AC 432 Exam 2 Homework

An example of a detective control

A requirement to prepare bank reconciliations

The auditors traced a sample of recorded cash receipts to postings in the correct customers' accounts

Accounting and posting

The auditors recalculate the cash listed on the daily deposit for a sample of recorded cash receipts

Accuracy

A transaction-level internal control activity is best described as

An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company

Embezzlement is a type of fraud that involves

An employee misappropriating an employer's money or property entrusted to the employee's control in the employee's normal job

Fraud risk factors are events or conditions that indicate...

An incentive or pressure to perpetrate fraud, an opportunity to carry out the fraud, and an attitude or rationalization that justifies the fraudulent action

In most audits of large entities, control risk assessment contributes to audit efficiency, which means that

Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs

When completing the audit of internal controls for an issuer, AS 2201 requires auditors to test ...

Both operating and design effectiveness

When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on

Both the magnitude of the potential misstatement resulting from the deficiency or the deficiencies and whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure

The auditors traced a sample of daily cash reports to the cash receipts journal

Completeness

An audit team might not use ____ test to test the operating effectiveness of a control

Confirmation of balances

According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to

Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed

The auditors vouched a sample of recorded cash receipts to the deposits in the bank statement

Existence

When performing confirmation of cash balances with a bank, the auditor is primarily gathering evidence related to which financial statement assertion?

Existence

When completing the audit of internal controls for an issuer, the PCAOB requires the audit team to audit internal controls over:

Financial reporting

This arrangement of duties would least likely lead to an embezzlement or theft

Financial vice president received checks made out to suppliers and the supporting invoices, signed the checks, and put them in the mail to payees

This statement is correct with respect to the elements of the "fraud triangle"

Fraud is most common when motive, opportunity, and rationalization all occur together

A material weakness is a situation in which

It is reasonably possible that a material misstatement would not be detected on a timely basis

Test of controls in a GAAS audit are required for

Obtaining evidence about the operating effectiveness of client control activities

Revenues are normally considered to have been earned when

The company has substantially accomplished what it must to be entitled to the benefits

The most important fundamental component of an entity's internal control is

The control environment

An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about

The entity's ability to process and summarize financial data

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of

Valuation and allocation

One of the typical characteristics of management fraud is:

Victimization of investors through the use of materially misleading financial statements

With respect to the concept of materiality, material is...

a matter of professional judgement

Cut off bank statements include activity for the period ... the period being audited

after

Cash confirmations need to be mailed under the control of the ...

auditor

Confirmations do not necessarily mitigate the risk of ...

bad debt

It is important to verify ... of both cash receipts and cash disbursements

cutoff

... communication with debtors is the most conclusive step in verifying accounts receivable

direct

In the audit of accounts receivable, the most important emphasis should be on the

existence assertion

Confirmations are more persuasive than subsequent cash receipts as they help mitigate the risk of ...

lapping

An example of a corrective control

maintaining backups of data

Auditors are often concerned with the ... of cash, as this is where most misstatements occur

overstatement

AR confirmations can be sent electronically or via ...

paper form

For a sample of recorded cash receipts, the auditors compared the date of receipt to the recording date

proper period

Cash reconciliations can be tested via ...

reperformance

Auditing standards do not require auditors of financial statements to:

report all errors and fraud found to the police

An example of a preventative control

segregation of duties

In the audit of cash the auditor obtains a bank cutoff statement primarily to

test the propriety of items appearing on the client's year-end bank reconciliation