Exam 2 review questions
Allison Everhart, an employee in accounts payable, believes she can run a fictitious invoice through the accounts payable system and collect the money. She knows payments are subject to an audit. Which account would be the best place to hide the fraud? A. Consulting service expense. B. Wage expense. C. Inventory. D. Property tax expense.
A
An auditor is required to confirm accounts receivable if the accounts receivable balances are: A. material to the financial statements B. Smaller than expected C. Subject to valuation estimates D. Older than the prior year
A
Effectiveness of audit procedures would be reduced by A. Performing procedures during the interim period as opposed to at the fiscal year-end date. B. Deciding to obtain external evidence instead of internal evidence. C. Performing audit procedures at the fiscal year-end date as opposed to the interim period. D. Selecting larger sample sizes for audit.
A
If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"? A. Accounts receivable. B. Inventory. C. Bad debt expense. D. Cost of goods sold.
A
It is acceptable under generally accepted auditing standards for an audit team to: A. Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive tests. B. Assess control risk at zero and perform a minimum of detection work. C. Decide that audit risk can be 40 percent. D. Assess inherent risk at zero and perform a minimum of detection work.
A
One of the typical characteristics of management fraud is: A. Victimization of investors through the use of materially misleading financial statements. B. Illegal acts committed by management to evade laws and regulations. C. Conversion of stolen inventory to cash deposited in a falsified bank account. D. Falsification of documents in order to misappropriate funds from an employer.
A
The best way to enact a broad fraud prevention program is to A. Establish a corporate culture conducive to ethical behavior in the workplace. B. Install airtight control systems of checks and supervision. C. Name an ethics officer who is responsible for receiving and acting upon fraud tips. D. Place dedicated hotline telephones on walls around the workplace with direct communication to the company ethics officer.
A
The best way to enact a broad fraud prevention program is to A. Practice management "of the people and for the people" to help them share personal and professional problems. B. Install airtight control systems of checks and supervision. C. Place dedicated hotline telephones on walls around the workplace with direct communication to the company ethics officer. D. Name an "ethics officer" who is responsible for receiving and acting on fraud tips.
A
The most important fundamental component of an entity's internal control is A. The control environment. B. Reliability of financial reporting. C. Effectiveness and efficiency of operations. D. Compliance with applicable laws and regulations.
A
The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the A. Authorization of transactions from the custody of related assets. B. Human resources function from the controllership function. C. Operational responsibility from the record-keeping responsibility. D. Administrative controls from the internal accounting controls.
A
What is the primary objective of the fraud brainstorming session? A. Assess the potential for material misstatement due to fraud. B. Determine audit risk and materiality. C. Identify whether analytical procedures should be applied to the revenue accounts. D. Determine whether the planned procedures in the audit plan will satisfy the general audit objectives.
A
When auditing with "fraud awareness," auditors should especially notice and follow up employee activities under which of these conditions? A. The company always estimates the inventory but never takes a complete physical count. B. The board of directors reviews and approves all investment transactions. C. Management has published a company code of ethics and sends frequent communication newsletters about it. D. The petty cash box is always locked in the desk of the custodian.
A
When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to: A. Evaluate the effect of the noncompliance on the financial statements. B. Determine whether other similar acts could have occurred. C. Determine whether to contact law enforcement officials. D. Recommend remedial actions to the audit committee.
A
Which of the following is the best reason for prenumbering in numerical sequence documents such as sales orders, shipping documents, and sales invoices? A. Enables personnel to check the numerical sequence for missing documents and unrecorded transactions. B. Enables company personnel to determine the accuracy of each document. C. Enables personnel to determine the validity of recorded transactions. D. Enables personnel to determine the proper period recording of sales revenue and receivable
A
Which of the following would occur during the planning stage of Audit Data Analytics? A. Auditor must determine the nature, timing, and extent of the work that will be completed as part of the ADA. B. Auditor can conclude that no additional risk of material misstatement is present in population items. C. Auditors may need to subject client systems to reliability testing. D. Auditor must consider whether the data has a logical connection to the purpose of the audit procedure.
A
A material weakness is a situation in which A. There is a remote likelihood that a material misstatement would be detected on a timely basis. B. It is reasonably possible that a material misstatement would not be detected on a timely basis. C. It is probable that an immaterial financial statement misstatement would not be detected on a timely basis. D. It is reasonably possible that an immaterial misstatement would not be detected on a timely basis.
B
A reason to believe that a fraud has occurred is called A. Restitution. B. Predication. C. Forensics. D. Deliberation.
B
An audit committee is: A. Composed of internal auditors. B. Composed of members of a company's board of directors who are not involved in the day-to-day operations of the company. C. A committee composed of persons not associating in any way with the client or the board of directors. D. Composed of members of the audit team.
B
Analytical procedures are generally used to produce evidence from: A. Confirmations mailed directly to the auditors by client customers. B. Relationships among current financial balances and prior balances, forecasts, and nonfinancial data. C. Physical observation of inventories. D. Detailed examination of external, external-internal, and internal documents.
B
Fraud risk factors are events or conditions that indicate which of the following? A. An incentive or pressure to perpetrate fraud. B. All of the choices are correct. C. An opportunity to carry out a fraud. D. An attitude or rationalization that justifies a fraudulent action.
B
In a fraud examination, original documents must be protected from damage and tampering to A. Develop documentation for employee dismissal. B. Protect the chain of custody. C. Ensure that suspects are unaware of an investigation in progress. D. Establish motive.
B
The primary purpose for obtaining an understanding of internal control during the audit of a nonissuer is to: A. provide a basis for making constructive suggestions in a management letter. B. determine the nature, timing, and extent of further audit tests to be performed. C. provide the rationale for the inherent risk assessment at the financial statement assertion level. D. provide information for a communication of internal control-related matters to management.
B
The risk of material misstatement is composed of which audit risk components? A. Control risk and detection risk. B. Inherent risk and control risk. C. Inherent risk, control risk, and detection risk. D. Inherent risk and detection risk.
B
When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to: A. Records of account receivable write-offs B. Sales invoices with shipping documents and customer sales invoices. C. Cash remittance lists and bank deposit slips. D. Credit files and reports.
B
When auditing the revenue and collection cycle, auditors normally select balances to confirm from the: A. General ledger B. Accounts receivable listing C. Sales Journal D. Cash receipts listing
B
Which of the following circumstances would most likely cause an audit team to perform extended procedures? A. The company maintains several different petty cash funds. B. The client made several large adjustments at or near year-end. C. Supporting documents are produced when requested. D. The company has recently hired a new chief financial officer after the previous one retired.
B
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. Kiting bank balances B. Inflating sales for the year C. Misappropriating merchandise D. Lapping year-end accounts receivable.
B
A client has a separate sales group for its largest "preferred" customers, a select group of customers who 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. Send out negative confirmations on a large sample of these customers. B. Prepare a schedule of purchases and payments for these customers. C. Send out positive confirmations on a large sample of these customers. D. Inquire of the sales manager regarding the accounts receivable terms.
C
An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue? A. The auditor should perform tests of controls at an interim date to obtain audit evidence about the operational effectiveness of internal controls over sales. B. The auditor should review period-end compensation to determine whether bonuses were paid to meet earnings goals. C. The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period. D. The auditor should perform analytical procedures at an interim date and discuss any changes in the level of sales with senior management.
C
Analytical procedures used when planning an audit should concentrate on: A. Management assertions in financial statements. B. Predictability of account balances based on individual significant transactions. C. Accounts and relationships that can represent specific potential problems and risks in the financial statements. D. Weaknesses in the company's internal control activities.
C
Auditing standards do not require auditors of financial statements to: A. Understand the nature of errors and frauds. B. Design audits to provide reasonable assurance of detecting errors and frauds. C. Report all errors and frauds found to police authorities. D. Assess the risk of occurrence of errors and frauds.
C
During an audit of cash, the auditor is most concerned with the management assertion of A. Occurrence. B. Rights and obligations. C. Existence. D. Valuation or allocation.
C
Embezzlement is a type of fraud that involves A. A manager's falsification of financial statements for the purpose of misleading investors and creditors. 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. An employee's misappropriating an employer's money or property not entrusted to him or her.
C
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. II and III are fraud risk factors. B. I is a fraud risk factor. C. I, II, and III are fraud risk factors. D. I and II are fraud risk factors. E. None of the choices are a fraud risk factor.
C
Revenues are normally considered to have been earned when: A. Goods have been shipped B. All the possibility of return has expired C. The company has substantially accomplished what it must to be entitled to the benefits. D. The cash is collected
C
Sales are normally recorded on the date of the: A. Payment check B. Customer purchase order C. Sales Invoice D. Bill of lading
C
Tests of controls in a GAAS audit are required for A. Obtaining evidence about the financial statement assertions. B. Accomplishing control over the occurrence of recorded transactions. C. Obtaining evidence about the operating effectiveness of client control activities. D. Applying analytical procedures to financial statement balances.
C
The first step of planning an ADA is: A. select techniques and tools used for performing the ADA. B. document the objective of the ADA. C. determine the overall purpose and specific objectives of the ADA. D. select the ADA that is best suited for the purpose.
C
When completing the audit of internal controls for an issuer, AS 2201 requires auditors to report on: Management's Report on Internal Control An Audit of Internal Control a. No No b. Yes No c. No Yes d. Yes Yes
C
When completing the audit of internal controls for an issuer, the PCAOB requires the audit team to audit internal controls over: A. Operations. B. Compliance with regulations. C. Financial reporting. D. All of the choices are correct.
C
When documenting an Audit Data Analytic (ADA), an experienced auditor with no prior connection to the engagement should be able to understand all these elements of the ADA except: A. results of procedures performed and evidence obtained. B. nature, timing, and extent of procedures performed. C. the software used in performing the ADA. D. conclusions reached and significant judgments made.
C
When making a decision about the dollar amount in an account balance based on a sample, the audit team considers the risk of incorrect acceptance to be more serious than the risk of incorrect rejection because A. The incorrect rejection decision impairs the efficiency of the audit. B. The audit team will do additional work and discover the misstatement of the incorrect decision. C. The incorrect acceptance decision impairs the effectiveness of the audit. D. Sufficient appropriate audit evidence will not have been obtained.
C
Which of the following control activities could prevent a paid disbursement voucher from being presented for payment a second time? A. Vouchers should be prepared by individuals who are responsible for signing disbursement checks. B. Disbursement vouchers should be approved by at least two responsible management officials. C. The official signing the check should compare it with the voucher and should stamp "paid" on the voucher documents. D. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.
C
Which of the following is a preventive control? A. Recalculation of a sample of payroll entries by internal auditors. B. Reconciliation of a bank account. C. Separation of duties between the payroll and personnel departments. D. Detailed fluctuation analysis completed by the CFO for revenue.
C
Which of the following is a specific audit procedure that would be completed in response to a particular fraud risk in an account balance or class of transactions? A. Carefully avoiding conducting interviews with people in areas that are most susceptible to fraud. B. Exercising more professional skepticism. C. Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis. D. Studying management's selection and application of accounting principles more carefully.
C
Which of the following is an effective audit procedure that an auditor might use to detect kiting between intercompany banks? A. Prepare a year-end bank reconciliation. B. Review the composition of authenticated deposit slips. C. Prepare a schedule of the bank transfers. D. Review subsequent bank statements.
C
Which of the following is true about electronic cash confirmations obtained through Confirmation (Confirmation.com)? A. Responses to electronic confirmations are often delayed compared with manual confirmations. B. Electronic cash confirmations provide more convincing evidence for the completeness assertion than manual confirmations. C. Auditors must obtain evidence supporting the reliability of controls surrounding the Confirmation (Confirmation.com) process. D. It is more difficult to determine the authenticity of an electronic confirmation obtained through Confirmation compared with confirmations mailed to the auditors.
C
Which of the following major stages of the audit is most closely related to variables sampling? A. Determining preliminary levels of performance materiality. B. Performing tests of controls procedures. C. Performing substantive procedures. D. Searching for the possible occurrence of subsequent events.
C
Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit? A. The entity's financial statements are generated at an outside service center. B. The entity's fiscal year ends on June 30. C. The entity enters into significant derivative transactions as hedges. D. The entity's financial data is available only in computer-readable form.
C
Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern? A. "We received this shipment on January 2." B. "This amount was paid on December 30." C. "These goods were returned for credit on November 15." D. "The balance does not reflect our sales discount for paying by January 5."
C
Which of these arrangements of duties could most likely lead to an embezzlement or theft? A. The cashier prepared the bank deposit, endorsed the checks with a company stamp, and delivered the cash and checks to the bank for deposit (no other bookkeeping duties). B. The accounts receivable clerk received a list of payments received by the cashier so he could make entries in the customers' accounts receivable subsidiary accounts. C. The inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records. D. The financial vice president received checks made out to suppliers and the supporting invoices, signed the checks, and mailed the checks.
C
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 establishment of a chief ethics officer. B. The establishment of a hotline for reporting unethical behavior. C. The posting of the code of ethics in the company workplace. D. The violation of the code of ethics by senior management.
D
Analytical procedures can be used in which of the following ways? A. As a means of overall review near the end of the audit. B. As "attention-directing" methods when planning an audit at the beginning. C. As substantive audit procedures to obtain evidence during an audit. D. All of the choices are correct.
D
Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the: A. Internal control over balances confirmed. B. Ownership of the balances confirmed. C. Collectability of the balances confirmed. D. Existence of the balances confirmed.
D
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 treat it as an exception. B. Accept the confirmation and file it in the working papers. C. Not accept the confirmation and select another customer's balance to confirm. D. Accept the confirmation but verify the source and content through a telephone call to the respondent.
D
If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must A. Provide additional examples of responses to assessed fraud risks relating to fraudulent financial reporting. B. Assess control risk at less than the maximum for all relevant assertions. C. Perform only substantive procedures. D. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance.
D
In most audits of large entities, control risk assessment contributes to audit efficiency, which means that A. Auditors will be able to reduce the cost of substantive procedures by an amount less than the cost of tests of controls. B. The cost of control evaluation work will exceed the cost of substantive procedures. C. The cost of substantive procedures will exceed the cost of control evaluation work. D. Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs.
D
In the audit of accounts receivable, the most important emphasis should be on the: A. Completeness Assertion B. Rights and obligations assertion. C. Presentation & Disclosure Assertion D. Existence Assertion
D
Select the proper order in performing Audit Data Analytics: I. Evaluate the results and conclude on whether the purpose and specific objectives of performing the ADA have been achieved II. Consider the relevance and reliability of the data used III. Plan the ADA IV. Perform the ADA V. Access and prepare the data for purposes of the ADA A. V, III, II, IV, I B. II, III, V, IV, I C. II, V, III, IV, I D. III, V, II, IV, I
D
The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as: A. Control risk. B. Detection risk. C. Inherent risk. D. Risk of material misstatement.
D
When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except: A. Examine client correspondence files. B. Examine Shipping documents C. Send a second request D. Do nothing for immaterial balances
D
When auditing with "fraud awareness," auditors should especially notice and review employee activities under which of these conditions? A. The board of directors reviews and approves all investment transactions. B. The petty cash box is always locked in the desk of the custodian. C. Management has published a company code of ethics and sends frequent communication newsletters about it. D. The company always estimates the inventory but never takes a complete physical count.
D
When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on: A. Whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure. B. Whether the account has a history of errors. C. The magnitude of the potential misstatement resulting from the deficiency or the deficiencies. D. Both the magnitude of the potential misstatement resulting from the deficiency or the deficiencies and whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure. E. All of the choices are correct.
D
Which of the following does not accurately summarize auditors' requirements regarding internal control? Issuer Non issuer a. Understanding Yes Yes b. Documenting Yes Yes c. Evaluating control risk Yes Yes d. Test controls Yes Yes
D
Which of the following is correct regarding including client data in audit documentation for an issuer? A. Auditors are required to retain their client's data in documentation for seven years. B. Auditors should always include client data in their documentation to enable an experienced auditor with no prior connection to the engagement to replicate testing. C. Client data should never be included in documentation. D. There is no specific requirement to include client data in auditing documentation.
D
Which of the following is least indicative of fraudulent activity? A. Three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later. B. Internal auditors cannot locate several credit memos to support reductions of customers' balances. C. Numerous cash refunds have been made to different people at the same post office box address. D. Bank reconciliation has no outstanding checks or deposits older than 15 days.
D
Which of the following would probably not be considered an indication of a material weakness? A. Ineffective oversight by the audit committee. B. Immaterial fraud committed by senior management. C. Evidence of a material misstatement. D. Overproduction by the manufacturing plant.
D
