a company should take steps to see that company's investment securities are protected. Which of the following is not a step that is designed to protect investment securities? A) Securities should be registered in the name of the owner. B) Access to securities should be vested in more than one person. C) Custody of securities should be assigned to persons who have the accounting responsibility for securities. D) Securities should be properly controlled physically in order to prevent unauthorized usage.

C) Custody of securities should be assigned to persons who have the accounting responsibility for securities.

46. When a client uses a service organization to process certain transactions (e.g., its employee benefit plan), the auditor is least likely to obtain an understanding relating to these transactions by A. Contacting the service organization to obtain specific information. B. Visiting the service organization and performing procedures. C. Sending a confirmation request to the service organization D. Obtaining and reading a type 1 or type 2 report from the service organization.

C. Sending a confirmation request to the service organization

61. Which of the following audit tests would be regarded as a test of a control? A. Tests of the specific items making up the balance in a given general ledger account. B. Tests confirming receivables. C. Tests of the signatures on canceled checks to board of director's authorizations. D. Tests of the additions to property, plant, and equipment by physical inspection.

C. Tests of the signatures on canceled checks to board of director's authorizations.

75. A report on internal control performed in accordance with PCAOB Standard No. 5 includes an opinion on internal control for: A. The entire year. B. The prior quarter. C. The "as of date." D. The end of each quarter.

C. The "as of date."

13. Which of the following statements is correct concerning the understanding of internal control needed by auditors? A. The auditors must understand the information system, not the accounting system. B. The auditors must understand monitoring and all preliminary accounting controls. C. The auditors must have a sufficient understanding to assess the risks of material misstatement. D. The auditors must understand the control environment, risk assessment, and all control activities.

C. The auditors must have a sufficient understanding to assess the risks of material misstatement.

35. Which of the following is true about the auditors' consideration of internal control in a financial statement audit? A. The auditors must assess control risk at a level lower than the maximum. B. The auditors must prepare a flowchart description of internal control for their working papers. C. The auditors must obtain an understanding of the steps in processing major types of transactions. D. The auditors must perform tests of controls.

C. The auditors must obtain an understanding of the steps in processing major types of transactions.

An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of: A. Tests of transactions and balances. B. An assessment of internal control. C. Specialized audit programs. D. Analytical procedures.

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's: A. Awareness of the consistency in the application of generally accepted accounting principles between accounting periods. B. Evaluation of all matters of continuing accounting significance. C. Opinion of any subsequent events occurring since the predecessor's audit report was issued. D. Understanding as to the reasons for the change of auditors.

Which of the following factors most likely would cause a CPA to not accept a new audit engagement? A. The prospective client has fired its prior auditor. B. The CPA lacks a thorough understanding of the prospective client's operations and industry. C. The CPA is unable to review the predecessor auditor's working papers. D. The prospective client is unwilling to make financial records available to the CPA.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? A. Large amounts of liquid assets that are easily convertible into cash. B. Low growth and profitability as compared to other entity's in the same industry. C. Financial management's participation in the initial selection of accounting principles. D. An overly complex organizational structure involving unusual lines of authority.

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted? A. There are significant related party transactions that management claims occurred in the ordinary course of business. B. Internal control activities requiring the segregation of duties are subject to management override. C. Management continues to employ an inefficient system of information technology to record financial transactions. D. It is unlikely that sufficient evidence is available to support an opinion on the financial statements.

Which of the following is least likely to render material a quantitatively small misstatement material? A. Affects the registrant's compliance with regulatory requirements. B. Masks a change in earnings or other trends. C. Arises from an item not capable of precise measurement. D. The Transaction involves a related party.

Which of the following is most likely to be an overall response to fraud risks identified in an audit? A. Only use certified public accountants on the engagement. B. Place increased emphasis on the audit of objective transactions rather than subjective transactions. C. Supervise members of the audit team less closely and rely more upon judgment. D. Use less predictable audit procedures.

Which of the following is not used by auditors to establish the completeness of recorded assets? A. Assessing control risk. B. Tracing from source documents to entries in the accounting records. C. Performing analytical procedures. D. Vouching transactions.

Which of the following situations would most likely require special audit planning by the auditors? A. Some items of factory and office equipment do not bear identification numbers. B. Depreciation methods used on the client's tax return differ from those used on the books. C. Assets costing less than $500 are expensed even though the expected life exceeds one year. D. Inventory is comprised of precious stones.

With respect to the auditor's planning of a year-end audit, which of the following statements is always true? A. An engagement should not be accepted after the fiscal year-end. B. An inventory count must be observed at the balance sheet date. C. The client's audit committee should not be told of any specific audit procedures which will be performed. D. It is an acceptable practice to carry out parts of the examination at interim dates.

Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? A) Tracing recorded dividend income to cash receipts records and validated deposit slips. B) Utilizing analytical techniques and statistical sampling. C) Comparing recorded dividends with amounts appearing on federal information form 1099s. D) Comparing recorded dividends with a standard financial reporting service's record of dividends.

D) Comparing recorded dividends with a standard financial reporting service's record of dividends.

In order to guard against the misappropriation of company-owned marketable securities, which of the following is the best course of action that can be taken by a company with a large portfolio of marketable securities? A) Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. B) Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. C) Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. D) Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

D) Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent. Having the securities held in safekeeping by a bank or stockbroker provides strong internal control because they are not available to employees responsible for maintaining the accounting records of the securities. Thus the separation of the custody of securities from the accounting function is complete.

Properly designed internal control will permit the same employee to: A) Receive and deposit checks, and also approve write-offs of customer accounts. B) Approve vouchers for payment, and also receive and deposit cash. C) Reconcile the bank statements, and also receive and deposit cash. D) Sign checks, and also cancel supporting documents.

D) Sign checks, and also cancel supporting documents.

An auditor's analytical procedures have revealed that the accounts receivable of a client have doubled since the end of the prior year. However, the allowance for doubtful accounts, as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor? A) Credit standards were liberalized in the current year. B) Twice as many accounts receivable were written off in the prior year as compared to this year. C) A greater percentage of accounts were currently listed in the "more than 90 days overdue" category than in the prior year. D) The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

D) The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

70. Of the following statements about internal control, which one is not valid? A. No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. B. Transactions must be properly authorized before such transactions are processed. C. Because of the cost/benefit relationship, a client may apply control procedures on a test basis. D. Control activities reasonably insure that collusion among employees cannot occur.

D. Control activities reasonably insure that collusion among employees cannot occur.

64. Which of the following is least likely to be considered an appropriate response relating to risks the auditors identify at the financial statement level? A. Assign more experienced staff. B. Incorporate additional elements of unpredictability in the selection of audit procedures. C. Increase the scope of auditor procedures. D. Emphasize the need to remain neutral, rather than to exercise professional skepticism.

D. Emphasize the need to remain neutral, rather than to exercise professional skepticism.

7. Tests of controls do not ordinarily address: A. By whom a control was applied. B. How a control was applied. C. The consistency with which a control was applied. D. The cost effectiveness of the way a control was applied.

D. The cost effectiveness of the way a control was applied.

26. Under which circumstance is it likely that the extent of substantive procedures will be expanded beyond that anticipated in the audit plan? A. The auditors have determined that controls have been implemented (placed in operation) but, in accordance with the audit plan, have performed no tests of controls. B. Certain controls do not leave a trail of documentary evidence. C. Deviation rates were greater than zero and approached anticipated levels. D. The operating effectiveness of certain controls was found to be less than expected, although no material misstatements were identified.

D. The operating effectiveness of certain controls was found to be less than expected, although no material misstatements were identified.

28. If the auditors do not perform tests of controls for certain assertions: A. They have performed a substandard audit. B. They are not required to communicate significant deficiencies relating to those accounts to management and the board of directors. C. They must issue a qualified opinion. D. They must assess control risk at the maximum level for those assertions.

D. They must assess control risk at the maximum level for those assertions.

18. Which of the following is most likely to be considered a risk assessment procedure relating to internal control? A. Confirm accounts receivable. B. Perform a test of a control relating to payroll. C. Take test counts of the year-end inventory. D. Trace a transaction through the information system relevant to financial reporting.

D. Trace a transaction through the information system relevant to financial reporting.

8. Which is most likely when the assessed level of control risk increases? A. Change from performing substantive procedures at year-end to an interim date. B. Perform substantive procedures directed inside the entity rather than tests directed toward parties outside the entity. C. Use the maximum number of dual purpose tests. D. Use larger sample sizes for substantive procedures.

D. Use larger sample sizes for substantive procedures.

An official of the client company took securities from the safe deposit box and sold them to obtain cash to meet a personal financial crisis. Even with proper internal control, if the official purchased identical securities before the year-end and placed them in the safe deposit box, this improper "borrowing" would probably go undetected during the annual audit. True False

False

Confirming a bank account establishes existence but not rights to the cash balance. True False

False

An auditor may obtain information on the December 31 month-end balance per bank in which of the following? Standard Conformation Form Jan 1-10 Cutoff Statement A) Yes Yes B) Yes No C) No Yes D) Yes No A) Option A B) Option B C) Option C D) Option D

Option A

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues?

Over-recorded sales due to a lack of control over the sales entry function.

The substantive approach to an audit is appropriate for many small businesses. True False

True

Many auditors take an approach to assessing the risk of material misstatement by beginning with an assessment of business risks. a. Define business risks. b. Why have auditors found it effective to take the approach of assessing business risks? c. Identify a business risk and explain how it might affect the auditor's audit procedures.

a. Business risks are those that threaten management's ability to achieve the organization's objectives. b. Auditors have found this approach effective because significant business risks often create related risks of material misstatement (inherent risks) that the auditors should address in designing their audit procedures. c. Students may provide a number of examples. The textbook provides the following: Assume that the auditors have identified as a significant business risk and audit risk that sales personnel, informally or through written side agreements, may be modifying the terms of contracts with customers which may affect the amount of revenue that should be recognized. The auditors must design tests that are focused on determining whether such modifications of terms have been made, perhaps by obtaining tailored confirmations from customers about the existence of such side agreements.

Auditors perform various tasks in planning an audit engagement. Provide an overall description of how each task is performed and its purpose. a. Obtain an understanding of the client's business. b. Assess audit risk and materiality for the engagement. c. Assess fraud risk. d. Assess the risk of material misstatement of assertions about financial statement accounts and classes of transactions.

a. The auditors obtain an understanding of the client's business through procedures such as inquiry of client personnel, observing client operations, studying AICPA Audit and Accounting Guides and Industry Risk Alerts and other industry publications, and reviewing prior annual reports, SEC filings, tax returns, and interim financial statements. An understanding of the client's business is necessary to the evaluation of the appropriateness of the client's transactions, accounting principles used, and the estimates and assumptions embodied in the financial statements. In addition, it provides part of the information to assess the risks of material misstatement. b. Materiality for planning purposes is the auditors' preliminary estimate of the smallest amount of misstatement that would affect the decisions of reasonable users of the financial statements. The auditors use judgment to determine the amount of planning materiality, usually based on some rule of thumb. Audit risk is the possibility that the auditors will fail to modify the opinion on financial statements that are materially misstated. The auditors assess this risk by considering characteristics of management, operations, and the engagement. Audit risk and materiality determine the overall scope of the engagement. The lower the amount of planning materiality, the more extensive the scope of the audit. The higher the risk of misstatement of the financial statements, the more extensive the scope of the audit. c. The auditors are required to assess fraud risk on every audit. This assessment is based on information derived from (1) the discussion among the audit staff about the risk of fraud, (2) inquiries of management, the audit committee, internal auditors and others, (3) the results of planning analytical procedures, and consideration of fraud risk factors. If the auditors identify fraud risks they may respond with (1) an overall response to the way the audit is conducted, or (2) a response specifically to address the identified risk. In all audits they must include responses to further address the risk of management override of internal control. d. The auditors assess the risk of material misstatement (composed of inherent risk and control risk) for each significant assertion about financial statement accounts and classes of assertions by considering the information about the client and its environment including internal control, and the nature of the account. These risk assessments are used to determine the nature, timing, and extent of the substantive procedures that will reduce the detection risk to the appropriate level.

The person maintaining the accounts receivable subsidiary ledger should reconcile the subsidiary ledger to the accounts receivable controlling account at least once a month.

The primary control that prevents the shipping department from making unauthorized shipments of merchandise is the use of serially numbered shipping documents.

Tracing a sample of shipping documents to recorded sales is designed to test the existence of recorded sales.

The use of serial numbers on shipping documents and sales invoices provides assurance that all goods shipped are billed to customers and recorded as sales.

The auditor examines copies of sales invoices only for the initials of the person responsible for checking the extensions. This is an example of a:

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