Audit - Exam 2
An auditor obtains sufficient understanding by performing risk assessment procedures to evaluate the design of controls relevant to an audit to:
-identify types of potential misstatements. -consider factors that affect the risks of material misstatement. -design tests of controls, when applicable, and substantive procedures.
Which of the following statements concerning audit evidence is correct? -Appropriate evidence supporting management's assertions should be convincing rather than merely persuasive. -Effective internal control contributes little to the reliability of the evidence created within the entity. -The cost of obtaining evidence is an important consideration to an auditor in deciding what evidence should be obtained. -A client's accounting data cannot by itself be considered sufficient appropriate audit evidence to support the financial statements.
A client's accounting data cannot by itself be considered sufficient appropriate audit evidence to support the financial statements.
What procedures would yield the most appropriate evidence?
A recalculation of bad debt expense
What situation most likely could lead to an embezzlement scheme?
Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement.
What is the best way to compensate for the lack of adequate segregation of duties in a small organization?
Allowing for greater management oversight of incompatible activities
Which of the following procedures is considered a test of controls? -An auditor reviews the entity's check register for unrecorded liabilities. -An auditor evaluates whether a general journal entry was recorded at the proper amount. -An auditor interviews and observes appropriate personnel to determine segregation of duties. -An auditor reviews the audit workpapers to ensure proper sign-off.
An auditor interviews and observes appropriate personnel to determine segregation of duties.
Which presumption does not relate to the appropriateness of audit evidence?
An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost.
What control would an entity most likely use in safeguarding against the loss of marketable securities?
An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities.
What statement is correct regarding internal control?
An inherent limitation to internal control is the fact that controls can be circumvented by management override.
Calculating the gross margin as a percent of sales and comparing it with previous periods is what type of evidence?
Analytic procedures
What procedures would provide the most reliable audit evidence?
Analytical procedures performed by the auditor on the entity's trial balance
According to AU-C 330.03, what term identifies a requirement for audit evidence?
Appropriate
Which activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud?
Approving a summary of hours each employee worked during the pay period
Which internal control procedures is not usually performed in the treasurer's department?
Approving vendors' invoices for payment
What question would an auditor most likely include on an internal control questionnaire for notes payable?
Are direct borrowings on notes payable authorized by the board of directors?
Which type of audit evidence is the most persuasive?
Bank statements obtained from the client
What statement correctly describes the "top-down approach" used during an audit of internal control over financial reporting?
Begin by understanding the overall risks to internal control over financial reporting at the financial statement level.
When testing journal entries, the auditor should focus on journal entries: I. made during the end of a reporting period, as fraudulent entries are made during that time. II. made throughout the reporting period, as material misstatements are made during that time
Both I and II
Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement? I. Financial statement accounts likely to contain a misstatement II. Conditions that require extension of audit tests
Both I and II
When a PCAOB auditing standard indicates that an auditor "could" perform a specific procedure, how should the auditor decide whether and how to perform the procedure?
By exercising professional judgment in the circumstances
The auditor determines that the entity has effective controls and the auditor intends to design substantive procedures based on the effective operation of those controls. As a result, the auditor elects to perform tests of controls to obtain evidence about their operating effectiveness. This often is done for what type of transactions?
Class of transactions that is reasonably uniform, noncomplex, and routinely processed and controlled by the entity's information system
A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows: Clerk 1 - Reviews vendor invoices for proper signature approval Clerk 2 - Enters vendor invoices into the accounting system and verifies payment terms Clerk 3 - Posts entered vendor invoices to the accounts payable ledger for payment and mails checks Treasurer - Reviews the vendor invoices and signs each check Which of the following would indicate a weakness in the company's internal control?
Clerk 3 mails the checks and remittances after they have been signed.
Which of the following types of evidence would an auditor most likely examine to determine whether internal control activities are operating as designed? -Confirmations of receivables verifying account balances -Letters of representation corroborating inventory pricing -Attorney's responses to the auditor's inquiries -Client records documenting the use of EDP programs
Client records documenting the use of EDP programs
Which type of evidence would an auditor most likely examine to determine whether control activities are operating as designed?
Client records documenting the use of EDP programs
What is an inherent limitation of internal controls?
Collusion
Which types of audit evidence generally is the most appropriate?
Confirmation of account information
When planning a review of an audit client's interim financial statements, which of the following procedures should the accountant perform to update the accountant's knowledge about the entity's business and its internal control?
Consider the results of audit procedures performed with respect to the current year's financial statements
Field, CPA, is auditing the financial statements of Miller Mailorder, Inc., (MMI) for the year ended January 31, 20X1. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI's financial statements, and a corresponding list of internal controls that, if properly designed and implemented, could assist MMI in preventing or detecting the errors and fraud. Select the internal control that most likely could assist MMI in preventing or detecting the sending of an invoice for shipped goods and its recording in the sales journal without being posted to any customer account.
Control amounts posted to the accounts receivable ledger are compared with control totals of invoices.
Of the following statements about internal controls, which one is least likely to be correct? -No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. -Transactions must be properly authorized before such transactions are processed -Because of the cost-benefit relationship, a client may apply controls on a select basis -Control procedures ensure that collusion among employees cannot occur.
Control procedures ensure that collusion among employees cannot occur.
Which procedures most likely would give the greatest assurance that securities held as investments are safeguarded?
Custody of investment securities is assigned to an outside agent such as a brokerage house, and access to securities requires the signatures and presence of two designated officials
Field, CPA, is auditing the financial statements of Miller Mailorder, Inc., (MMI) for the year ended January 31, 20X1. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI's financial statements, and a corresponding list of internal controls that, if properly designed and implemented, could assist MMI in preventing or detecting the errors and fraud. Select the internal control that most likely could assist MMI in preventing or detecting the sending of an invoice for shipped goods that is not recorded in the sales journal.
Daily sales summaries are compared with control totals of invoices.
Which of the following ratios is best used to assess a company's ability to meet its long-term debt obligations?
Debt to Equity
Which presumption is correct about the reliability of audit evidence?
Effective internal control provides more assurance about the reliability of audit evidence.
A client that recently installed a new accounts payable system assigned employees a user identification code (UIC) and a separate password. Each UIC is a person's name, and the individual's password is the same as the UIC. Users are not required to change their passwords at initial login, nor do passwords ever expire. Which statement does not reflect a limitation of the client's computer-access control?
Employees are not required to take regular vacations.
Which controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?
Employees involved in the credit-granting function are separated from the sales function.
What is a management control method that most likely could improve management's ability to supervise company activities effectively?
Establishing budgets and forecasts to identify variances from expectations
What type of evidence would provide the highest level of assurance in an audit engagement?
Evidence obtained from independent sources
Auditors must perform tests of controls separately from substantive tests of transactions
False
The Sarbanes-Oxley Act of 2002 requires that all companies issue an internal control report
False
What is an inherent limitation in internal control?
Faulty human judgment
What factors would most likely be considered an inherent limitation to an entity's internal control?
Human judgment in the decision-making process
Which of the following is considered a control environment factor?
Human resources policies and practices
Communication with which of the following will help to obtain sufficient knowledge of the communication component to understand how the entity communicates financial reporting roles, responsibilities, and significant matters pertaining to financial reporting? I. With personnel regarding their roles and responsibilities in the internal control structure II. With personnel about how their activities in the financial reporting system relate to others III. With personnel about how and to whom to report financial reporting exceptions IV. Between management and those charged with governance, as well as third parties such as regulatory authorities
I, II, III, and IV
Management override of controls can occur in unpredictable ways. Due to this fact, the auditor should perform procedures, in addition to the procedures already performed to address identified risks of material misstatements due to fraud, that include which of the following? I. Examining journal entries and other adjustments for evidence of possible material misstatement due to fraud II. Reviewing accounting estimates for biases that could result in material misstatement due to fraud III. Evaluating the business rationale for significant unusual transactions
I, II, and III
In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the: I. operating effectiveness of policies and procedures. II. design of policies and procedures.
II only
Why should an auditor obtain an understanding of control activities relevant to an audit?
Information on control activities can be utilized to determine areas that need attention.
Which of the following inquiries would an accountant most likely make during a review of financial statements?
Inquiries directed toward management regarding the entity's accounting principles and practices and the methods followed in applying them
An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. What type of audit procedures do these actions illustrate?
Inquiry and inspection of records
Which audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?
Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.
What actions should the auditor first take in response to discovering a deviation from the prescribed control procedure?
Make inquiries to understand the potential consequence of the deviation
What would an auditor most likely consider in evaluating the control environment of an audit client?
Management's operating style
Which of the following is a factor in the control environment?
Management's philosophy and operating style
Which of the following elements should the auditor not consider in evaluating the entity's control environment?
Measurements and review of the entity's financial performance
Field, CPA, is auditing the financial statements of Miller Mailorder, Inc., (MMI) for the year ended January 31, 20X1. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI's financial statements, and a corresponding list of internal controls that, if properly designed and implemented, could assist MMI in preventing or detecting the errors and fraud. Select the internal control that most likely could assist MMI in preventing or detecting the misappropriation of a customer's check.
Monthly statements are mailed to all customers with outstanding balances.
Which of the following is the primary basis used to decide materiality for a for-profit entity?
Net Income
When controls are deemed ineffective and assessed control risk is at the maximum for a private company, which of the following would normally be true?
No emphasis is placed on the controls. Significant substantive testing is completed.
Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonpublic entity?
Observing the safeguards over access to and use of assets and records
At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. What action is the auditor most likely to take?
Obtain additional evidence regarding the valuation of inventory
In addition to descriptions of the nature, timing, and extent of planned risk assessment procedures and planned further audit procedures, which of the following additional pieces of information should be documented in the audit plan?
Other audit procedures to be performed to comply with generally accepted auditing standards
What are considered control environment factors?
Personnel policies and practices
Which types of audit evidence is the least persuasive?
Prenumbered purchase order forms
What types of audit evidence provides the least assurance of reliability?
Prenumbered receiving reports completed by the client's employees
What audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?
Preparation of system flowcharts
In designing systems of internal control, which type of controls are the best to include in the design in order to be fully effective?
Preventative, detective, and corrective controls
Which one of the following is not a general IT control: -Virus protection -Reasonable tests of transactions -Passwords to access -Contingency planning
Reasonable tests of transactions
What procedures would an auditor most likely perform in auditing the statement of cash flows?
Reconcile the amounts included in the statement of cash flows to the other financial statements' balances and amounts
When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor's original invoices have been misplaced. What should the auditor do in response to this situation?
Reevaluate the risk of fraud, and design alternate tests for the related transactions
An audit client has substantial assets held in a trust that is managed by the trust department of a bank. What action by the auditor is the most efficient way to obtain information about the trust department's internal controls?
Rely on the trust department's audit report on internal controls placed in operation and their operating effectiveness.
Initial audit planning involves four matters. Which of the following is not one of these? -Develop an overall audit strategy -request that bank balances be confirmed -Schedule engagement staff and audit specialists -Identify the client's reason for the audit.
Request that bank balances be confirmed
What payroll control activities would most effectively ensure that payment is made only for work performed?
Require employees to have their direct supervisors approve their timecards
n auditor is auditing a mutual fund company that uses a transfer agent to handle accounting for shareholders. What actions by the auditor would be most efficient for obtaining information about the transfer agent's internal controls?
Review reports on internal control placed in operation and its operating effectiveness produced by the agent's own auditor
What procedures should a user auditor include in the audit plan to create the most efficient audit when an audit client uses a service organization for several processes?
Review the service auditor's report on controls placed in operation
What is a component of internal control?
Risk Assessment
Field, CPA, is auditing the financial statements of Miller Mailorder, Inc., (MMI) for the year ended January 31, 20X1. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI's financial statements, and a corresponding list of internal controls that, if properly designed and implemented, could assist MMI in preventing or detecting the errors and fraud. Select the internal control that most likely could assist MMI in preventing invoices from being sent to allies in a fraudulent scheme, and sales from being recorded for fictitious transactions.
Sales invoices are compared with shipping documents and approved customer orders before invoices are mailed.
Which represents an inadequate design of internal controls: -The factory gates are nightly locked to prevent unauthorized entry and access. -The receiving person counts the inventory items received on the loading dock prior to putting the items away. -Securing petty cash or cash on-hand in a small secure metal box that resides on the controller's desk. -The accountant reconciles the AP control account to the detail open invoices.
Securing petty cash or cash on-hand in a small secure metal box that resides on the controller's desk.
Which internal control procedures most likely would deter lapping of collections from customers?
Segregation of duties between receiving cash and posting the accounts receivable ledger
Which computer documentations would an auditor most likely utilize in obtaining an understanding of internal control?
Systems flowcharts
When an auditor plans to rely on controls that have changed since they were last tested, which course of action would be most appropriate?
Test the operating effectiveness of such controls in the current audit
What represents an inherent limitation of internal controls?
The CEO can request a check with no purchase order.
What describes a weakness in accounts payable procedures?
The accounts payable manager issues purchase orders.
Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control? -The auditor should design and apply tests of controls to discover significant deficiencies that could result in material misstatements. -The auditor need not search for significant deficiencies unless management requests an attestation that "no significant deficiencies were noted in the audit." -The auditor should search for significant deficiencies if the auditor expects to assess control risk at below the maximum. -The auditor need not search for significant deficiencies but should document and communicate any significant deficiencies that are discovered.
The auditor need not search for significant deficiencies but should document and communicate any significant deficiencies that are discovered.
When an auditor is to conduct an audit of a service organization, what considerations should the auditor make in the planning stages regarding internal controls of the organization?
The auditor should obtain an understanding of the effect of the user organization upon the service organization.
Which of the following statements concerning audit evidence is correct? -To be appropriate, audit evidence should be either persuasive or relevant, but need not be both. -The auditor should use professional judgment in evaluating the sufficiency and appropriateness of audit evidence. -The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test without modifying the report. -A client's accounting data can be sufficient appropriate audit evidence by itself to support the financial statements.
The auditor should use professional judgment in evaluating the sufficiency and appropriateness of audit evidence.
Which of the following controls should prevent an invoice for the purchase of merchandise from being paid twice?
The check signer reviews and cancels the voucher packets.
Which event occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit?
The chief financial officer waived approvals on all checks to one vendor to expedite payment
If an auditor is obtaining an understanding of an issuer's information and communication component of internal control, which factors should the auditor assess?
The classes of transactions in the issuer's operations that are significant to the issuer's financial statements
A client uses a service organization to process its payroll. What statement is correct regarding the user auditor's use of the service auditor's report on internal controls placed in operation?
The client's auditor can use the service auditor's report as audit evidence for the client's internal controls.
What is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls?
The degree to which information technology is used in the accounting function
In the integrated audit of an issuer, which of the following would not be considered an entity-level control?
The outside auditor's assessment process of internal auditor competence and objectivity
What procedures represents a weakness in internal controls for payroll?
The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department.
A service organization provides processing services for a client's sales orders. What information is relevant when gathering data for the report on the service organization's internal controls?
The service organization's system calculates accounts receivable balances.
What is most relevant when an auditor considers the client's organizational structure in the context of control risk?
The suitability of the client's lines of reporting
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?
The write-off of receivables by personnel who receive cash permits the misappropriation of cash.
Field, CPA, is auditing the financial statements of Miller Mailorder, Inc., (MMI) for the year ended January 31, 20X1. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI's financial statements, and a corresponding list of internal controls that, if properly designed and implemented, could assist MMI in preventing or detecting the errors and fraud. Select the internal control that most likely could assist MMI in preventing or detecting the recording of a credit for the customer's full account balance when the customer's check is for less than the customer's full account balance.
Total amounts posted to the accounts receivable ledger from remittance advices are compared with the validated bank deposit slips.
Field, CPA, is auditing the financial statements of Miller Mailorder, Inc., (MMI) for the year ended January 31, 20X1. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI's financial statements, and a corresponding list of internal controls that, if properly designed and implemented, could assist MMI in preventing or detecting the errors and fraud. Select the internal control that most likely could assist MMI in preventing or detecting when customers' checks are misappropriated after being forwarded to the cashier for deposit.
Total amounts posted to the accounts receivable ledger from remittance advices are compared with the validated bank deposit slips.
Field, CPA, is auditing the financial statements of Miller Mailorder, Inc., (MMI) for the year ended January 31, 20X1. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI's financial statements, and a corresponding list of internal controls that, if properly designed and implemented, could assist MMI in preventing or detecting the errors and fraud. Select the internal control that most likely could prevent or detect when different customer accounts are each credited for the same cash receipt.
Total amounts posted to the accounts receivable ledger from remittance advices are compared with the validated bank deposit slips.
Proper authorization of write-offs of uncollectible accounts should be approved in which department?
Treasurer
A planning memo is required to document details in accordance with GAAS as well as to guide the audit process.
True
The most important element of the COSO framework is the control environment
True
An auditor is evaluating a client's internal controls. Which situation would be the most difficult internal control issue for an auditor to detect?
Two employees, who work in different departments, are circumventing an internal control.
An auditor is concerned about a policy of management override as a limitation of internal control. Which tests would best assess the validity of the auditor's concern?
Verifying that approved spending limits are not exceeded
An auditor who performed analytical procedures that compared current-year financial information to the comparable prior period noted a significant increase in net income. Given this result, which of the following expectations of recorded amounts would be unreasonable?
a decrease in retained earnings
Dunn, CPA, is auditing the financial statements of Taft Co. Taft uses Quick Service Center (QSC) to process its payroll. Price, CPA, is expressing an opinion on a description of the controls placed in operation at QSC regarding the processing of its customers' payroll transactions. Dunn expects to consider the effects of Price's report on the Taft engagement. Price's report should contain:
a description of the scope and nature of Price's procedures.
The permanent file of an auditor's working papers generally would not include:
a working trial balance
In testing the existence assertion for an asset, an auditor ordinarily works from the:
accounting records to the supporting evidence.
If an auditor establishes a relatively high level for materiality, then the auditor will:
accumulate less evidence than if a lower level had been set
After assessing control risk below the maximum level, an auditor desires to seek a further reduction in the assessed level of control risk. At this time, the auditor would consider whether:
additional audit evidence sufficient to support a further reduction is likely to be available.
After obtaining an understanding of the internal control and assessing control risk at maximum, an auditor did not want to perform additional tests of controls. The auditor most likely concluded that the:
additional evidence to support a reduction in control risk was not cost beneficial to obtain.
In an audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure:
affects management's financial statement assertions.
An auditor assesses control risk because it:
affects the level of detection risk that the auditor may accept.
The authority to accept incoming goods in receiving should be based on:
an approved purchase order.
Which of the following is not one of the three primary objectives of effective internal control? -reliability of financial reporting -efficiency and effectiveness of operations -compliance with laws and regulations -assurance of elimination of business risk
assurance of elimination of business risk
Which of the following normally signs the engagement letter for an audit of a public company? -Corporate treasurer -Chief financial officer -Chairman of the board of directors. -Audit committee
audit committees
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the:
authorization of transactions from the custody of related assets.
An auditor most likely would not rely on controls if the payroll department supervisor is responsible for:
authorizing payroll rate changes for all employees.
An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:
collection of receivables
The audit program usually cannot be finalized until the:
consideration of the entity's internal control has been completed.
The overall attitude and awareness of an entity's board of directors concerning the importance of internal control usually is reflected in its:
control environment
Which of the following components of internal control would be considered the foundation for the other components?
control environment
An auditor may decide to perform only substantive procedures for specific assertions because the auditor believes:
control policies and procedures are unlikely to pertain to the assertions.
The average check written by ABC Company for inventory purchases is over $5,000; therefore, the management of ABC Company has decided to require two signatures on their checks for inventory purchases only if the check is in excess of $10,000. This is an example of a reasonable limitation on internal control based on:
cost-benefit considerations in implementing controls.
The objectives of the internal control for a production cycle are to provide assurance that transactions are properly executed and recorded, and that:
custody of work-in-process and of finished goods is properly maintained.
An auditor suspects 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 auditor most likely would compare the:
dates checks are deposited per bank statements with the dates remittance credits are recorded.
When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the:
debit memo
An auditor most likely would introduce test data into a computerized payroll system to test internal controls related to the:
discovery of invalid employee ID numbers.
In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required to:
document the auditor's understanding of the entity's internal control.
The purpose of an engagement letter is to:
document the terms of the engagement in writing to minimize misunderstandings such as audit fee structure and timing of the engagement
When assessing the internal auditor's competence, the independent CPA should obtain information about the
educational background and professional certification of the internal auditors.
For effective internal control, the accounts payable department generally should:
establish the agreement of the vendor's invoice with the receiving report and purchase order.
A written audit plan is required to be prepared by an auditor for:
every audit
In designing a written audit plan, an auditor should establish specific audit objectives that relate primarily to the:
financial statement assertions
In planning an audit, the auditor's knowledge about the design of relevant control activities should be used to:
identify the types of potential misstatements that could occur.
Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been:
implemented
To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including:
inquiry
When the operating effectiveness of a control is not evidenced by written documentation, an auditor should obtain evidence about the control's effectiveness by:
inquiry and other procedures such as observation.
In assessing the competence of a client's internal auditor, an independent auditor most likely would consider the:
internal auditor's compliance with professional internal auditing standards.
The reliance the auditor places on substantive tests in relation to the reliance placed on internal control varies in a relationship that is ordinarily:
inverse
Inherent risk is _______ related to detection risk and _______ related to the amount of audit evidence.
inversely, directly
Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control procedure that provides for:
investigation of variances within a formal budgeting system.
In evaluating controls over cash disbursements, an auditor most likely would determine that the control risk is lower when the person who signs checks also:
is responsible for mailing the checks.
After obtaining an understanding of the entity and its environment and assessing the risk of material misstatement, an auditor decided to perform tests of controls. The auditor most likely decided that:
it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.
The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with:
knowledge necessary for audit planning.
Which of the following procedures would an auditor most likely perform in the planning stage of an audit?
make a preliminary judgment about materiality
Green, CPA, is auditing the financial statements of Ajax Co. Ajax uses the DP Service Center to process its payroll. DP's financial statements are audited by Blue, CPA, who recently issued a report on DP's policies and procedures regarding the processing of other entity's transactions. In considering whether Blue's report is satisfactory for Green's purposes, Green should:
make inquiries concerning Blue's professional reputation.
Management philosophy and operating style most likely would have a significant influence on an entity's control environment when:
management is dominated by one individual.
When obtaining an understanding of an entity's internal control, an auditor should concentrate on the implementation of the procedures because:
management may establish appropriate procedures but not enforce compliance with them.
Internal control consists of five interrelated components except:
materiality
The preliminary judgment about materiality is the _________ amount by which the auditor believes the statements could be misstated and still not affect the decisions of reasonable users.
maximum
Evidence concerning the proper segregation of duties for receiving and depositing cash receipts ordinarily is obtained by:
observing the employees who are performing the control activities.
One of the responsibilities of the auditor in an audit conducted in accordance with generally accepted auditing standards is to:
obtain evidence to support his opinion.
Proper segregation of duties reduces the opportunities to allow persons to be in positions to:
perpetrate and conceal errors and fraud.
The Auditing Standards Board has concluded that analytical procedures are so important that they are required /could be done during:
planning, detail substantive testing and completion phases.
Sound internal control procedures dictate that immediately upon receiving checks from customers by mail, a responsible employee should:
prepare a duplicate listing of checks received.
When assessing the competence of the internal auditors, an independent CPA should obtain information about the:
quality of the internal auditors' working-paper documentation.
Sound internal control procedures dictate that defective merchandise returned by customers should be presented initially to the:
receiving clerk
Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both:
record and conceal fraudulent transactions in the normal course of assigned tasks.
Each of the following types of controls is considered to be an entity-level control, except those:
regarding the company's annual stockholder meeting.
To obtain an understanding of a continuing client's business in planning an audit, an auditor most likely would:
review prior-year working papers and the permanent file for the client.
In obtaining an understanding of an entity's internal controls in a financial statement audit, an auditor is not obligated to:
search for significant deficiencies in the operation of the entity's internal controls.
Internal control is a process, affected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in all of the following categories, except:
segregation of functional responsibilities in asset management.
Mailing disbursement checks and remittance advices should be controlled by the employee who:
signs the checks last.
AU-C 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, acknowledges all limitations of internal control except:
small size of the entity.
When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs:
tests of controls and limited tests of current year property and equipment transactions.
Audit plans should be designed so that:
the audit evidence gathered supports the auditor's conclusions.
Audit programs should be designed so that:
the audit evidence gathered supports the auditor's conclusions.
An auditor should design the written audit plan so that:
the audit procedures selected will achieve specific audit objectives.
The one component of internal control that sets the tone of an organization, influencing the control consciousness of its people and serving as the foundation for all other components of internal control is:
the control environment.
Knowledge of the client's "industry, regulatory, and other factors" includes an understanding of all of the following, except:
the entity's accounting policies and procedures.
Throughout the course of an audit, an auditor may become aware of significant transactions that are outside the normal course of business. It is important that the auditor understand the business rationale for the transaction. In understanding the business rationale, the auditor should not consider:
the personnel that were involved in booking the transaction to the G/L.
The definition of internal control found in AU-C 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, is taken from the definition found in Internal Control—Integrated Framework (the COSO Framework). In the definition, internal control in a business entity is said to be effected by all of the following, except:
the public's perception of the risk associated with the entity.
When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the:
trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.
An auditor obtains knowledge about a new client's business and its industry to:
understand the events and transactions that may have an effect on the client's financial statements.
Preventative controls are:
usually more cost beneficial than detective controls
