Auditing I - Exam 2

Auditors are more concerned with the occurrence assertion for revenues than the completeness assertion because: A. Clients are more likely to overstate than understate revenues B. Clients are more likely to understate than overstate revenues C. It is difficult to determine when services have been performed D. The allowance for doubtful accounts often is understated

A. Clients are more likely to overstate than understate revenues

Which of the following procedures would ordinarily be expected to best reveal improper cutoff of sales at the balance sheet date? A. Compare shipping documents with sales records. B. Apply gross profit rates to inventory disposed of during the period. C. Trace payments received subsequent to the balance sheet date. D. Send accounts receivable confirmation requests.

A. Compare shipping documents with sales records.

Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the: A. Difficulty and expense involved in testing a particular item. B. Assessment of control risk at a low level. C. Low inherent risk involved. D. Relationship between the cost of obtaining evidence and its usefulness.

A. Difficulty and expense involved in testing a particular item.

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 tests of details. B. Level of inherent risk. C. Extent of tests of controls. D. Level of detection risk.

A. Extent of tests of details.

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.

A. Incompatible duties.

A substantive strategy differs from a reliance strategy in that a substantive strategy includes... A. Increased implementation of detailed tests of transactions and balances. B. Extra tests of controls. C. Increased emphasis on verbal representations from management. D. Setting control risk at a minimum level.

A. Increased implementation of detailed tests of transactions and balances.

In testing plant and equipment balances, an auditor may physically inspect new additions listed on the summary of plant and equipment transactions for the year. This procedure is designed to obtain evidence concerning management's assertions about classes of transactions and events, and specifically, which assertion? A. Occurrence. B. Cutoff. C. Authorization. D. Classification.

A. Occurrence.

Vouching is used primarily to test which of the following assertions about classes of transaction? A. Occurrence. B. Completeness. C. Authorization. D. Classification.

A. Occurrence.

Which is not a key segregation of duties for the revenue process? Different parties should... A. Prepare shipping orders and prepare bills of lading B. Perform the credit and billing functions C. Perform the shipping and billing function D. Receive cash and adjust accounts receivable

A. Prepare shipping orders and prepare bills of lading

The basic concept of internal control which recognizes that the cost of internal control should not exceed the benefits expected to be derived is known as... A. Reasonable assurance B. Management responsibility C. Limited liability D. Management by exception

A. Reasonable assurance

Footing is an example of... A. Recalculation. B. Confirmation. C. Inquiries. D. Analytical procedures.

A. Recalculation.

Walkthroughs usually involve all of the following audit procedures except: A. Reperformance. B. Inquiry. C. Observation. D. Inspection.

A. Reperformance.

In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following? A. The credit manager's opinion B. An aging schedule of past due accounts C. Subsequent year collections of amounts in accounts receivable at the balance sheet date D. Ratios calculated showing the past relationship of the valuation allowance to net credit sales

A. The credit manager's opinion

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about... A. Valuation and allocation B. Completeness C. Existence D. Rights and obligations

A. Valuation and allocation

To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would... A. request the senders to mail the original forms to the auditor or the auditor may follow up with a telephone call to verify the response. B. examine subsequent cash receipts for the accounts in question. C. consider the e-mail responses to the confirmations to be exceptions. D. mail second requests to the e-mail respondents.

A. request the senders to mail the original forms to the auditor or the auditor may follow up with a telephone call to verify the response.

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Which of the following statements is true regarding the auditor's use of confirmations? A. The positive confirmation form must always be used to confirm all balances regardless of size. B. A combination of the two confirmation types can be used, with the positive form used for large balances and the negative form used for small balances. C. A combination of the two confirmation types can be used, with the positive form used for trade receivables and the negative form for other receivables. D. The positive confirmation form should be used when controls related to receivables are satisfactory and the negative confirmation form should be used when controls related to receivables are unsatisfactory.

B. A combination of the two confirmation types can be used, with the positive form used for large balances and the negative form used for small balances.

The control environment component of internal controls includes all of the following except... A. Management's operating style B. Access to computer programs C. Organizational structure D. Human resource policies and practices

B. Access to computer programs

It is important for the CPA to consider the competence of the audit clients' employees because their competence bears directly and importantly upon the... A. Cost/benefit relationship of the system of internal control B. Achievement of the objectives of the system of internal control C. Comparison of recorded accountability with assets D. Timing of the tests to be performed

B. Achievement of the objectives of the system of internal control

Which of the following presumptions does not relate to the appropriateness of audit evidence? A. The more effective the internal control system, the more assurance it provides about the accounting data and financial statements. B. An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost. C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. D. The independent auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly.

B. An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost.

Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of... A. Authorization, execution, and payment B. Authorization, recording, and custody C. Custody, execution, and reporting D. Authorization, payment, and recording

B. Authorization, recording, and custody

Tracing copies of sales invoices to shipping documents will provide evidence that all... A. Shipments to customers were recorded as receivables B. Billed sales were shipped C. Accounts receivable ledger is complete D. Shipments to customers were billed

B. Billed sales were shipped

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to assess the assertion of... A. Authorization and accuracy. B. Completeness. C. Cutoff. D. Occurrence.

B. Completeness.

Tracing is used primarily to test which of the following assertions about classes of transactions? A. Occurrence. B. Completeness. C. Cutoff. D. Classification

B. Completeness.

Assessing control risk below maximum involves all of the following except... A. Identifying specific controls to rely on B. Concluding that controls are ineffective C. Performing tests of controls D. Analyzing the achieved level of control risk after performing tests of controls

B. Concluding that controls are ineffective

Tests designed to detect credit sales made after the end of the year that have been recorded in the current year provide assurance about management's assertion of... A. Classification B. Cutoff C. Occurrence D. Authorization and accuracy

B. Cutoff

Auditors sometimes use ratios as audit evidence. For example, an unexplained increase in the ratio of gross profit to sales may suggest which of the following possibilities? A. Fictitious purchases B. Fictitious sales C. Selling and general expenses erroneously being recorded as merchandise purchases D. Unrecorded sales

B. Fictitious sales

Factors that the auditor should consider as increasing the effectiveness of the audit committee include all of the following except whether... A. It is independent of management B. It is comprised almost exclusively of members of management, ensuring detailed knowledge of the company's operations C. It asks management difficult questions D. It interacts regularly with internal auditors

B. It is comprised almost exclusively of members of management, ensuring detailed knowledge of the company's operations

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when... A. External policies established by parties outside the entity affect its accounting practices B. Management is dominated by one individual C. Internal auditors have direct access to the board of directors and the entity's management D. The audit committee is active in overseeing the entity's financial reporting policies

B. Management is dominated by one individual

Management philosophy and operating style most likely would have a significant influence on an entity's control environment when... A. The internal auditor reports directly to management. B. Management is dominated by one individual. C. Accurate management job descriptions delineate specific duties. D. The audit committee actively oversees the financial reporting process.

B. Management is dominated by one individual.

For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by... A. Reperformance and corroboration. B. Observation and inquiry. C. Inspection and vouching. D. Confirmation and recomputation.

B. Observation and inquiry.

Which statement concerning audit evidence is not valid? A. The auditor is seldom convinced beyond all doubt with respect to all aspects of the financial statements being audited. B. The auditor performs tests to collect convincing evidence that the financial statements are not misstated. C. The auditor weighs the cost of obtaining evidence with its usefulness. D. The auditor considers the amount of risk present in deciding the nature and extent of evidence to be collected.

B. The auditor performs tests to collect convincing evidence that the financial statements are not misstated.

When reviewing bank confirmations for any liens on receivables, the auditor is testing the ______________ assertion. A. valuation and allocation B. rights and obligations C. existence D. completeness

B. rights and obligations

What is channel stuffing? A. A company records revenue before delivery terms can be arranged B. A company records revenue on goods that will be shipped overseas C. A company induces distributors to buy substantially more inventory than they can promptly resell D. A company alters the terms and conditions of recorded sales to entice customers to accept delivery of goods

C. A company induces distributors to buy substantially more inventory than they can promptly resell

Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that... A. Fraud exists within the relevant accounts. B. Internal control activities are not operating effectively. C. Additional tests of details are required. D. The communication with the audit committee should be revised.

C. Additional tests of details are required.

Which set of assertions is tested when, during completion of the audit, the audit partner conducts a final review of the format of the entity's balance sheet? A. Assertions about classes of transactions and events. B. Assertions about account balances at the period end. C. Assertions about presentation and disclosure. D. None of these.

C. Assertions about presentation and disclosure.

Of the following, which is the least persuasive type of audit evidence? A. Documents mailed by outsiders to the auditor. B. Correspondence between the auditor and third party vendors. C. Copies of client sales invoices inspected by the auditor. D. Computations made by the auditor.

C. Copies of client sales invoices inspected by the auditor.

Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables'... A. Valuation B. Classification C. Existence D. Completeness

C. Existence

An entity's control activities include all of the following except... A. Performance reviews B. Information processing C. External auditor's tests of controls D. Segregation of duties

C. External auditor's tests of controls

An entity's control activities include all of the following except: A. Performance reviews. B. Information processing. C. External auditor's tests of controls. D. Segregation of duties.

C. External auditor's tests of controls.

In creating lead schedules for an audit engagement, what financial information is needed to begin? A. Interim financial information, such as third quarter sales, net income, and inventory and receivables balances. B. Specialized journal information, such as the invoice and purchase order numbers of the last few sales and purchases of the year. C. General ledger information, such as account numbers, prior-year account balances, and current year unadjusted information. D. Adjusting entry information, such as deferrals and accruals and reclassification journal entries.

C. General ledger information, such as account numbers, prior-year account balances, and current year unadjusted information.

Which of the following misstatements is not related to the completeness assertion for revenue? A. Goods are shipped, but revenue is not recorded B. This year's revenue is recorded next year C. Next year's revenue is recorded this year D. Revenue is not recognized for services that have been performed

C. Next year's revenue is recorded this year

Which assertions may be tested for the "transactions and events" category of management assertions? A. Existence, completeness, rights and obligations, accuracy, cutoff and classification. B. Occurrence, completeness, rights and obligations, accuracy, cutoff and classification. C. Occurrence, completeness, authorization, accuracy, cutoff and classification. D. Existence, rights and obligations, accuracy, authorization, and completeness.

C. Occurrence, completeness, authorization, accuracy, cutoff and classification.

In determining whether transactions have been recorded, the direction of the audit testing should start from the... A. General ledger balances. B. Adjusted trial balance. C. Original source documents. D. General journal entries.

C. Original source documents.

A well-prepared flowchart should make it easier for the auditor to A. Prepare audit procedure manuals. B. Prepare detailed job descriptions. C. Perform walkthroughs. D. Assess the degree of accuracy of financial data.

C. Perform walkthroughs.

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive procedures? A. Relationships involving balance sheet accounts. B. Transactions subject to management discretion. C. Relationships involving income statement accounts. D. Data subject to audit testing in the prior year.

C. Relationships involving income statement accounts.

Analytical procedures are... A. Never required. B. Required for planning, substantive testing, and overall review of the financial statements. C. Required for planning and overall review of the financial statements. D. Required during planning only.

C. Required for planning and overall review of the financial statements.

Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent... A. Disclosures of information that significantly contradict the auditor's going concern assumption B. Material fraud or illegal acts perpetrated by high-level management C. Significant design flaws in internal controls or poor implementation of internal controls D. Manipulation or falsification of accounting records or documents from which financial statements are prepare

C. Significant design flaws in internal controls or poor implementation of internal controls

The audit working papers belong to... A. The client. B. The government. C. The audit firm. D. They are public record documents.

C. The audit firm.

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

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

The risk assessment component of internal controls refers to... A. The auditor's assessment of control risk B. The auditor's assessment of client risk C. The entity's identification and analysis of risks relevant to achievement of its objectives D. The entity's monitoring of the potential for material misstatements

C. The entity's identification and analysis of risks relevant to achievement of its objectives

A confirmation is used to... A. Verify the inventory count is correct. B. Verify that a control is being observed. C. Verify a representation from a third party. D. Verify that a specific trend is correct.

C. Verify a representation from a third party.

All audit documentation should have a heading, which includes... A. Name of the client. B. Title of the working paper. C. Client's year-end date. D. All of the above.

D. All of the above.

Which of the following presumptions is correct about the reliability of audit evidence? A. Information obtained indirectly from outside sources is the most reliable audit evidence. B. To be reliable, audit evidence should be convincing rather than persuasive. C. Reliability of audit evidence refers to the amount of corroborative evidence obtained. D. An effective internal control system provides more reliable audit evidence.

D. An effective internal control system provides more reliable audit evidence.

Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must... A. Be well documented and cross-referenced in the audit documents. B. Be based on sources that are considered reliable. C. Bear a direct relationship to the audit assertion. D. Be persuasive enough to enable the auditor to form an opinion.

D. Be persuasive enough to enable the auditor to form an opinion.

The documentation of an auditor's understanding of internal controls... A. Is optional B. Must be exclusively in either narrative, questionnaire, or flowchart form C. Must include flowcharts D. Can use any combination of narratives, questionnaire, or flowchart

D. Can use any combination of narratives, questionnaire, or flowchart

An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about the... A. Efficiency of management's decision-making process B. Appropriate prices that the entity should charge for its products C. Methods of assigning production tasks to employees D. Entity's ability to accurately process and summarize financial data

D. Entity's ability to accurately process and summarize financial data

An aged trial balance of accounts receivable is normally used by the auditor to... A. Verify the existence of recorded receivables. B. Ensure that all accounts are promptly credited. C. Evaluate the results of tests of controls. D. Evaluate the allowance for bad debts.

D. Evaluate the allowance for bad debts.

Once a CPA has determined that accounts receivable have increased because of slow collection in a "tight money" environment, the CPA would be likely to... A. Increase the balance in the allowance for bad debts account B. Review the going concern ramifications C. Require the client to tighten their credit policy D. Expand tests regarding the collectability of receivable

D. Expand tests regarding the collectability of receivable

All of the following are significant deficiencies except: A. Absence of appropriate reviews of transactions. B. Evidence of willful wrongdoing by lower-level employees. C. Inadequate provisions for safeguarding assets. D. Inventory is highly subject to obsolescence.

D. Inventory is highly subject to obsolescence.

Which of the following show the detailed general ledger accounts that make up a financial statement category on the auditor's working trial balance? A. Account analyses. B. Supporting schedules. C. Control accounts. D. Lead schedules

D. Lead schedules

As part of gaining an initial understanding of internal control, an auditor is required to do all of the following except: A. Consider factors that affect the risk of material misstatement. B. Ascertain whether internal control policies and procedures have been placed in operation. C. Identify the types of potential misstatements that can occur. D. Obtain knowledge about the operating effectiveness of the internal control.

D. Obtain knowledge about the operating effectiveness of the internal control.

Which assertions may be tested for the "presentation and disclosure" category of management assertions? A. Existence, rights and obligations, cutoff and classification, completeness, accuracy and valuation. B. Occurrence, rights and obligations, existence, accuracy and valuation, cutoff and classification. C. Occurrence, completeness, classification and understandability, cutoff and classification. D. Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation.

D. Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation.

Which of the following might be detected by an auditor's review of the client's sales cutoff? A. Excessive goods returned for credit. B. Unrecorded sales discounts. C. Lapping of year-end accounts receivable. D. Overstated sales for the year.

D. Overstated sales for the year.

At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization be of least concern to the auditor? A. Granting of credit. B. Shipment of goods. C. Determination of discounts. D. Selling of goods for cash.

D. Selling of goods for cash.

Tracing bills of lading to sales invoices provides evidence that... A. Shipments to customers were properly authorized. B. Recorded sales were shipped. C. Billed sales were shipped. D. Shipments to customers were billed.

D. Shipments to customers were billed.

Which of the following is the best argument against the use of negative accounts receivable confirmations? A. The cost-per-response is excessively high. B. There is no way of knowing if the intended recipients received them. C. Recipients are likely to feel that, in reality, the confirmation is a subtle request for payment. D. The inference drawn from receiving no reply may not be correct.

D. The inference drawn from receiving no reply may not be correct.

True or False: Once a level of control risk has been assessed in planning, it cannot be changed.

False

True or False: The auditor gathers audit evidence to evaluate the auditor's assertions.

False

True or False: The auditor must understand internal control before assessing inherent risk.

False

True or False: The completeness assertion refers to transactions and events being recorded in the correct accounting period.

False

True or False: The cut-off assertion refers to ensuring that transactions and events that should have been recorded actually have been recorded.

False

True of False: Audit evidence includes written information used by the auditor in arriving at an opinion about the fairness of financial statements.

True

True or False: A negative confirmation requests that customers respond only if they disagree with the amount due to the client stated in the confirmation.

True

True or False: A non-reliance strategy is used when control risk has been set at the maximum level.

True

True or False: Internal control includes monitoring of controls.

True

True or False: Tests of controls must be performed if control risk is set at below the maximum level.

True

True or False: The auditor must use his or her professional judgment to determine the amount (the "sufficiency") of audit evidence to be gathered.

True

True or False: The competency of evidence refers to the quality of audit evidence.

True

True or False: The concept of internal control includes IT systems and manual systems.

True