Exam 2 Audit

1. commitment to integrity and ethical values 2. effective board of directors 3. effective organizational structure 4. attracting, developing, and retaining component employees 5. individual accountability

1. A clearly articulated statement of ethical values 4. Management is committed to hiring employees with appropriate levels of education, experience, and evidence of integrity and ethical behavior 2. The extent of independence of this group is critical The extent of independence of this group is critical 3. A well designed structure provides a basis for planning, directing, and controlling operations 5. The organization must hold individuals accountable for their internal control responsibilities

1. ___________should develop a statement of ethical values. 2.If employees lack ________, they may be ineffective in performing their duties. 3.Organizational structure provides a basis for planning, directing, and controlling _________. 4.The audit committee should be composed of directors who are not _______of the organization. 5.To enhance the control environment, management develops job __________.

1. Senior management 2. Skills 3. Operations 4. Employees 5. Descriptions

1.Segregation of duties is a control aimed at _______ misstatement. 2.The requirement to _________ journal entries is an example of a preventive control 3.The goal to find a misstatement that has already been made is a type of ________ control. 4.Preparing bank ___________ can help detect misstatements that have been made.

1. preventing 2. approve 3. detective 4. reconciliations

1.Cash reconciliations can be tested via __________. 2.It is important to verify ______ of both cash receipts and cash disbursements. 3.Cash confirmations need to be mailed under the control of the __________. 4.Auditors are often concerned with the _______of cash, as this is where most misstatements occur. 5.Cutoff bank statements include activity for the period _______the period being audited.

1. reperformance 2. cutoff 3. auditor 4. overstatement 5. after

1.Many instances of misstatement are based on the inappropriate recognition of ______. 2.One way to avoid misstatement of revenue is to ensure the client has proper ________. 3.Revenues are deemed to be earned when the company has ______ what it must do to fulfill its obligation. 4.Side _________ can substantially alter the terms of a sale. 5.________ needs to be assured in order to recognize revenue.

1. revenue 2. cutoff policies 3. accomplished 4. agreement 5. collectibility

detective control

A requirement to prepare bank reconciliations

corrective control

Maintaining backups of data

Which of the following is a preventive control? a. Separation of duties between the payroll and personnel departments. b.Recalculation of a sample of payroll entries by internal auditors. c.Detailed fluctuation analysis completed by the CFO for revenue. d.Reconciliation of a bank account.

a. Separation of duties between the payroll and personnel departments

The auditor should assess control risk for each relevant assertion by evaluating the evidence obtained from all sources, including a. The auditor's testing of controls for the audit of internal control on an issuer. b. Misstatements detected during the financial statement audit.Incorrect c. Any control deficiencies identified during the audit. d. All of the choices are correct.

a. The auditor's testing of controls for the audit of internal control on an issuer

Fraud risk factors are events or conditions that indicate which of the following? a. All of the choices are correct. b. An attitude or rationalization that justifies a fraudulent action. c. An incentive or pressure to perpetrate fraud. d. An opportunity to carry out a fraud.

a. all of the choices are correct

When performing confirmation of cash balances with a bank, the auditor is primarily gathering evidence related to which financial statement assertion? a. Existence b. Completeness c. Presentation and Disclosure d. Valuation

a. existence

From the data files shown, list the information that you would include on the confirmation requests. If the information should be included from the Master file, select Yes. If not, select No. a..Ledger b.Sales c.Customer account n d.Date of last billing e.Balance (gross) f.Discount available to customer (memo account only) g.Date of last purchase

a. no b. no c. yes d. no e. yes f. yes g. no

Which of the following is an effective audit procedure that an auditor might use to detect kiting between intercompany banks? a. Prepare a schedule of the bank transfers. b. Review subsequent bank statements. c. Prepare a year-end bank reconciliation. d. Review the composition of authenticated deposit slips.

a. prepare a schedule of the bank transfers

Which of the following accounts is not normally part of the revenue and collection cycle? a. Purchases Returns and Allowances. b. Sales. c. Accounts Receivable. d. Cash.

a. purchases returns and allowances

Revenues are normally considered to have been earned when: a. The company has substantially accomplished what it must to be entitled to the benefits. b. Goods have been shipped. c. All possibility of return has expired. d. The cash is collected.

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

Matters that could affect the necessary extent of testing for a control activity as it related to the degree of auditor reliance on a control activity would not include the following: A. The relevance and reliability of the audit evidence to be obtained to test the operating effectiveness of a control activity. b. The expected rate of deviation for a control activity. c. The length of time that the auditor is planning to rely on the operating efficiency of the control activity. d. The frequency of the performance of the control by the company during the period being audited.

a. the relevance and reliability of the audit evidence to be obtained to test the operating effectiveness of a control activity

A code of ethics is an important element of a fraud prevention program. Which of the following would diminish the effectiveness of a company's code of conduct? a. The violation of the code of ethics by senior management. b. The posting of the code of ethics in the company workplace. c. The establishment of a hotline for reporting unethical behavior. d. The establishment of a chief ethics officer.

a. the violation of the code of ethics by senior management

During the confirmation of accounts receivable, an auditor receives a confirmation via the client's fax machine. Which of the following actions should the auditor take? a. Not accept the confirmation and select another customer's balance to confirm. b. Accept the confirmation but verify the source and content through a telephone call to the respondent. c. Not accept the confirmation and treat it as an exception. d. Accept the confirmation and file it in the working papers.

b. accept the confirmation but verify the source and content through a telephone call to the respondent

Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client? a. A narrative memorandum describing the control system. b. An internal control questionnaire. c. A flowchart of the documents and procedures used by the company. d. A detailed description of entity and transaction level controls.

b. an internal control questionnaire.

When completing the audit of internal controls for an issuer, AS 2201 requires auditors to report on: Management's Report on Internal ControlAn Audit of Internal Control a.No No b.Yes No c.No Yes d.Yes Yes

c

Embezzlement is a type of fraud that involves a. An employee's misappropriating an employer's money or property not entrusted to him or her. b. An employee's mistaken representation of opinion that causes incorrect accounting entries. c. An employee misappropriating an employer's money or property entrusted to the employee's control in the employee's normal job. d. A manager's falsification of financial statements for the purpose of misleading investors and creditors.

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

Incorporating elements of unpredictability in the selection of audit procedures to be performed by auditors include all of the following except a. Performing audit procedures on an unannounced basis. b. Varying the timing of the audit procedures. c. Sending attorney letters to every attorney listed under the legal expense account. d. Selecting items for testing that have lower amounts or are otherwise outside customary selection parameters. e. None of the choices are correct.

c. sending attorney letters to every attorney listed under the legal expense account

Fraud risk factors are events or conditions that indicate I. An incentive or pressure to perpetrate fraud. II. An opportunity to carry out the fraud. III. An attitude or rationalization that justifies the fraudulent action. Which of the following statements is true? a. I is a fraud risk factor. b. None of the choices are a fraud risk factor. c. II and III are fraud risk factors. d. I, II, and III are fraud risk factors. e. I and II are fraud risk factors.

d. I,II, and III are fraud risk factors

If the auditors encounter a significant scope limitation in evaluating an issuer's internal control over financial reporting, which of the following types of opinions on the effectiveness of the company's internal control over financial reporting would be appropriate? A. Unqualified opinion or adverse opinion. b.Unqualified opinion or disclaimer of opinion c.Qualified opinion or adverse opinion. d. Disclaimer of opinion.

d. disclaimer of opinion

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. All sales invoices have been properly posted to customer accounts. b. Sales invoices represent bona fide sales. c. All sales have been recorded. d. Entries in the accounts receivable subsidiary ledger were properly invoiced.

d. entries in the accounts receivable subsidiary ledger were properly invoiced

An auditor noted that client sales 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. Based on this information, the auditor is most likely concerned about: a. Improper credit approvals. b. Unrecorded costs. c. Improper sales cutoff. d. Fictitious sales

d. fictitious sales

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. Recorded sales were shipped. b. Shipments to customers were recorded as sales. c., Invoiced sales were shipped. d. Shipments to customers were invoiced.

d. shipments to customers were invoiced

When planning the audit of internal controls for an issuer, the audit team should:

identify significant accounts, locations, and relevant assertions.

Preventive control

segregation of duties