Audit test two

Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern? A) "This amount was paid on December 30th." B) "We received this shipment on January 2nd." C) "These goods were returned for credit on November 15th." D) "The balance does not reflect our sales discount for paying by January 5th."

C) "These goods were returned for credit on November 15th."

________ may be used to access computerized receivable files to select and print confirmations.

CAATS

control risk

The probability that the client's internal control activities will fail to prevent or detect material misstatements provided that they enter or would have entered the accounting system

After checks are signed for vendor invoices, why should vouchers be marked "paid" or otherwise mutilated?

To show they have been processed so they cannot be paid again.

embezzlement of defalcation

a type of fraud involving employees or non employees wrongfully taking money or property entrusted to their care

for a sample of recorded sales, determine whether credits was approved

accuracy

The SEC requires all of the following for revenue to be recognized except: A) cash is collected. B) persuasive evidence of an arrangement exists. C) delivery has occurred or services have been rendered. D) the seller's price to the buyer is fixed or determinable.

cash is collected

The primary consideration when planning whether to send confirmations of accounts receivable before the balance sheet date is the: A) type of confirmation to be used. B) client's internal control over transactions affecting receivables. C) availability of staff auditors. D) number of customer accounts.

clients internal control over transactions affecting receivables

Are sales invoices blanks prenumbered

completeness

scan sales invoices for missing numbers in sequence

completeness

The mail which includes payments should be opened by two people. This control is called: A) separation of duties. B) joint custody. C) anti-collusion. D) lapping.

joint custody

Which of the following is not considered one of the three factors increasing the probability of fraud? A) Motive. B) Lack of training. C) Opportunity. D) Rationalization.

lack of training

white collar crime

misdeeds done by people who steal with a pencil or computer

Internal control assessment is important because it governs the ________, ________ and ________ of substantive procedures.

nature, timing, extent

sales manager approves taking discounts

rights and obligations

Post, CPA, accepted an engagement to audit the financial statements of General Co., a new client. General is a publicly held retailing entity that recently replaced its operating management. In the course of applying audit procedures, Post discovered that General's financial statements may be materially misstated due to the existence of fraud.(a) Describe Post's responsibilities on the circumstances described above. (b) Describe Post's responsibilities for reporting on General's financial statements and other communications if Post is precluded from applying necessary procedures in searching for frauds. (c) Describe Post's responsibilities for reporting on General's financial statements and other communications if Post concludes that General's financial statements are materially affected by frauds.

(a) If Post discovers that General's financial statements may be materially misstated due to the existence of frauds, Post should consider the implications for other aspects of the audit and discuss the matter and approach to further investigation with an appropriate level of management that is at least one level above those involved with the frauds. Post should also attempt to obtain sufficient competent evidential matter to determine whether, in fact, material frauds exist and, if so, their effect. Post may suggest that General consult with its legal counsel on matters concerning questions of law. (b) If Post is precluded from applying necessary procedures, Post should disclaim or qualify an opinion on the financial statements and communicate these findings to General's audit committee or its board of directors. Post should also consider resigning from the audit. (c) If Post concludes that General's financial statements are materially affected by frauds, Post should insist that the financial statements be revised and, if they are not, express a qualified or an adverse opinion on the financial statements, disclosing all the substantive reasons for such an opinion. Additionally, Post should adequately inform General's audit committee or its board of directors about the frauds.

List several elements of a company's control environment.

* Management's philosophy and operating style. * Company organization structure. * Functioning of the board of directors, particularly its audit committee. * Methods of assigning authority and responsibility. * Management's monitoring methods, including internal auditing. * Personnel policies and practices. * External influences.

Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable? A) Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence. B) Write-offs must be supported by an aging schedule showing that only receivables overdue several months have been written off. C) Write-offs must be approved by the cashier who is in a position to know if the receivables have, in fact, been collected. D) Write-offs must be authorized by company field sales employees who are in a position to determine the financial standing of the customers.

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

An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using: A) employee fidelity bonds. B) independently prepared mailroom prelists. C) daily check summaries. D) a bank lockbox system.

a bank lockbox system

errors

a bookkeeper inadvertently recorded depreciation by transposing numbers in a journal entry

Independent auditors who consider fraud in the course of financial statement audits are well-advised to quantify "materiality" in terms of: A) the maximum amount of asset overstatement that might mislead investors in relation to the latest financial statements under audit. B) a maximum percentage of net income overstatement that might mislead investors in relation to the latest financial statements under audit. C) a cumulative amount of misstatement of assets or income over several years past and current that might mislead investors in relation to the latest financial statements under audit. D) controversial accounting measurements that might mislead investors in relation to the latest financial statements under audit.

a cumulative amount of misstatement of assets or income over several years past and current that might mislead investors in relation to the latest financial statements under audit

Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriation of assets? A) A large number of bearer bonds on hand. B) A large number of inventory items with low sales prices. C) A large number of transactions processed in a short period of time. D) A large number of fixed assets with easily identifiable serial numbers.

a large number of bearer bonds on hand

the auditors traced a sample of recorded sash receipts to posting s in the correct customers accounts

accounting and posting

When auditing the revenue and collection cycle, auditors normally select balances to confirm from the: A) sales journal. B) accounts receivable listing. C) general ledger. D) cash receipts listing.

accounts receivable listing

Are all credit sales approved by the credit department prior to shipment?

accuracy

The control activity "credit sales approved by credit department" is directed toward which transaction assertion? A) Occurrence. B) Completeness. C) Accuracy. D) Cutoff.

accuracy

perform arithmetic recalculation of a sample of recorded sales invoices

accuracy

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

accuracy

) After obtaining an understanding of the entity's internal control and assessing control risk, an auditor of a non-public company decided not to perform additional tests of controls. The auditor most likely concluded that the: A) additional evidence to support a further reduction in control risk was not cost beneficial. B) assessed level of inherent risk exceeded the assessed level of control risk. C) internal control structure was properly designed and justifiably may be relied on. D) evidence obtainable through tests of controls would not support an increased level of control risk.

additional evidence to support a further reduction in control risk was not cost beneficial

In an audit of financial statements, an auditor's primary consideration regarding an internal control policy or activity is whether the policy or activity: A) reflects management's philosophy and operating style. B) affects management's financial statement assertions. C) provides adequate safeguards over access to assets. D) enhances management's decision making processes.

affects managements financial statement assertions

An auditor assesses the risk of material misstatement because it: A) is relevant to the auditor's understanding of the control environment. B) provides assurance that the auditor's overall materiality levels are appropriate. C) indicates to the auditor where inherent risk may be the greatest. D) affects the level of detection risk that the auditor may accept.

affects the level of detection risk that the auditor may accept

When auditing financial statements and finding indications of a possible misappropriation of assets, independent auditors should: A) investigate fully to determine the total amount of the misappropriation. B) determine which accounts are affected and the amount by which they are overstated or understated. C) determine the methods by which the misappropriation was carried out. D) identify a person(s) who are likely responsible for the misappropriation and obtain evidence about some other fraud indications in their work. E) all of these.

all of these

Accountants should be under orders to record sales and accounts receivable when: A) the customer's order is received. B) all supporting documentation of shipping is in order. C) the item has been paid for. D) the terms are agreed upon.

all supporting documentation of shipping is in order

balance total of individual customers receivables with the control account

allocation or valuation

Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization? A) Disclosing lack of segregation of duties to the external auditors during the annual review. B) Replacing personnel every three or four years. C) Requiring accountants to pass a yearly background check. D) Allowing for greater management oversight of incompatible activities.

allowing for greater management oversight of incompatible activities

Which of the following procedures is considered a test of controls? A) An auditor reviews the entity's check register for unrecorded liabilities. B) An auditor evaluates whether a general journal entry was recorded at the proper amount. C) An auditor interviews and observes appropriate personnel to determine segregation of duties. D) An auditor reviews the audit workpapers to ensure proper sign-off.

an auditor interviews and observes appropriate personnel to determine segregation of duties

Which of the following statements concerning noncompliance by clients is correct? A) An auditor's responsibility to detect noncompliance that has a direct and material effect on the financial statements is the same as that for errors and frauds. B) An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect noncompliance that has an indirect but material effect on the financial statements. C) An auditor considers noncompliance from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions. D) An auditor has no responsibility for noncompliance that has an indirect effect on the financial statements.

an auditors responsibility to detect noncompliance that has a direct and material effect on the financial statements s the same as the at for errors and frauds

Larceny

an employee in a supermarket takes home a bag of fresh fruit each day without paying for them

An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by: A) an error in recording amortization of the excess of the investor's cost over the investment's underlying book value. B) the investee's decision to reduce cash dividends declared per share of its common stock. C) an error in recording the unrealized gain from an increase in the fair value of available-for-sale securities in the income account for trading securities. D) a substantial fluctuation in the price of the investee's common stock on a national stock exchange.

an error in recording amortization of the excess of the investors cost over the investments underlying book value

Which of the following statements is correct regarding internal control? A) A well-designed internal control environment ensures the achievement of an entity's control objectives. B) An inherent limitation to internal control is the fact that controls can be circumvented by management override. C) A well-designed and operated internal control environment should detect collusion perpetrated by two people. D) Internal control is a necessary business function and should be designed and operated to detect all errors and fraud.

an inherent limitation to internal control is the fact that controls can be circumvented by management override

To determine whether sales transactions have been recorded in the proper accounting period, the auditor performs cutoff tests. Which of the following best describes the overall approach used when performing cutoff tests? A) Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period. B) Analyze transactions occurring within a few days before and after year-end. C) Confirm year-end transactions with regular customers. D) Examine cash receipts in the subsequent period.

analyze transactions occurring within a few days

Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud? A) Distributing paychecks directly to department store employees. B) Setting the pay rate for departmental employees. C) Hiring employees and authorizing them to be added to payroll. D) Approving a summary of hours each employee worked during the pay period.

approving a summary of hours each employee worked during the pay period

Which of the following client internal control activities is not usually performed in the treasurer's department? A) Verifying the accuracy of checks and vouchers. B) Controlling the mailing of checks to vendors. C) Approving vendors' invoices for payment. D) Canceling payment vouchers when paid.

approving vendors invoices for payment

For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent. A) As a substantive test: Yes; In the final review stage: Yes. B) As a substantive test: Yes; In the final review stage: No. C) As a substantive test: No; In the final review stage: Yes. D) As a substantive test: No; In the final review stage: No.

as a substantive test, no. in the final review stage, yes.

matching shipping documents with sales invoices before a sale is recorded

assertions

The acceptable level of detection risk is inversely related to the: A) assurance provided by substantive tests. B) risk of misapplying audit procedures. C) preliminary judgment about materiality levels. D) risk of failing to discover material misstatements.

assurance provided by substantive tests

The auditor uses the assessed level of risk of material misstatement to determine the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the: A) nature of substantive tests to more effective procedures. B) timing of substantive tests, such as performing them at year-end rather than at an interim date. C) extent of substantive tests, such as using larger sample sizes. D) assurances provided by substantive tests to a lower level.

assurances provided by substantive tests to a lower level

the probability that an audit team will give an inappropriate opinion on financial statements best describes A) audit risk. B) inherent risk. C) control risk. D) detection risk

audit risk

chain of evidence found at an audit client

audit trail

The existence of audit risk is recognized by the statement in the auditor's standard report that the: A) auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management. B) financial statements are presented fairly, in all material respects, in conformity with applicable financial reporting framework. C) audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. D) auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.

auditor obtains reasonable assurance about whether the financial

Which of the following statements best describes auditors' responsibility to detect errors and frauds? A) Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements. B) Auditors are responsible to detect material errors, but have no responsibility to detect material frauds that are concealed through employee collusion or management override of the internal control structure. C) Auditors have no responsibility to detect errors and frauds unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated. D) Auditors have no responsibility to detect errors and frauds because an auditor is not an insurer and an audit does not constitute a guarantee.

auditors should design a audit t oprovide reasonable assurance fo detecting errors and frauds that are material to the financial statements

If the auditor obtains sufficient competent evidence on the client's accounts receivable balance by alternative procedures because it is impractical to confirm accounts receivable, the auditor's opinion should be unqualified and could be expected to: A) disclose the fact that alternative procedures were used due to client-imposed scope limitation. B) disclose in the opinion paragraph that confirmation of accounts receivable was impracticable. C) avoid mentioning the alternative procedures. D) include an explanatory paragraph that discloses the performance of alternative procedures.

avoid mentioning the alternative procedures

Control strengths and weaknesses should be documented in audit documentation, sometimes called: A) questionnaires, narratives, and flowcharts. B) bridge working papers. C) communications of significant deficiencies. D) internal control letters.

bridge working papers

Sources of financial and nonfinancial data do not include: A) financial account information for comparable prior periods. B) nonfinancial information such as physical production statistics. C) company budgets and forecasts. D) Bureau of Labor statistics.

bureau of labor statistics

A proof of cash: A) is required by GAAS. B) can be used to test the transactions process. C) is most helpful when control risk for cash is low. D) always detects lapping.

can be used to test the transactions process

Most fraud investigators utilize the fraud triangle theory. A new theory called the fraud diamond has been proposed. Which of the following is an element of the fraud diamond and is not an element of the fraud triangle? A) Motive. B) Opportunity. C) Capability. D) Liquidity.

capability

Which of the following sets of information does an auditor usually confirm on one form? A) Accounts payable and purchase commitments. B) Cash in bank and collateral for loans. C) Inventory on consignment and contingent liabilities. D) Accounts receivable and accrued interest receivable.

cash in bank and collateral for loans

A sales clerk enters a customer's six-number customer account. The computer program uses the first five numbers to calculate a sixth number. This resulting number is then compared to the sixth number entered by the sales clerk. This is an example of a: A) valid character test. B) missing data test. C) reasonableness test. D) check digit.

check digit

Clerk 1 Review vendor invoices for proper signature approval. Clerk 2 Enters vendor invoice into the accounting system and verifies payment terms. Clerk 3 Posts entered vendor invoices to accounts payable ledger for payment and mails checks. Treasurer Review the vendor invoices and signs each check. Which of the following would indicate a weakness in the company's internal controls?

clerk 3 mails the checks and remittances after they have been signed

When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations: A) copies of the client's shipping documents that support the account balances. B) lists of the customers' recent payments that the client has already recorded. C) client-prepared statements of account that show the details of the account balances. D) copies of the customers' purchase orders that support the account balances.

client prepared statements of account that show the details of the account balances

Which of the following analytical procedures most likely would be used during the planning stage of an audit? A) Comparing current-year to prior-year sales volumes. B) Reading the financial statements and notes and considering the adequacy of evidence. C) Comparing the current-year ratio of aggregate salaries paid to the number of employees to the prior-year's ratio. D) Reading the letter from the client's attorney and considering the threat of litigation.

comparing current to prior years sales volume

If the amount of a check is altered by an employee after it has cleared the bank, the change can be detected by: A) comparing the amount written on the check face to the amount written in the cash disbursements journal. B) comparing the magnetic imprint of the amount paid to the amount written on the check face. C) examining the endorsement on the back of the check. D) comparing the check number on the face of the check to the check number in the cash disbursements journal.

comparing the magnetic on print of the amount paid to the amount written on the check face

Alpha Brewery Corporation recorded sales through January 4, 2018, dating them December 31, 2017. This situation is an example of a violation of which of the following assertions? A) Existence or occurrence. B) Completeness. C) Classification. D) Accuracy.

completeness

In the revenue and collection cycle, the auditor checks the numerical sequence of shipping documents. This procedure is related to which of the following assertions? A) Existence. B) Completeness. C) Rights and obligations. D) Valuation or allocation.

completeness

Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what assertion? A) Completeness. B) Accuracy. C) Occurrence. D) Classification.

completeness

Vouching debits from a sample selection of customers' accounts receivable records to supporting sales invoices is an audit procedure designed to obtain evidence about the assertion of: A) occurrence. B) completeness. C) classification. D) accuracy.

completeness

the auditors traced a sampled o daily cash reports to the cash receipts journal

completeness

trace a sample of credit memos to postings in customers accounts

completeness

Dual direction testing involves samples of transactions selected to obtain evidence about control over ________ in one direction and control over ________ in the other direction.

completeness, occurence

The pending sales orders can be reviewed for evidence of the ________ of recorded ________ and ________.

completeness, sales, accounts receivable

Which of the following is not required by AU 240, "Consideration of Fraud in a Financial Statement Audit"? A) Conduct a continuing assessment of the risks of material misstatement due to fraud throughout the audit. B) Conduct a discussion by the audit team of the risks of material misstatement due to fraud. C) Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until verified by the auditor. D) Conduct inquiries of shareholders as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.

conduct inquiries of shareholders as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud

The "obtaining an understanding" work phase (Phase 1) of internal control evaluation would not give auditors an overall acquaintance with the client's: A) control environment. B) information and communication system. C) control activity effectiveness. D) monitoring activities.

control activity effectiveness

The overall attitude and awareness of an entity's board of directors concerning the importance of the client's internal control usually is reflected in its: A) computer-based control activities. B) system of separation of duties. C) control environment. D) safeguards over access to assets.

control environment

________ of accounts receivable records implies the power to alter them directly or enter transactions to alter them.

custody

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because: A) many customers merely sign and return the confirmation without verifying its details. B) recipients usually respond only if they disagree with the information on the request. C) customers may not be inclined to report understatement errors in their accounts. D) auditors typically select many accounts with low recorded balances to be confirmed

customers may not be inclined to report understatement errors in their accounts

Control activities intended to ensure that transactions are recorded in the right period are designed to achieve the ASB assertion of: A) occurrence. B) accuracy. C) valuation or allocation. D) cutoff.

cutoff

computer check for billing the quantity shipped, list price, and total

cutoff

An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the: A) check register for the last month is reviewed. B) cutoff bank statement is reconciled. C) bank confirmation is reviewed. D) search for unrecorded liabilities is performed.

cutoff bank statement is reconciled

Which of the following internal control activities most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger? A) Daily sales summaries are compared to daily postings to the accounts receivable ledger. B) Each sales invoice is supported by a prenumbered shipping document. C) The accounts receivable ledger is reconciled daily to the control account in the general ledger. D) Each shipment on credit is supported by a prenumbered sales invoice.

daily sales summaries are compared to daily postings to the accounts receivable ledger

The appropriate separation of duties does not include: A) authorization to execute transactions. B) recording of transactions. C) custody of assets involved in the transactions. D) data preparation.

data preparation

Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would: A) decrease substantive testing. B) decrease detection risk. C) increase inherent risk. D) increase materiality levels.

decrease detection risk

If a control total were to be computed on each of the following data items, which would best be identified as a hash total for a payroll IT application? A) Hours worked. B) Total debits and total credits. C) Net pay. D) Department numbers.

department numbers

According to auditing standards, external auditors' responsibilities for indirect noncompliance do not include: A) designing audit procedures to detect noncompliance in the absence of specific information brought to the auditors' attention. B) performing audit procedures when specific information indicates that possible noncompliance may have a material indirect effect on financial statements. C) considering the qualitative materiality of known and suspected noncompliance. D) obtaining written management representations concerning the absence of violations of laws and regulations.

designing audit procedures to detect noncompliance in the absence of specific information brought to the auditors attention

An audit team's responsibility would not include: A) designing client's internal controls. B) documentation of understanding of a client's internal controls. C) communicating internal control deficiencies. D) assessing the effectiveness of a client's internal controls.

designing clients internal controls

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement actually exists is: A) audit risk. B) inherent risk. C) control risk. D) detection risk.

detection risk

If control risk increases, and all other risks in the audit risk model stay constant except the one referred to below, which of the following statements is correct? A) Detection risk will decrease. B) Inherent risk will increase. C) Audit risk will decrease. D) Detection risk will increase.

detection risk will decrease

An audit team uses the assessed risk of material misstatement to: A) evaluate the effectiveness of the entity's internal control policies and activities. B) identify transactions and account balances where inherent risk is at the maximum. C) indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high. D) determine the acceptable level of detection risk for financial statement assertions.

determine the acceptable level of detection risk for financial statement assertions

Each of the following is a type of known misstatement, except: A) an inaccuracy in processing data. B) the misapplication of accounting principles. C) differences between management and the auditor's judgment regarding estimates. D) a difference between the classification of a reported financial statement element and the classification according to generally accepted accounting principles.

differences between management and the auditors judgement regarding estimates

Jones, CPA, is auditing the financial statements of XYZ Retailing Inc. What assurance does Jones provide that direct effect noncompliance that is material to XYZ's financial statements, and noncompliance that has a material, but indirect effect on the financial statements will be detected? A) Direct effect noncompliance: Reasonable; Indirect effect noncompliance: None. B) Direct effect noncompliance: Reasonable; Indirect effect noncompliance: Reasonable. C) Direct effect noncompliance: Limited; Indirect effect noncompliance: None. D) Direct effect noncompliance: Limited; Indirect effect noncompliance: Reasonable.

direct effect noncompliance, reasonable, indirect effect noncompliance. none

Auditor's Communication with Those Charged with Governance

disagreements with management on significant accounting and audit matters

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except: A) send a second request. B) do nothing for immaterial balances. C) examine shipping documents. D) examine client correspondence files.

do nothing for immaterial balances

) In an audit of financial statements of a non-public company in accordance with generally accepted auditing standards, an auditor is required to: A) document the auditor's understanding of the entity's internal control. B) search for significant deficiencies in the operation of the internal controls. C) perform tests of controls to evaluate the effectiveness of the entity's accounting system. D) determine whether control activities are operating effectively to prevent or detect material misstatements.

document the auditor's understanding of the entity's internal control.

Which of the following should an auditor do when control risk is assessed at the maximum level? A) Perform fewer substantive tests of details. B) Perform more tests of controls. C) Document the assessment. D) Document the control structure more extensively.

document the control structure more extensively

After obtaining an understanding of a client's financial reporting control activities, the auditor would next: A) test the client's control activities. B) assess the final control risk. C) document the understanding obtained. D) plan the remainder of the audit work.

document the understanding obtained

A procedure to gather evidence on both account balances and controls is called a ________ procedure.

dual purpose

To be recognized, revenues must also be realized or realizable and: A) foreseeable. B) collected. C) earned. D) shipped.

earned

When an auditor becomes aware of possible noncompliance by a client, the auditor should obtain an understanding of the nature of the act to: A) evaluate the effect on the financial statements. B) determine the reliability of management's representations. C) consider whether other similar acts may have occurred. D) recommend remedial actions to the audit committee.

elevate the effect on the financial statements

Which of the following outcomes is a likely benefit of information technology used for internal control? A) Processing of unusual or nonrecurring transactions. B) Enhanced timeliness of information. C) Potential loss of data. D) Recording of unauthorized transactions.

enhanced timelines of information

Analytical procedures used in planning an audit should focus on: A) reducing the scope of tests of controls and substantive tests. B) providing assurance that potential material misstatements will be identified. C) enhancing the auditor's understanding of the client's business. D) assessing the adequacy of the available evidential matter.

enhancing the auditors understanding of the clients business

An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that: A) sales invoices represent bona fide sales. B) all sales have been recorded. C) all sales invoices have been properly posted to customer accounts. D) entries in the accounts receivable subsidiary ledger were properly invoiced.

entries in the accounts receivable subsidiary ledger were properly invoiced

What assurance does the auditor provide that errors, frauds, and direct effect noncompliance that are material to the financial statements will be detected? A) Errors: Limited; Frauds: Negative; Direct effect noncompliance: Limited. B) Errors: Limited; Frauds: Limited; Direct effect noncompliance: Reasonable. C) Errors: Reasonable; Frauds: Limited; Direct effect noncompliance: Limited. D) Errors: Reasonable; Frauds: Reasonable; Direct effect noncompliance: Reasonable.

errors: reasonable; frauds: reasonable; Direct effect noncompliance: Reasonable.

Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily to: A) evaluate internal control over credit sales. B) test the accuracy of recorded charge sales. C) estimate credit losses. D) verify the existence of the recorded receivables.

estimate credit losses

auditing accounting estimates

evaluate the net realizable value of inventory

Confirmations of accounts receivable provide the most evidence for which of the following assertions? A) Existence. B) Valuation or allocation. C) Rights and obligations. D) Completeness.

existence

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

existence

In the audit of accounts receivable, the most important emphasis should be on the: A) completeness assertion. B) existence assertion. C) rights and obligations assertion. D) presentation and disclosure assertion.

existence assertion

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the: A) collectability of the balances confirmed. B) ownership of the balances confirmed. C) existence of the balances confirmed. D) internal control over balances confirmed.

existence of the balances conformed

Assertions related to account balances are ________, ________, ________ ________, ________ and ________.

existence, completeness, rights, obligations, valuations, allocations

Confirmations provide evidence of ________ and, to a limited extent, ________ of accounts and notes receivable.

existence, valuation

The risk of material misstatement differs from detection risk in that it: A) arises from the misapplication of audit procedures. B) may be assessed in either quantitative or non-quantitative terms. C) exists independently of the financial statement audit. D) can be changed at the auditor's discretion.

exists independently of the financial statement audit

When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the: A) extent of substantive tests of details. B) level of inherent risk. C) extent of tests of controls. D) level of detection risk.

extent of substantive tests of details

When the audit team increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the audit team would most likely increase the: A) extent of substantive tests of details. B) level of inherent risk. C) extent of tests of controls. D) level of detection risk.

extent of substantive tests of details

An auditor noted that client sales had increased 10 percent for the year. At the same time, cost of goods sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. The auditor is most likely concerned about: A) unrecorded costs. B) improper credit approvals. C) improper sales cut-off. D) fictitious sales.

fictitious sales

To gather evidence regarding the bank's balance in a bank reconciliation, an auditor would examine all of the following except the: A) cutoff bank statement. B) general ledger. C) bank confirmation. D) year-end bank statement.

general ledger

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable? A) Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. B) Separate duties so that no employee has access to both checks from customers and currency from daily cash receipts. C) Have customers send payments directly to the company's depository bank. D) Request that customer's payment checks be made payable to the company and addressed to the treasurer.

have customers send payments directly to the company's depository bank

Certain conditions and circumstances are often present when management fraud occurs. Which of the following is not such a condition or circumstance? A) Unfavorable industry conditions. B) Lack of working capital. C) High liquidity. D) Slow customer collections.

high liquidity

Sound internal control can be described as separating all of the following duties and responsibilities except for: A) transaction authorization. B) recordkeeping. C) custody of, or direct access to, assets. D) hiring of employees.

hiring employees

refers to changes across two or more years

horizontal analysis

In the planning stage, analytical procedures are used to: A) identify potential problem areas. B) provide direct evidence about the balances in accounts. C) determine the mathematical correctness of the financial statements. D) perform all of these.

identify potential problem areas

Analytical procedures are audit methods of evaluating financial statement accounts by studying and comparing relationships among financial and nonfinancial data. The primary purpose of analytical procedures conducted during the planning stages is to: A) identify the appropriate schedules to be prepared by the client. B) identify the types of errors or frauds that can occur in transactions. C) identify unusual conditions that deserve additional audit effort. D) determine the existence of unrecorded liabilities or overstated assets.

identify unusual conditions that deserve additional audit effort

Assessing control risk at below the maximum level most likely would involve: A) performing more extensive substantive tests with larger sample sizes than originally planned. B) reducing inherent risk for most of the assertions relevant to significant account balances. C) changing the timing of substantive tests by omitting interim-date testing and performing the tests at year end. D) identifying specific internal control activities that are relevant to specific financial statement assertions.

identifying specific internal control activities that are relevant to specific financial statement assertions

When an employee embezzles company funds from an electric utility company for the purpose of paying expenses of an anti-nuclear protest organization, the fraudster's motive is said to be: A) psychotic. B) egocentric. C) ideological. D) economic.

ideological

As payments are received, one mailroom employee is assigned the responsibility of prelisting receipts and preparing the deposit slip prior to forwarding the receipts, deposit slip, and remittance advices to accounts receivable for posting. Accounts receivable personnel re-foot the deposit slip, stamp a restrictive endorsement on the back of each check, and then forward the receipts and deposit slip to the treasury department. Evaluate the internal control of the described process. Which of the following is a reasonable assessment of internal control in this process? A) Adequate internal control. B) Inadequate internal control because mailroom employees should not have access to cash. C) Inadequate internal control because treasury employees should prepare the deposit slip. D) Inadequate internal control because of a lack of separation of duties.

inadequate internal control because of a lack of separation of duties

If fictitious credit sales were recorded, and the fictitious accounts receivable were later directly written off as bad debt expense, A) income would be overstated. B) income would be understated. C) income would not be misstated. D) accounts receivable would be understated.

income would not be misstated

) Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls? A) Incompatible duties. B) Management override. C) Mistakes in judgment. D) Collusion among employees.

incompatible duties

Which of the following is an acceptable response to fraud risks related to sales that were identified in an audit? A) Exercise professional skepticism when performing sales testing. B) Increase the assessment of control risk for sales. C) Increase the assessment of detection risk for sales. D) Perform additional substantive sales procedures on a surprise basis.

increase the assessment of detection risk for sales

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose: A) customers with credit balances. B) small account balances. C) individual overdue balances. D) individual invoices.

individual invoices

Which of the following would most likely be classified as a material weakness? A) Absence of appropriate separation of duties. B) Absence of appropriate reviews and approvals of transactions. C) Evidence of failure of control activities. D) Ineffective oversight of the financial reporting process by the company's audit committee.

ineffective oversight of the financial reporting process by the company's audit committee

Which of the following might be detected by auditors' cutoff review and examination of sales journal entries for several days prior to the balance sheet date? A) Lapping year-end accounts receivable. B) Inflating sales for the year. C) Kiting bank balances. D) Misappropriating merchandise.

inflating sales for the year

) If an auditor encounters significant risks at the client, the auditor should do all of the following except: A) inform the SEC. B) perform extended procedures. C) include more experienced auditors on the engagement. D) perform tests closer to year end.

inform the SEC

Which of the following is not a component of internal controls? A) Control environment. B) Control activities. C) Inherent risk. D) Monitoring.

inherent risk

Inherent risk and control risk differ from detection risk in which of the following ways? A) Inherent risk and control risk are calculated by the client. B) Inherent risk and control risk exist independently of the audit. C) Inherent risk and control risk are controlled by the auditor. D) Inherent risk and control risk exist as a result of the auditor's judgment about materiality.

inherent risk and control risk exist independently of the audit

The financial records of the Movitz Company show that Mr. Dennis owes $4,100 on an account receivable. An independent audit is being carried out and the auditors send a positive confirmation to Mr. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here? A) Control risk was particularly low for accounts receivable. B) Inherent risk was particularly high for accounts receivable. C) Mr. Dennis's account was not yet due. D) Mr. Dennis's account was not with a related party.

inherent risk was particularly high for accounts receivable

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. Which of the following types of audit procedures do these actions illustrate? A) Observation and inspection of records. B) Confirmation and reperformance. C) Inquiry and inspection of records. D) Analytical procedures and reperformance.

inquiry and inspection of records

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? A) Review the cash receipts journal for the month prior to the year-end. B) Intensify the study of the internal control structure concerning the revenue cycle. C) Increase the assessed level of detection risk for the existence assertion. D) Inspect the shipping records documenting the merchandise sold to the debtors.

inspect the shipping records documenting the merchandise sold to the debtors

Management fraud generally refers to: A) unintentional mistakes. B) noncompliance. C) intentional distortions of financial statements. D) violations of GAAS.

intentional distortions of financial statements

Which of the following accounts tends to be most predictable for purposes of analytical procedures? A) Accounts receivable. B) Travel and entertainment expense. C) Interest expense. D) Income taxes payable.

interest expense

a wide range of evidence gather activity that occurs before year end

interim audit work

Information about the internal control system can be gathered by completing an ________.

internal control questionaire

consideration of fraud in a financial statement audit

investigate large an unusual transactions, particularly those that occur at or near year end

The document that generates recording of a sale is the: A) customer order. B) shipping order. C) invoice. D) purchase order.

invoice

Which of the following questions included in an internal control questionnaire would evaluate the valuation objective of revenues? A) Is customer credit approved before orders are shipped? B) Are sales orders prenumbered? C) Are shipping documents required before a customer invoice is sent? D) Are payments received from the customer deposited in the bank in a timely manner?

is customer credit approved before orders are shipped

After obtaining an understanding of internal controls and assessing control risk on the audit of a non-public company, an auditor decided to perform tests of controls. The auditor most likely decided that: A) it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests. B) additional evidence to support a further reduction in control risk is not available. C) an increase in the assessed level of control risk is justified for certain financial statement assertions. D) there were many internal control weaknesses that could allow errors to enter the accounting system.

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 the entity's internal control is to provide an auditor with: A) knowledge necessary for audit planning. B) evidential matter to use in assessing inherent risk. C) a basis for modifying tests of controls. D) an evaluation of the consistency of application of management's policies.

knowledge necessary for audit planning

Auditing the details of customer payments listed in bank deposits in comparison to details of customer payment postings can detect ________.

lapping

The auditor maintains control of the mailing and receipt of confirmations by typically performing all of the following except: A) preparing the confirmation letters. B) mailing the confirmation letters. C) receiving the confirmation letters. D) none of these is correct.

mailing the confirmation letters

consideration of laws and regulation

make inquiries about managers policies and procedures for compliance with laws and regulations

Managing business risk is the responsibility of: A) the auditors. B) management. C) the SEC. D) the PCAOB.

management

The major emphasis in GAAS related to consideration of fraud in a financial statement audit (AU 240) is on: A) employee misappropriation of assets. B) management fraud. C) client fraud on customers. D) employee embezzlement.

management fraud

Which of the following management policies would increase the probability of fraud in a company? A) Diversifying authority throughout divisions and subsidiaries in the organization. B) Measuring performance and awarding bonuses based on short-term operating results. C) Giving employees performance feedback that considers positive and constructive praise along with critical and negative observations on their work. D) Establishing work teams that share responsibilities, performance, and bonuses based on collective efforts.

measuring performance and awarding bonuses based on short term operation reults

In order for auditors to be able to recognize potential fraud, they must be aware of the basic characteristics of fraud. Which of the following is not a characteristic of fraud? A) Intentional deception. B) Taking unfair or dishonest advantage of other people. C) Perpetration for the benefit or detriment of the organization. D) Negligence on the part of executive management.

negligence on the part of executive management

An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when: A) no reply to a positive confirmation request is received. B) no reply to a negative confirmation request is received. C) collectability of the receivables is in doubt. D) pledging of the receivables is probable.

no reply to a positive confirmation request is received

Experience has shown that the many large fraudulent transactions can be found in: A) systematic processing of large volumes of day-to-day ordinary transactions. B) payroll fraudsters' mistakes in using unissued Social Security numbers. C) petty cash embezzlements. D) non-routine, nonsystematic journal entries.

non-routine, nonsystematic journal entries

select a sample of customer accounts and vouch debits to sales invoices

occurence

) The assertion that auditors will probably emphasize in the revenue and collection cycle is: A) occurrence. B) completeness. C) accuracy. D) classification.

occurrence

The auditor selects a sample of recorded sales invoices and vouches them to shipping documents. This procedure is related to which of the following assertions? A) Occurrence. B) Completeness. C) Accuracy. D) Cutoff.

occurrence

account for numerical sequence of pre numbered shipping documents

occurrence

is access to sales invoice blanks restricted

occurrence

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following? A) One of the cashiers has been covering a personal embezzlement by lapping. B) One of the sales clerks has not been preparing charge slips for credit sales to family and friends. C) One of the IT control clerks has been removing all sales invoices applicable to his account from the data file. D) The credit manager has misappropriated remittances from customers whose accounts have been written off.

one of the cashiers has been covering a personal embezzlement by lapping

Analytical procedures are most appropriate when testing which of the following types of transactions? A) Payroll and benefit liabilities. B) Acquisitions and disposals of fixed assets. C) Operating expense transactions. D) Long-term debt transactions.

operating expense transactions

The internal control in small business is highly dependent on the: A) separation of functional responsibilities. B) complexity of the client's internal controls. C) owner-manager's competence, as well as his/her ethics and integrity. D) bonding of employees.

owner managers competence as well as his or her ethics and integrity

The file that contains sales transactions that were initiated in the system but are not yet completed is the: A) credit check file. B) sales detail. C) inventory master. D) pending order master.

pending order master

If auditors assess control risk at the maximum level, they will tend to: A) perform a great deal of additional tests of controls. B) perform a great deal of substantive testing during the audit. C) perform substantive tests at an interim date. D) perform more audit procedures using internal evidence.

perform a great deal of substantive testing during the audit

) Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the expectations (estimates) developed by the auditor. If management is unable to provide an acceptable explanation, the auditor should: A) consider the matter a scope limitation. B) perform additional audit procedures to investigate the matter further. C) intensify the audit with the expectation of detecting management fraud. D) withdraw from the engagement.

perform additional audit procedures to investigate the matter further

Proper separation of duties reduces the opportunities to allow persons to be in positions to both: A) journalize entries and prepare financial statements. B) record cash receipts and cash disbursements. C) establish internal controls and authorize transactions. D) perpetrate a fraud and then conceal it in the books.

perpetrate a fraud ad then conceal it in the books

The ________ confirmation form is used when individual balances are ________ or accounts are in ________.

positive, large , dispute

Two widely used confirmation forms to test accounts receivable are ________ and ________ confirmations

positive, negative

Which of the following controls is designed to meet the completeness assertion? A) Prenumbering invoices, shipping documents, and sales orders. B) Sales orders are approved by the credit department prior to shipping goods. C) The sale is to a customer on the approved customer list. D) Sales are dated by the computer to ensure it is included in the proper period.

pre numbering invoices, shipping documents, and sales orders

Your client is in the process of acquiring another company. You have been requested to verify that cash for the company being acquired is properly stated. The audit technique that will yield the most persuasive evidence is: A) examination of the company's escrow account. B) interview with the company's treasurer and cash manager. C) preparation and review of standard bank confirmation inquiries. D) analytical computations comparing current cash in the bank with previous accounting periods.

preparation and review of standard bank confirmation inquiries

When auditing financial statements of a private company, the minimum work an auditor must perform in connection with a company's internal control is best described by which of the following statements? A) Perform exhaustive tests of accounting controls and evaluate the company's control system effectiveness. B) Determine whether the company's control policies are designed well enough to prevent material misstatements. C) Prepare auditing working papers that document the auditor's understanding of the company's internal control. D) Design procedures to search for significant deficiencies in the actual operation of the company's internal control.

prepare auditing working papers that document the auditors understanding of the company's internal control

Inherent risk is the: A) probability that some accounts are more susceptible to misstatement than others. B) probability that the client's internal control policies and procedures will fail to detect material misstatements. C) probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements. D) probability that the auditor may not detect material misstatements in the financial statements.

probability that materials misstatements have occurred in transactions entering the accounting system used to develop the accounting system used to develop financial statements

In computer systems, the information technology general controls (ITGC) would not include: A) processing control activities. B) separation of various computer system functions. C) appropriate documentation of the data processing system. D) control over physical access to computer hardware.

processing control activities

In the revenue and collection cycle, the order of the activities in the cycle is best illustrated by: A) delivering goods, billing customer, granting credit, and performing collection activities. B) customer ordering, delivering goods, granting credit, and billing customers. C) processing customer orders, granting credit, delivering goods, and billing customers. D) granting credit, billing customers, delivering goods, and processing cash receipts.

processing customer orders, granting credit, delivering goods, and billing customer

Which of the following would not be considered an analytical procedure? A) Converting dollar amounts of income statement account balances to percentages of net sales for comparison with industry averages. B) Developing the current year's expected net sales based on the sales trend of similar entities within the same industry. C) Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics. D) Estimating the current year's expected expenses based on the prior year's expenses and the current year's budget.

projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics

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

proper period

A customer reply on a positive confirmation says "We dispute the $250 charge. We believe it is excessive." This confirmation: A) provides evidence of existence. B) does not provide evidence of existence because the customer may refuse to pay the $250 charge. C) provides evidence that the account was understated. D) provides evidence that the account should be written off.

provides evidence of existence because the customer may refuse to pay the $250

Which of the following accounts is not normally part of the revenue and collection cycle? A) Sales. B) Accounts Receivable. C) Cash. D) Purchases Returns and Allowances.

purchases returns and allowances

Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion? A) Presumptive. B) Judgmental. C) Criticizing. D) Questioning.

questioning

Which of the following is not an input control activity? A) Reasonableness tests. B) Record counts. C) Financial totals. D) Hash totals.

reasonableness tests

Each of the following types of controls is considered to be an entity-level control, except those: A) relating to the control environment. B) pertaining to the company's risk assessment process. C) regarding the company's annual stockholder meeting. D) addressing policies over significant risk management practices.

regarding the company's annual stockholder meeting

When determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the: A) liquidity of the account. B) degree of management estimation involved in determining the proper account balance. C) related internal control policies and procedures. D) complexity of calculations involved.

related internal control policies and procedures

When counting cash on hand the auditor must exercise simultaneous control over all cash and other negotiable assets to prevent: A) theft. B) irregular endorsement. C) replacement or substitution of stolen assets. D) deposits in transit.

replacement or substitutions of stolen assets

External auditors are responsible: A) for authenticating documents. B) for reporting immaterial frauds to a level of management at least one level above the people involved. C) for finding all intentional misstatements concealed by collusion. D) for reporting all frauds to outside agencies or parties.

reporting immaterial frauds to a level of management at least one level above the people involved

An audit plan of substantive procedures for cash would not include: A) request a cutoff bank statement be mailed to the client. B) request client to prepare bank reconciliations. C) prepare a schedule of interbank transfers for a period of ten business days before and after year-end date. D) obtain a written client representation concerning compensating balance agreements.

request a cutoff bank statement

Which of the following payroll control activities would most effectively ensure that payment is made only for work performed? A) Require all employees to record arrival and departure by using the time clock. B) Have a payroll clerk recalculate all time cards. C) Require all employees to sign their time cards. D) Require employees to have their direct supervisors approve their time cards.

require employees to have their direct supervisors approve their time cards

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 (these returns did not exist). The most effective control for preventing this activity is to: A) prenumber and account for all credit memorandums. B) require receiving reports to support all credit memorandums before they are approved. C) have the sales department independent of the accounts-receivable department. D) mail monthly statements to the customer.

require receiving reports to support all credit memorandums before hey are approved

If not already performed during the overall review stage of the audit, the auditor should perform analytical procedures relating to which of the following transaction cycles? A) Payroll. B) Revenue. C) Purchasing. D) Inventory.

revenue

The most effective audit procedure for determining the collectability of an account receivable is the: A) review of the subsequent cash collections. B) examination of the related sales invoice(s). C) confirmation of the account. D) review of authorization of credit sales to the customer and the previous history of collections.

review of the subsequent cash collections

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the: A) factors that raise doubts about the auditability of the financial statements. B) operating effectiveness of internal control policies and procedures. C) risk that material misstatements exist in the financial statements. D) possibility that the nature and extent of substantive tests may be reduced.

risk that material misstatements exist in the financial statements

"Bill and hold" refers to an arrangement where: A) sales are recorded but are not shipped. B) sales are shipped but are not recorded. C) sales are billed but not collected. D) inventory is held but not billed.

sales are recorded but are not shipped

Sales are normally recorded on the date of the: A) customer purchase order. B) bill of lading. C) sales invoice. D) payment check.

sales invoice

When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to: A) sales invoices with shipping documents. B) records of accounts receivable write-offs. C) cash remittance lists and bank deposit slips. D) credit files and reports.

sales invoices with shipping documents

To conceal defalcations involving receivables, a dishonest bookkeeper might charge which of the following accounts? A) Miscellaneous income. B) Petty cash. C) Miscellaneous expense. D) Sales returns.

sales returns

When obtaining an understanding of an entity's internal control in a financial statement audit at a non-public company, an auditor is not obligated to: A) determine whether the control activities have been placed in operation. B) perform procedures to understand the design of the internal control system. C) document the understanding of the company's internal control system. D) search for significant deficiencies in the operation of the internal control system.

search for significant deficiencies in the design of the internal control system

Auditors ordinarily send a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balances. A purpose of this procedure is to: A) provide the data necessary to prepare a proof of cash. B) request that a cutoff bank statement and related checks be sent to the audit. C) detect questionable bank activities that may otherwise not be discovered. D) seek information about contingent liabilities and security agreements.

seek information about contingent liabilities

When accounts receivable are confirmed at an interim date, auditors need not be concerned with: A) obtaining a summary of receivables transactions from the interim date to the year-end date. B) obtaining a year-end trial balance of receivables, comparing it to the interim trial balance, and obtaining evidence and explanations for large variations. C) sending negative confirmations to all the customers as of the year-end date. D) considering the necessity for some additional confirmations as of the balance sheet date if balances have increased materially.

sending negative confirmations to all the customers as of the year end date

Which of the following internal control activities most likely would deter lapping of collections from customers? A) Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries. B) Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval. C) Separation of duties between receiving cash and posting the accounts receivable ledger. D) Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.

separation of duties between receiving cash and point the accounts receivable ledger

Which of the following is an information technology general control? A) Check digit. B) Run-to-run totals. C) Distribution of computerized output. D) Separation of duties in the IT department

separation of duties in the IT department

Tracing bills of lading to sales invoices provides evidence that: A) shipments to customers were invoiced. B) shipments to customers were recorded as sales. C) recorded sales were shipped. D) invoiced sales were recorded as sales.

shipments to customers were invoiced

When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that: A) shipments to customers were invoiced. B) shipments to customers were recorded as sales. C) recorded sales were shipped. D) invoiced sales were shipped.

shipments to customers were involved

Tracing shipping documents to prenumbered sales invoices provides evidence that: A) no duplicate shipments or billings occurred. B) shipments to customers were properly invoiced. C) all goods ordered by customers were accounted for. D) all pre-numbered sales invoices were accounted for.

shipments to customers were properly invoiced

Generally accepted auditing standards states that analytical procedures: A) should be applied in the planning and final review stages of the audit and as a substantive test during the audit. B) should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit. C) should be applied in the planning stage and can be applied as a substantive test and in the final review stage. D) should be applied in the final review stage, and can be applied as a substantive test and in the planning stage.

should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit

To provide assurance that each voucher is submitted and paid only once, an auditor 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

stamped paid by the check signer

Which of the following audit procedures most likely would provide an auditor with the most assurance about the effectiveness of the operation of an entity's internal control? A) Confirmation with outside parties. B) Inquiry of client personnel. C) Successful re-performance of the control activity. D) Observation of client personnel.

successful re-performance of the control activity

When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate? A) Test the operating effectiveness of such controls in the current audit. B) Document that reliance and proceed with the original audit strategy. C) Inquire of management as to the effectiveness of the controls. D) Report the reliance in the report on internal controls.

test the operation effectiveness of such controls in the current audit

In the audit of cash the auditor obtains a bank cutoff statement primarily to: A) identify old outstanding checks that the client may exclude from the year-end bank reconciliation in order to misappropriate cash. B) obtain sufficient information to reconcile the client's bank account as of year-end. C) obtain direct confirmation of the client's bank balances as of year-end. D) test the propriety of items appearing on the client's year-end bank reconciliation.

test the propriety of items appearing on the clients year end bank reconciliations

Which of the following areas can external auditors rely on internal auditors' work in auditing internal controls? A) Evaluation of the auditing environment. B) Testing of low risk internal control activities. C) All testing of the operating effectiveness of internal control activities. D) As providing the principle evidence for the external auditors' opinion.

testing of low risk internal control activities

Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks? A) The relevant internal control components are not well documented. B) The internal auditor already has tested the relevant controls and found them effective. C) Testing the operating effectiveness of the relevant controls would not be efficient. D) The cost of substantive procedures will exceed the cost of testing the relevant controls.

testing the operating effectiveness of the relevant controls would not be efficient

) Elm Tree Inc. has a December 31 year end. On October 15, the auditor evaluated and tested Elm Tree's internal control procedures over the sales recording process and finds the controls to be effective. At a minimum, the auditor's year-end procedures for testing internal control procedures must include: A) confirmations of year-end accounts that were examined on October 15. B) tests the client's internal control procedures from October 15 through the year end. C) tests of compliance with internal control for a random sample of transactions throughout the audit period. D) a comparison of the responses to the auditor's internal control questionnaire with a detailed flowchart of control procedures at year end.

tests the clients internal procedures form october 15 through the end of the year

A report on internal control effectiveness by the management team of public companies is required by: A) the Sarbanes-Oxley Act of 2002. B) the PCAOB. C) the AICPA. D) the auditors.

the Sarbanes-Oxley Act of 2002

The sum of customers' unpaid balances that is compared to the general ledger balance comes from: A) a total of sales invoices. B) a total of shipping orders. C) the sales journal. D) the accounts receivable trial balance.

the accounts receivable trial balance

In auditing related party transactions, an auditor ordinarily places primary emphasis on: A) the probability that related party transactions will recur. B) confirming the existence of the related parties. C) verifying the valuation of the related party transactions. D) the adequacy of the disclosure of the related party transactions.

the adequacy of the disclosure of the related party transactions

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because: A) a majority of recipients usually lacks the willingness to respond objectively. B) some recipients may report incorrect balances that require extensive follow up. C) the auditor cannot infer that all nonrespondents have verified their account information. D) negative confirmations do not produce evidential matter that is statistically quantifiable.

the auditor cannot infer that all nonrespondents have verified their account information.

An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if: A) the illegal act is a violation of generally accepted accounting principles. B) the client does not take the remedial action that the auditor considers necessary. C) the illegal act was committed during a prior year that was not audited. D) the auditor has already assessed control risk at the maximum level.

the client does not take the remedial action that the auditor considers necessary

An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if: A) the noncompliance is a violation of generally accepted accounting principles. B) the client does not take the remedial action that the auditor considers necessary. C) the illegal act was committed during a prior year that was not audited. D) the auditor has already assessed control risk at the maximum level.

the client does not take the remedial action that the auditor considers necessary

Which of the following is not a valid reason for an auditor deciding not to send accounts receivable confirmations? A) The balance is immaterial. B) Confirmations would be ineffective. C) The client requests alternative procedures be performed instead. D) Other procedures provide sufficient competent evidence.

the client requests alternative procedures be performed instead

Which of the following pieces of information discovered by an auditor when performing substantive tests of account balances would most likely raise red flags about the possible existence of material fraudulent financial reporting? A) Paper copies of paid invoices and cancelled checks are microfiched and then destroyed. B) The controller requires that you schedule any audit inquiries for after lunch each day, not in the morning. C) The petty cash fund custodian never takes a vacation. D) The client's estimate of the allowance for doubtful accounts is lower than the auditor's independent evaluation of the allowance.

the clients estimate of the allowance for doubtful accounts is lower than the auditor independent evaluation of the allowance

Revenues are normally considered to have been earned when: A) all possibility of return has expired. B) the company has substantially accomplished what it must to be entitled to the benefits. C) the cash is collected. D) goods have been shipped.

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

A set of characteristics that helps to define a seriousness about employees' attitudes about the control activities in a company is referred to as: A) management assertions. B) the control environment. C) control risk assessment. D) functional responsibilities.

the control environment

management fraud

the controller changed the journal entry for estimating bad debt expense to a smaller number to hide the poor results

Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls? A) The industry and the business and regulatory environments in which the client operates. B) The degree to which information technology is used in the accounting function. C) The relationship between management, the board of directors, and external stakeholders. D) The degree to which the auditor intends to use internal audit personnel to perform substantive tests.

the degree to which information technology is used in the accounting function

Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of illegal acts? A) The exchange of property for similar property in a nonmonetary transaction. B) The discovery of unexplained payments made to government employees. C) The presence of several difficult-to-audit transactions affecting expense accounts. D) The failure to develop adequate procedures that detect unauthorized purchases.

the discovery of unexplained payments made to government employees

An auditor would least likely initiate a discussion with a client's audit committee concerning: A) the methods used to account for significant unusual transactions. B) the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated. C) indications of fraud and illegal acts committed by a corporate officer that were discovered by the auditor. D) disagreements with management as to accounting principles that were resolved during the current year's audit.

the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.

audit risk

the probability that an auditor will give an inappropriate opinion on financial statements

detection risk

the probability that audit procedures will fail to produce evidence of material misstatements

inherent risk

the probability that material misstatements have occurred in transactions entering the accounting system

An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion. The auditor need not perform this omitted procedure if: A) the results of alternative procedures that were performed compensate for the omission. B) the auditor's assessed level of detection risk is low. C) the omission is documented in a communication with the audit committee. D) no individual investment is material to the financial statements taken as a whole.

the results of alternative procedures that were performed compensate for the omission

Which of the following is a definition of control risk? A) The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls. B) The risk that the auditor will not detect a material misstatement. C) The risk that the auditor's assessment of internal controls will be at less than the maximum level. D) The susceptibility of material misstatement assuming there are no related internal controls, policies, or procedures.

the risk that a material misstatement will not be prevented or detected on a timely basis by the clients internal controls

Custody of inventory is transferred to the shipping area upon authorization of: A) the customer order. B) the shipping order. C) the invoice. D) the purchase order.

the shipping order

) Which of the following would be consistent with an employee taking cash receipts from customers on account? A) The total of the accounts receivable subsidiary ledger balances is less than the accounts receivable control account. B) The total of the accounts receivable subsidiary ledger balances is greater than the accounts receivable control account. C) Total cash receipts from customers for the month are less than credit sales for the month. D) Total cash receipts from customers for the month are greater than credit sales for the month.

the total of the accounts receivable subsidiary ledger balances is less than the accounts receivable control account

Write-offs of doubtful accounts should be approved by: A) the salesperson. B) the credit manager. C) the treasurer. D) the cashier.

the treasurer

While performing an audit of the financial statements of a company for the year ended December 31, year 1, the auditor notes that the company's sales increased substantially in December, year 1, with a corresponding decrease in January, year 2. In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor's initial indication about the potential for fraud in sales revenue? A) There is a broad indication of misappropriation of assets. B) There is an indication of theft of the entity's assets. C) There is an indication of embezzling receipts. D) There is a broad indication of financial reporting fraud.

there is a broad indication of financial reporting fraud

Auditors would use the enterprise risk model: A) to reduce the client's business risk. B) to determine detection risk. C) to evaluate management's risk assessment. D) to monitor client risk.

to evaluate management risk assessment

Auditors use brainstorming: A) to heighten the audit team's awareness of fraud potential. B) to heighten management's awareness of fraud potential. C) to determine detection risk. D) to set materiality.

to heighten the audit teams awareness of fraud potential

) Which of the following is the least important audit reason for the auditor's obtaining an understanding of a company's internal control? A) To serve as a basis for constructive suggestions. B) To plan subsequent substantive tests. C) To identify types of possible misstatements that may occur. D) To consider factors that may affect the risk of material misstatement.

to serve as a basis for constructive suggestions

The purpose of an audit strategy is: A) to provide a defense against litigation. B) to gain an understanding of the client. C) to comply with securities law. D) to set the scope, timing, and direction for auditing each relevant assertion.

to set the scope, timing, and direction for auditing each relevant assertion

When an account receivable is considered uncollectible, the person who generally authorizes the write-off is the client's: A) credit manager. B) treasurer. C) accountant. D) internal auditor.

treasurer

An auditor is evaluating a client's internal controls. Which of the following situations would be the most difficult internal control issue for an auditor to detect? A) The accounting staff neglects the control, due to increased transactions to be processed. B) The technology department writes a program that does not properly implement the control, due to a lack of understanding. C) Two employees, who work in different departments, are circumventing an internal control. D) Someone erroneously disables edit checks in a software program designed to identify control exceptions.

two employees who work in different departments are circumventing an internal control

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor? A) Understating the sales journal. B) Overstating the accounts receivable control account. C) Overstating the accounts receivable subsidiary ledger. D) Understating the cash receipts journal.

understating the sales journal

) Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities? A) Unrecorded purchases. B) Unrecorded sales. C) Merchandise purchases being charged to selling and general expense. D) Fictitious sales.

unrecorded sales

) Which of the following most likely would be detected by an auditor's review of a client's sales cutoff? A) Shipments lacking sales invoices and shipping documents. B) Excessive write-offs of accounts receivable. C) Unrecorded sales at year-end. D) Lapping of year-end accounts receivable.

unrecorded sales at year end

Which of the following statements is correct concerning the use of negative confirmation requests? A) Unreturned negative confirmation requests rarely provide significant explicit evidence. B) Negative confirmation requests are effective when detection risk is low. C) Unreturned negative confirmation requests indicate that alternative procedures are necessary. D) Negative confirmation requests are effective when understatements of account balances are suspected.

unreturned negative confirmation requests indicate that alternative procedures are necessary

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate? A) Move detailed analytical procedures from year end to interim. B) Increase the dollar threshold of vouching customer invoices. C) Send negative accounts receivable confirmations instead of positive accounts receivable confirmations. D) Use more experienced audit team members to perform year-end testing.

use more experienced audit team members to perform year end testing

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: A) existence. B) valuation or allocation. C) completeness. D) rights and obligations.

valuation or allocation

An auditor is concerned about a policy of management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor's concern? A) Matching purchase orders to accounts payable. B) Verifying that approved spending limits are not exceeded. C) Tracing sales orders to the revenue account. D) Reviewing minutes of board meeting.

verifying that approved spending limits are not exceeded

The type of financial analysis that expresses balance sheet accounts as percentages of total assets is known as: A) horizontal analysis. B) vertical analysis. C) net worth analysis. D) expenditure analysis.

vertical analysis

financial statement amounts expressed as proportions of a base

vertical analysis

Favorite Soda Company distributes beverages in the Portland, Oregon area. Which of the following would be the test to determine that shipments made were actual sales? A) Trace bills of lading to the sales journal. B) Vouch entries made in the sales journal to the bills of lading. C) Trace entries in the sales journal to accounts receivable subsidiary ledger. D) Vouch bills of lading to the customer order documents.

vouch bills of lading to the customer order documents

An auditor noted that client sales had increased 10 percent for the year. At the same time, cost of goods sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. The auditor interviewed the sales manager who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor best test the sales manager's representation? A) Perform additional inquiries with sales personnel. B) Obtain copies of all price lists in use during the year and vouch the prices to sales invoices. C) Send confirmations asking customers about unit prices paid for product. D) Vouch vender invoices to payments made after year-end.

vouch vender invoices to payments made after year end

The actions in tests of controls involve ________, ________, ________, ________ and ________.

vouching, tracing, observing, scanning, recalculating

Another way to obtain information about the internal control system is to take a single example of a transaction and ________ the process from its initiation to its recording in the accounting records.

walkthrough

When fraud risk is significant, and management cooperation is unsatisfactory, the auditors will most likely: A) perform extended audit procedures. B) consult with fraud examiners. C) report directly to the Securities and Exchange Commission within one day. D) withdraw from the engagement.

withdraw from the engagement

) If tests of controls induce the auditor to change the assessed level of control risk for Property Plant & Equipment from 50% to 100%, and audit risk (6%) and inherent risk remain constant, the acceptable level of detection risk: A) would most likely change from 10% to 5%. B) would most likely change from 20% to 40%. C) would most likely change from 30% to 15%. D) would be unchanged, because the auditor has control over detection risk. E) cannot be determined because inherent risk is not given.

would most likely change from 30 to 15%

Ed's wife Diane owns a printing business in town. Ed works in the accounts payable department of Jiffy Abs Vitamin Company. Diane prints invoices for work supposedly done for Jiffy Abs (no actual work was performed) and Ed places in the invoice in the approved for payment invoice pile. Jiffy Abs pays these invoices and sends Diane a check. 1. Name two internal controls that might prevent or detect these fraudulent payments. 2. Name two audit procedures that might detect this fraud.

1. Controls include: • Voucher package that includes a receiving report • An approved vendor list and the requirement that the vendor be on the approved vendor list • The inclusion of an expense account for the charging of all material. Each department gets a report of all expenses each month for review. 2. Procedures include: • Review of voucher packages to ensure goods were received • Review of voucher packages to ensure vendors are on the approved vendor list • Analytical procedures to identify increases in expenditures for specific types of products (printing services) • Analytical procedures to identify increases in expenditures to specific vendors.

What are the six steps auditors of public companies should use to audit internal control over financial reporting (ICOFR)?

1. Planning the engagement 2. Using a top-down approach to gain an understanding 3. Testing controls 4. Evaluating control deficiencies 5. Wrapping up: forming an opinion on the effectiveness of internal control over financial reporting 6. Reporting on internal control

In tests of controls auditing, auditors need to define "deviations" in advance. Give seven examples of control compliance deviations related to a client's processing of credit sales transactions and the related assertion that was violated.

: a. Occurrence. Fictitious sales are recorded. b. Completeness. Shipments to customers are not recorded. c. Accuracy. Customer credit is not approved. d. Accuracy. Sales are recorded in the wrong amount (quantity and/or price is wrong). e. Classification. Sales are recorded in the wrong revenue account. f. Completeness. Some sales are not posted to the customer accounts. g. Cutoff. Sales are recorded for the wrong date.

The negative request form of accounts receivable confirmation is useful particularly when the: Assessed Level of Risk of Material Misstatement Relating to Receivables Is Number of Small Balances Is Proper Consideration by the Recipient Is A. Low Many Likely B. Low Few Unlikely C. High Few Likely D. High Many Likely

A

Describe how a lockbox works and indicate the advantages of such a system.

A lockbox is a post office box under the control of the bank. The bank will send employees to retrieve checks from the box and deposit them in the company's account. The bank will provide a listing of deposits and the remittance advises to the company. The bank may also provide images of the checks (if the company is willing to pay for these additional services). There are two main advantages to this system: 1. Checks are retrieved by the bank and never enter the company. Therefore the risk that checks will be misplaced or end up in the hands of the wrong individuals is eliminated. Separation of duties also becomes easier since the custody of the asset is no longer a possible for record keepers or authorizers. 2. The money is placed immediately into the bank allowing for immediate access to the use of the funds or interest on the funds.

What constitutes a material weakness?

A material weakness in internal control is defined as a deficiency, or combination of deficiencies, that results in a reasonable possibility that a material misstatement would not be prevented or detected on a timely basis. The following circumstances should be regarded as strong indicators that a material weakness exists: • Restatement of previously issued financial statements to reflect the correction of a misstatement. • Evidence of material misstatements (caught by the audit team) that were not prevented or detected by the client's internal controls. • Ineffective oversight of the financial reporting process by the entity's audit committee. • Indication of fraud (either material or immaterial) by senior management.

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified? A) A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers. B) A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances. C) A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers. D) A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

) Management's report on internal controls must include each of the following except: A) a statement that management is responsible for establishing and maintaining adequate internal control over financial reporting. B) a statement identifying the framework management uses to evaluate the effectiveness of the company's internal control. C) a statement providing management's assessment of the effectiveness of the company's internal control. D) a statement providing management's evaluation of the company's control environment.

A statement providing management evaluations of the company's control environment

What are some of the problems in establishing an internal control system in small business?

A. Separation of functional responsibilities would be difficult because of the small number of employees. B. The owner manager has to assume a greater role to oversee and supervise authorization, recordkeeping, and custodial functions. C. The owner manager must be diligent, competent, and have a high degree of integrity.

Which of the following statements is correct with respect to the elements of the "fraud triangle"? A) Motive is a cause that pressures people into action. B) Opportunity refers to a situation that allows someone with motive to carry out fraud. C) A lack of integrity describes a person who does not stick to the social or organizational ethical code. D) Fraud is most common when these three factors exist together. E) All of these statements are correct.

All of the answers are correct

Can an auditor place complete reliance on internal control to the exclusion of other audit procedures? Explain your answer using the audit risk model.

An auditor cannot place complete reliance on internal control to the exclusion of other audit procedures. You cannot have a condition where AR = IR × CR (= 0) × DR = 0

procedures performed that rly on relationships among account balances and or relevant non financial data

Analytical procedures

) Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. They range from simple comparisons to the use of complex models involving many relationships and elements of data. They involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by auditors. Required: a. Describe the broad purposes of analytical procedures. b.Identify the sources of information from which an auditor develops expectations.

Answer: a. Analytical procedures are used for these broad purposes: 1. To assist the auditor in planning the nature, timing, and extent of other audit procedures. 2. As a substantive test to obtain evidential matter about particular assertions related to account balances or classes of transactions. 3. As an overall review of the financial information in the final review stage of the audit. b. An auditor's expectations are developed from the following sources of information: 1. Financial information for comparable prior periods considering known changes. 2. Anticipated results for example, budgets, forecasts, and extrapolations. 3. Relationships among elements of financial information within the period. 4. Information regarding the industry in which the client operates. 5. Relationships of financial information with relevant nonfinancial information.

This question tests your ability to perceive the place(s) where various potential problems may exist and the type of problem (overstatement or understatement) that may exist. It asks that you supply the words or descriptions that complete the analysis begun by applying analytical procedures. Required: For each of the items below, identify the account(s) that need(s) to be audited carefully and the reason (i.e., potential overstatement or understatement of _______). a. If the current year accounts receivable are larger than last year but the allowance for doubtful accounts is the same. b. If the current year inventory is larger than last year and the current year gross margin (profit) is larger. c. If current year long-term liabilities are larger than last year and the interest expense is the same. d. If current year fixed assets are larger and current depreciation expense is the same as last year.

Answer: a. The collectability of accounts receivable is of concern. The allowance for doubtful accounts may be understated. The bad debt expense may be understated. b. The existence of the inventory account is of concern. Inventory may be overstated. Cost of goods sold may be understated. c. The amount of accrued interest is of concern. Interest expense may be understated. Less likely, long-term liabilities could be overstated. d. Depreciation expense and accumulated depreciation may be understated. It may also be possible that fixed assets are overstated.

What is the difference between a significant deficiency and a material weakness?

Answer: The difference between a significant deficiency and a material weakness is the (1) likelihood and (2) materiality that a potential (or actual) misstatement would not be detected on a timely basis.

You are the auditor for Wilson Wholesale Products Inc. As part of the audit of accounts receivable, Wilson has provided you an electronic file representing its accounts receivable as of its fiscal year-end. The file includes the customer name, customer address, customer number, sales invoice number, sales invoice date, and amount. Required: Describe three or more substantive audit procedures you might perform using computer-assisted audit tools and techniques (CAATs) with this computer file.

Answer: The following substantive tests could be performed with CAATs. a. Compute the total accounts receivable by adding the sales invoice amounts. Compare to general ledger control account total (manual). b. Scan the sales invoice date field for any dates after the year-end. c. Prepare an aged accounts receivable trial balance using the sales invoice date and amount. d. Select and print accounts for confirmation of accounts receivable. e. Scan the sales invoice amount for negative balances. f. Other ________.

Which of the following would not likely be found in the minutes of the board of directors? A) Amount of dividends declared. B) Approval to pledge assets as security for debts. C) Authorization of officers' salaries. D) Approval of a new desktop computer for the controller.

Approval of a new desktop computer for the controller

Why is it important for auditors to understand their clients' business risks?

Auditing standards recognize that most business risks are eventually reflected in the financial statements. So audit teams now devote a significant amount of their engagement planning to their clients' business risks. Firms believe they must learn more about their clients' business strategies and processes to understand whether the financial statements are fairly presented.

Explain the different opinions that auditors can issue for an entity's internal control over financial reporting.

Auditors can issue the following opinions for an audit of an entity's internal control over financial reporting: • Unqualified. No material weaknesses exist. • Disclaimer. The audit team cannot perform all of the procedures considered necessary and therefore cannot issue an opinion. • Adverse opinion. One or more material weaknesses exist.

What procedures should an auditor perform for a positive confirmation that is not returned by the client's customer?

Auditors have to perform alternative procedures to ensure existence. These include examining (a) subsequent cash receipts, (b) sales orders, invoices and shipping documents, and (c) correspondence files for past due accounts. Examining subsequent cash receipts is a particularly effective test because a customer's payment of the account is strong evidence that the receivable existed. The cash receipt should be traced to the remittance advice and the deposit into cash.

A small business owner can best offset the lack of separation of duties by: A) creating an internal audit department. B) installing the latest computer equipment and software. C) being actively involved in the accounting process. D) relying on the external auditor to detect errors.

Being actively involved in the accounting process

Horizontal analysis refers to: A) the trend of income from year to year of persons suspected of fraud. B) changes of financial statement numbers and ratios across several years. C) financial statement amounts expressed each year as a proportion of a base amount. D) the change in a suspect's net worth from the beginning to the end of a period.

Changes of financial statement numbers and ratios across several years

What is the difference between an internal control's design effectiveness and its operating effectiveness?

Design effectiveness determines whether the controls over financial reporting, if operating effectively, would be expected to prevent or detect errors or fraud that could result in a material financial misstatement. Operating effectiveness is whether the control is operating as designed and whether the person performing the control possesses the necessary authority and qualifications to perform the control effectively.

Narbona, CPA, is reviewing controls over cash received through a bank night depository. Which controls would she find most important? A) Responsibilities are rotated for processing night depository receipts among employees of the various departments. B) Dual control (joint custody) is established over the contents of the night depository box from the time of removal until initial recording is completed. C) Vacations are required for all employees engaged in night depository activities. D) All deposit tickets related to night deposits are numbered.

Dual control (joint custody) is established over the contents of the night depository box from the time of removal until initial recording is completed.

What is dual direction testing?

Dual direction testing involves samples selected to obtain evidence about control over completeness in one direction and control over occurrence in the other direction. The completeness direction determines whether all transactions that occurred were recorded. The occurrence direction determines whether recorded transactions actually occurred.

Which of the following is the best reason for prenumbering in sequence such documents as sales orders, shipping documents, and sales invoices? A) Enables company personnel to determine the accuracy of each document. B) Enables personnel to determine the proper period for recording of sales revenue and receivables. C) Enables personnel to check the numerical sequence for missing documents and unrecorded transactions. D) Enables personnel to determine the validity of recorded transactions.

Enables personnel to check the numerical sequence for missing documents and unrecorded transactions.

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are: A) elements of audit risk whereas detection risk is not. B) changed at the auditor's discretion whereas detection risk is not. C) considered at the individual account-balance level whereas detection risk is not. D) functions of the client and its environment whereas detection risk is not.

Functions of the client and its environment whereas detection risk is not

Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been: A) authorized. B) implemented. C) tested. D) monitored.

Implemented

Is the confirmation of cash and accounts receivable required according to auditing standards? Explain.

In general, the use of confirmations for cash balances and trade accounts receivable is considered a requirement under auditing standards (SAS 67). However, auditors may decide not to use them if suitable alternative procedures are available and applicable in certain circumstances. Justifications for not using confirmations include (a) receivables are not material, (b) confirmations would not be effective, and (c) analytical procedures and other substantive tests of details procedures would provide sufficient, competent evidence.

What are the independent auditor's responsibilities to detect and report errors and frauds?

Independent auditors have the responsibility to (1) assess the risk that errors and frauds may cause a client's financial statements to be materially misstated, and (2) design the audit to provide reasonable assurance of detecting errors and frauds material to the financial statements. Extended procedures should be performed if evidence indicates that material errors or frauds might exist.

Which of the following is an example of a control activity that satisfies the accuracy control objective for sales invoices? A) Recorded sales in the sales journal are supported by invoices. B) Invoices, shipping documents, and sales orders are prenumbered and the numerical sequence is checked. C) Sales are recorded in the proper account. D) Invoice quantities are compared to shipment and customer order quantities.

Invoice quantities are compared to shipment and customer order quantities

) Which of the following is a factor in the control environment? A) Segregation of duties. B) Information processing. C) Performance reviews. D) Management's philosophy and operating style.

Managements philosophy and operating style

Which of the following is ordinarily considered an "extended procedure" during the independent audit of financial statements? A) Send positive confirmations on recorded customer accounts receivable balances. B) Perform physical observation and test count during the client's inventory taking. C) Measure the time lag between the date of recording cash receipts in the books to the date of deposit credit in the bank. D) Conduct interviews with the client's sales billing personnel to learn about sales recording control activities.

Measure the time lag between the date of recording cash receipts in the books to the date of deposit credit in the bank.

List, and briefly describe, the three factors that increase the probability of fraud.

Motive, opportunity, and lack of integrity are the three factors that increase the probability of fraud. Motive is a cause that pressures people into action. Economic motives are common in business fraud. Opportunity refers to a situation that allows someone with motive to carry out fraud. An example would be a lack or lapse of a specific control or controls in an organization. A lack of integrity describes a person who does not stick to the social or organizational ethical code. They may rationalize their actions to defend such a lack of integrity. Fraud is most common when these three factors exist together.

) In determining the adequacy of the allowance for uncollectible accounts, the least valuable evidence would be obtained from: A) an aging schedule of past due accounts that the auditor has tested. B) correspondence with the client's collection agency. C) financial statements of individual customers. D) no reply to negative confirmations.

No reply to negative confirmations

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the activities by: A) confirmation and observation. B) observation and inquiry. C) analytical procedures and confirmation. D) inquiry and analytical procedures.

Observation and inquiry

Generally accepted auditing standards (GAAS) give auditors considerable discretion to decide the amount of work required to satisfy auditing standards guiding internal control evaluation and related audit planning. Which of the descriptions below best expresses the minimum amount of work permitted by GAAS for nonpublic companies? A) Do not obtain an understanding of client environment, accounting, or control activities. Do not document the decision to assess control risk at maximum. Perform 100% substantive audit on all financial statement transactions and balances. B) Obtain an understanding of client environment, accounting, and control activities. Document the decision to assess control risk at maximum. Perform an extensive but not 100% substantive audit on financial statement transactions and balances. C) Obtain an understanding of client environment, accounting, and control activities, and perform detail tests of controls. Document the decision to assess control risk below the maximum. Perform restricted substantive audit on financial statement transactions and balances, considering the control risk assessment. D) Obtain an understanding of client environment, accounting, and control activities, and perform detail tests of controls. Document the decision to assess control risk at zero. Perform no substantive audit on financial statement transactions and balances, since zero control risk means that no errors or fraud can reach the accounts.

Obtain an understanding of client environment, accounting, and control activities. Document the decision to assess control risk at maximum. Perform an extensive but not 100% substantive audit on financial statement transactions and balances.

Which of the following is not an objective of internal controls over financial reporting as defined by the Sarbanes-Oxley Act? A) Policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant. B) Policies and procedures that provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant. C) Policies and procedures that provide reasonable assurance regarding the compliance with applicable laws and regulations. D) Policies and procedures that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements.

Policies and procedures that provide reasonable assurance regarding the compliance with applicable laws and regulations.

The composition of Oak and Company's accounts receivable are as follows Over $250,000 - 5 accounts Between $25,000 and $250,000 - 80 accounts Less than $25,000 - 200 accounts The best confirmation strategy for the auditor is: A) positive confirmations on a sample of all 285 accounts. B) positive confirmations on all a sample of all accounts over $25,000; negative confirmations on a sample of accounts less than $25,000. C) positive confirmations on all 5 accounts over $250,000; positive confirmations on a sample of the accounts between $25,000 and $25,000; negative confirmations on a sample of accounts less than $25,000. D) positive confirmations on all 5 accounts over $250,000; negative confirmations on a sample of the accounts less than $250,000.

Positive confirmations on a sample for all 285 accounts

At the end of each business day, Safe Company sends its bank a listing of all checks written during the day including the check number, payee, and amount. When a check is sent to the bank for payment the bank compares the payee and the amount with the listing provided by Safe Company. This system is called: A) PayChex. B) Pay-As-You-Go. C) Positive Pay. D) Pay Master.

Positive pay

In testing control activities, an auditor ordinarily selects from a variety of techniques, including: A) inquiry and analytical procedures. B) reperformance and observation. C) comparison and confirmation. D) inspection and verification.

Reperformance and observation

Which of the following should be performed by the persons opening the mail and recording payments? A) Restrictive endorsement on all checks. B) Entering of payment information into customer accounts. C) The preparation of the deposit slip and the delivery of the checks to the bank. D) The segregation of all payments made on accounts listed as past due.

Restrictive endorsements on all checks

A client has a separate sales group for its largest "preferred" customers. This is a select group of customers that normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform? A) Prepare a schedule of purchases and payments for these customers. B) Send out negative confirmations on a large sample of these customers. C) Inquire of the sales manager regarding the accounts receivable terms. D) Send out positive confirmations on a large sample of these customers.

Send out positive confirmations on a large samples of these customers

Regardless of the assessed level of control risk, an auditor of a non-public company would perform some: A) tests of controls to determine the effectiveness of internal control policies. B) analytical procedures to verify the design of internal control activities. C) substantive tests to restrict detection risk for significant transaction classes. D) dual purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

Substantive tests to restrict detection risk for significant transaction classes

When you examine canceled checks returned in the bank statement by a client's bank, how could you tell whether the amount on the check had been skillfully raised (increased, say, from $75.00 to $7,500 in the amount box, and altered in the written line from "Seventy-five dollars" to "Seventy-five hundred dollars") after the check was cleared by the bank? (An employee might do this to "support" a $7,500 cash disbursement journal entry.)

The bank imprints the check with the amount paid by the bank (magnetic print in the lower right corner). It will be 00007500, meaning $75.00.

Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded? A) The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances. B) The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly. C) The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers. D) The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

What kind of error or fraud could happen if the inventory warehouse manager also had responsibility for making the physical inventory count and reconciling discrepancies to the perpetual inventory records?

The inventory manager could 1. Commit an inadvertent error of miscounting and adjust the error into the accounts and inventory records. 2. Steal inventory and adjust the inventory records permanently to cover up the theft.