Audit Test 3

Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee? a) recurring operating losses that may indicate going concern problems b) management's current plans to reduce its ownership equity in the equity c) management's failure to renegotiate unfavorable long-term purchase commitments d) evidence of a lack of objectivity by those responsible for accounting decisions

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

Which of the following is not considered one of the 5 main components of internal control? a) control activities b) monitoring c) risk assessment d) physical controls

Physical controls

Under which circumstance is it likely that the event of substantive procedures will be expanded beyond that anticipated in the audit plan?

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

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? a) approval of all disbursements by an individual independent of cash receipts b) prenumbered remittance advices c) a bank lockbox system d) monthly bank cutoff statements

A bank lockbox system

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

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.

Acknowledge the receipt of securities returned

The provision of the foreign corrupt practices act that require implementing an internal control system apply to:

All corporations under the jurisdiction of the SEC

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect:

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

By preparing a four-column bank reconciliation (proof of cash) at year-end, an auditor will generally be able to detect:

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

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?

At least every third audit.

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:

Committee of Sponsoring Organizations

The SOX Act of 2002 requires that the audit committee:

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

The auditors use a bank cutoff statement to compare:

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

Kitting would least likely be detected by:

Comparing customer remittance advice with recorded disbursements in cash disbursements journal

A partial and effective audit procedure for the detection of lapping is:

Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicated deposit slips validated by the bank

Anderson embezzled $20,000 from her company's account in Bank X. At year-end, she hid the shortage by making a deposit in December 31 In Bank X, drawn on Bank Y. She has not recorded the transaction on the books. Which of the following is most likely to be effective in detecting this fraud? a) bank transfer schedule prepared using only the cash receipts and cash disbursements journals b) receivable confirmation c) comparison of bank cutoff statement to the cash receipts and disbursements records d) bank confirmation

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

Which of the following is the best audit procedure for the detection of lapping? a) reconciliation of the cash account balances b) confirmation of the cash balance c) comparison of postings of cash receipts to accounts with the details of cash deposits d) preparing a proof of cash

Comparison of postings of cash receipts to accounts with the details of cash deposits

The definition of internal control developed by the Committee of Sponsoring Organizations includes controls related to the reliability of internal and external reporting, the effectiveness and efficiency of operations, and:

Compliance with applicable laws and regulations

Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? a) questionnaire b) flowchart c) confirmation d) check list

Confirmation

Which of the following statements is not correct? a) confirmation of cash should only be performed as of the balance statement date because the auditor expresses and opinion as of that date b) payroll cash account balances kept on an impressive basis are more easily controlled than others not so kept. c) reviewing interbank transfers is important to the auditor because of the possibility that then client may be engaged in kitting d) cash is important to the audit process because of the vulnerability to misappropriation, despite the fact that the balance at the balance sheet date may be immaterial

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

Which of the following is least likely to be evidence of operating effectiveness of controls a) cancelled supporting documents b) confirmations of accounts receivables c) signatures on authorization forms d) records documenting usage of computer programs

Confirmations of accounts receivable

Which statement is correct concerning the relevance of various types of controls to a financial statement audit? a) all controls are ordinarily relevant to an audit b) controls over safeguarding assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant c) controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant d) an auditor may ordinarily ignore the consideration of controls when a substantive audit approach is used

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

The auditors count of the clients cash should be coordinated to coincide with the:

Count of investment securities.

Internal control over marketable securities is enhanced when:

Custody of securities is maintained by a stockbroker or bank

An auditor may obtain information on the December 31 month-end balance per bank in which of the following?

December 31 bank statement

During financial statement audits, the auditors' consideration of their clients' internal control is integral to both assess the risk of material misstatement and to:

Design further audit procedures.

Which of the following is not a control over cash disbursements? a) documents supporting the payment of disbursement should be canceled by the person preparing the check to prevent reuse b) disbursements should be made by check c) voided checks should be defaced and filed with paid checks d) a check protecting machine should be used

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

When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed level of control risk will:

Equal the preliminary assessed level of control risk.

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?

Examination of paid checks issued in payment of securities purchases

A significant deficiency:

Is less severe than a material weakness.

Which statement is correct concerning the definition of internal control developed by the Committee of Sponsoring Organizations?

It is a process effected by individuals

Which of the following is correct concerning window dressing for cash? a) it may increase but not falsify cash position b) it generally involves manipulation of inventory c) a segregation of duties within the cash function effectively eliminates its occurrence. d) it is illegal, and an audit is designed to provide reasonable assurance of its detection.

It may increase but not falisy cash position

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:

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

Anderson embezzled $20,000 from her company's account in Bank X. At year end, she hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. She has not recorded the transaction on the books. This is an example of:

Kitting

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.

Net income is overstated.

The effectiveness of controls is not generally tested by: a) observation of the application of accounting policies and procedures b) performance of analytical procedures c) inquiries of appropriate client personnel. d) inspection of documents and reports

Performance of analytical procedures

Which of the following is not a control that generally is established over cash transactions? a) depositing each days receipts intact b) centralizing the receipt of cash c) separating cash handling from record keeping d) obtaining a receipt for every disbursement

Obtaining a receipt for every disbursement

In assessing the objectivity of a client's internal auditors, the CPA would be most likely to consider internal auditors:

Organizational status within the company

Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year end bank reconciliation?

Receive a cutoff statement directly from the client's bank.

Which of the following is not a component of the control environment? a) organizational structure b) commitment to attracting, developing, and retaining competent employees c) integrity and ethical values d) risk assessment

Risk assessment

Which of the following is not ordinarily considered a factor indicative of increased financial reporting risk when an auditor is considering a clients risk assessment policies? a) corporate restructuring b) rapid growth of the organization c) implementation of a new information system d) salaried sales personnel

Salaries sales personnel

Which of the following is not confirmed on the standard confirmation form used for cash balances at financial institutions? a) cash checking account balances b) cash savings account balance c) loans payable d) securities held for the client by the financial institution

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.

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

In November, 2 months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with debit to cash and a credit to interest revenue. The most effective methods for detecting this type of error is:

Send a bank confirmation as of year end

Which of the following is not a universal rule for achieving internal control over cash?

Separate record keeping from accounting for cash to the extent possible.

Which of the following must the auditor communicate to the audit committee? a) significant deficiencies and material weaknesses b) neither significant deficiencies nor material weakness c) only material weaknesses d) only significant deficiencies

Significant deficiencies and material weaknesses

An auditor may obtain information on the December 31 month-end balance per bank in which of the following?

Standard confirmation form and January 1-10 cutoff statement

Which of the following is least likely to be regarded as a test of a control? a) recalculation of payroll deductions b) tests of the additions to property by physical inspection c) comparisons of the signatures on cancelled checks to the authorized check signer list d) tests of signatures on purchase orders

Tests of the additions to property by physical inspection

Which of the following comes closest to outlining the auditors responsibility for considering internal control in all financial statement audits.

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.

Which of the following statements is correct concerning the understanding of internal control needed by auditors? a) the auditors must have a sufficient understanding to assess the risks of material misstatement b) the auditors must understand the information system, not the accounting system c) the auditors must understand the control environment, risk assessment, and all control activities d) the auditors must understand monitoring and all preliminary accounting controls

The auditors must have a sufficient understanding to assess the risk of material misstatement

Test of controls do not ordinarily address:

The cost effectiveness of the way a control was applied

The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following expect: a) the interest rate of a direct liability b) the principle amount paid on a directly liability c) description of collateral for a direct liability d) date due of a direct liability

The principle amount paid on a direct liability

If the auditors do not perform tests of controls for certain assertions:

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

Which of the following is not a control that generally is established over cash receipts? a) to prevent theft of cash, receipts should be deposited daily b) to prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel c) to ensure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks d) to ensure accuracy of the accounts receivable records, the records should be reconciled monthly to the a/r controlling account

To ensure accurate posting, the accounts receivable clerk should post the customers' receipts from customers checks

Which of the following is most likely to be considered a risk assessment procedure relating to internal control? a) take test counts of the year end inventory b) confirm accounts receivable c) perform a test of a control relating to payroll d) trace a transaction through the information system relevant to financial reporting

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

Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements?

Understatement of outstanding checks

Which is most likely when the assessed level of control risk increases? a) use larger sample sizes for substantive procedures b) perform substantive procedures directed inside the entity rather than tests directed towards parties outside entity c) change from performing substantive procedures at year end to an interim date d) use the maximum number of dual purpose tests

Use larger sample sizes for substantive procedures

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to:

Verify reconciling items on the clients bank reconciliations

On financial statement audits, it is required that the auditors obtain an understanding of internal control, including:

Whether it has been implemented (placed in operation).

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?

maximum