Exam 2 Suggested MC

6-13 Which of the following statements about internal control is correct? a. A properly maintained internal control system reasonably ensures that collusion among employees cannot occur. b. The establishment and maintenance of internal control is an important responsibility of the internal auditor. c. An exceptionally strong internal control system is enough for the auditor to eliminate substantive procedures on a significant account balance. d. The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system.

...d. The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system.

7-28 In auditing a public company, Natalie, an auditor for N. M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue? a. An unqualified report. b. An adverse report. c. A disclaimer of opinion. d. An exculpatory opinion.

a. An unqualified report.

6-16 After obtaining an understanding of an entity's internal control system, an auditor may set control risk at high for some assertions because he or she a. Believes the internal controls are unlikely to be effective. b. Determines that the pertinent internal control components are not well documented. c. Performs tests of controls to restrict detection risk to an acceptable level. d. Identifies internal controls that are likely to prevent material misstatements.

a. Believes the internal controls are unlikely to be effective.

10-21 The negative request form of accounts receivable confirmation is useful particularly when •The Assessed Level of Control Risk Relating to Receivables Is •The Number of Small Balances Is •Consideration by the Recipient Is a. Low, High, Likely b. Low, Low, Unlikely c. High, Low, Likely d. High, High, Likely

a. Low, High, Likely

10-22 An auditor should 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. The collectibility of the receivables is in doubt. d. Pledging of the receivables is probable.

a. No reply to a positive confirmation request is received.

7-30 Which of the following statements concerning control deficiencies is true? a. The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit. b. All significant deficiencies are material weaknesses. c. All control deficiencies are significant deficiencies. d. An auditor must immediately report material weaknesses and significant deficiencies discovered during an audit to the PCAOB.

a. The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit.

7-32 Which of the following most likely represents a weakness in internal control of an IT system? a. The systems analyst reviews output and controls the distribution of output from the IT department. b. The accounts payable clerk prepares data for computer processing and enters the data into the computer. c. The systems programmer designs the operating and control functions of programs and participates in testing operating systems. d. The control clerk establishes control over data received by the IT department and reconciles control totals after processing.

a. The systems analyst reviews output and controls the distribution of output from the IT department.

10-16 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.

a. Understating the sales journal.

10-19 Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff? a. Unrecorded sales for the year. b. Lapping of year-end accounts receivable. c. Excessive sales discounts. d. Unauthorized goods returned for credit.

a. Unrecorded sales for the year.

5-27 An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n) a.Lead schedule. b.Supporting schedule. c.Audit control account. d.Working trial balance.

a.Lead schedule.

5-21 Which of the following types of audit evidence is the least reliable? a.Prenumbered purchase order forms prepared by the entity. b.Bank statements obtained from the entity. c.Test counts of inventory performed by the auditor. d.Correspondence from the entity's attorney about litigation.

a.Prenumbered purchase order forms prepared by the entity.

10-18 If the number of days' sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated? a. Existence or occurrence. b. Completeness. c. Rights and obligations. d. Classification.

b. Completeness.

6-18 Assessing control risk below high 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

7-20 A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a a. Deficiency in design. b. Deficiency in operation. c. Significant deficiency. d. Material weakness.

b. Deficiency in operation.

10-15 Smith Corporation has numerous customers. A customer file is maintained and includes a customer record with a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to a. Develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations. b. Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit. c. Request a printout of all account balances so that they can be manually checked against the credit limits. d. Request a printout of a sample of account balances so that they can be individually checked against the respective credit limits.

b. Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit.

6-20 The highest-quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by a. Inspection of documents prepared by a third party but which contain the initials of those applying entity controls. b. Observation by the auditor of the employees performing control activities. c. Inspection of a flowchart of duties performed and available personnel. d. Inquiries of employees who apply control activities.

b. Observation by the auditor of the employees performing control activities.

6-19 Which of the following audit techniques would most likely provide an auditor with the most assurance about the effectiveness of the operation of a control? a. Inquiry of entity personnel. b. Reperformance of the control by the auditor. c. Observation of entity personnel. d. Walkthrough.

b. Reperformance of the control by the auditor.

7-24 If the financial reporting risks for a location are low and the entity has good entity-level controls, management may rely on which of the following for its assessment? a. Documentation and test controls over specific risks. b. Self-assessment processes in conjunction with entity-level controls. c. Documentation and test entity-level controls over the entire entity. d. Selective control test at that location.

b. Self-assessment processes in conjunction with entity-level controls.

6-24 An auditor's flowchart of an entity's accounting system is a diagrammatic representation that depicts the auditor's a. Program for tests of controls. b. Understanding of the system. c. Understanding of the types of fraud that are probable, given the present system. d. Documentation of the study and evaluation of the system.

b. Understanding of the system.

10-23 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 and allocation. c. Completeness. d. Rights and obligations.

b. Valuation and allocation.

5-20 Which of the following presumptions is least likely to relate to the reliability of audit evidence? a.The more effective internal control, the more assurance it provides about the accounting data and financial statements. b.An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and 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 is formed within a reasonable time to achieve a balance between benefit and cost.

5-17 Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness? a.Reviewing standard bank confirmations for indications of cash manipulations. b.Comparing a sample of shipping documents to related sales invoices. c.Observing the entity's distribution of payroll checks. d.Confirming a sample of recorded receivables by direct communication with the debtors.

b.Comparing a sample of shipping documents to related sales invoices.

5-22 Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence? a.Bank statements obtained from the entity. b.Computations made by the auditor. c.Prenumbered entity sales invoices. d.Vendors' invoices included in the entity's files.

b.Computations made by the auditor.

5-23 An auditor would be least likely to use confirmations in connection with the examination of a.Inventory held in a third-party warehouse. b.Refundable income taxes. c.Long-term debt. d.Stockholders' equity.

b.Refundable income taxes.

5-24 The assurance bucket is filled with all of the following types of evidence except a.Test of controls. b.The audit report. c.Substantive analytical procedures. d.Tests of details.

b.The audit report.

5-19 Which of the following statements concerning audit evidence is correct? a.To be appropriate, audit evidence should be either persuasive or relevant but need not be both. b.The measure of the reliability of audit evidence lies in the auditor's judgment. c.The difficulty and expense of obtaining audit evidence concerning an account balance are a valid basis for omitting the test. d.An entity's general ledger may be sufficient audit evidence to support the financial statements.

b.The measure of the reliability of audit evidence lies in the auditor's judgment.

7-27 AnnaLisa, an auditor for N. M. Neal & Associates, is prevented by the management of Lileah Company from auditing controls over inventory. Lileah is a public company. Management explains that controls over inventory were recently implemented by a highly regarded public accounting firm that the entity hired as a consultant and insists that it is a waste of time for AnnaLisa to evaluate these controls. Inventory is a material account, but procedures performed as part of the financial statement audit indicate the account is fairly stated. AnnaLisa found no material weaknesses in any other area of the entity's internal control relating to financial reporting. What kind of report should AnnaLisa issue on the effectiveness of Lileah's internal control? a. An unqualified report. b. An adverse report. c. A disclaimer of opinion. d. An exculpatory opinion.

c. A disclaimer of opinion.

7-29 In auditing ICFR for a public company, Emily finds that the entity has a significant subsidiary located in a foreign country. Emily's accounting firm has no offices in that country, and the entity has thus engaged another reputable firm to conduct the audit of internal control for that subsidiary. The other auditor's report indicates that there are no material weaknesses in the foreign subsidiary's ICFR. What should Emily do? a. Disclaim an opinion because she cannot rely on the opinion of another auditor in dealing with a significant subsidiary. b. Accept the other auditor's opinion and express an unqualified opinion, making no reference to the other auditor's report in her audit opinion. c. Accept the other auditor's opinion after evaluating the auditor's work and make reference to the other auditor's report in her audit opinion. d. Qualify the opinion because she is unable to conduct the testing herself, and this constitutes a significant scope limitation.

c. Accept the other auditor's opinion after evaluating the auditor's work and make reference to the other auditor's report in her audit opinion.

7-23 Which of the following controls would most likely be tested during an interim period? a. Controls over nonroutine transactions. b. Controls over the period-end financial reporting process. c. Controls that operate on a continuous basis. d. Controls over transactions that involve a high degree of subjectivity.

c. Controls that operate on a continuous basis.

7-22 Entity-level controls can have a pervasive effect on the entity's ability to meet the control criteria. Which one of the following is not an entity-level control? a. Controls to monitor results of operations. b. Management's risk assessment process. c. Controls to monitor the inventory taking process. d. The period-end financial reporting process.

c. Controls to monitor the inventory taking process.

10-14 Which of the following internal controls would be most likely to deter the 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 the credit approval function. c. Segregation 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.

c. Segregation of duties between receiving cash and posting the accounts receivable ledger.

7-31 Significant deficiencies and material weaknesses must be communicated to an entity's audit committee because they represent a. Material fraud or illegal acts perpetrated by high-level management. b. Disclosures of information that significantly contradict the auditor's going concern assumption. c. Significant deficiencies in the design or operation of internal control. d. Potential manipulation or falsification of accounting records.

c. Significant deficiencies in the design or operation of internal control.

6-22 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 deficiencies in the design or operation of the internal control. d. Manipulation or falsification of accounting records or documents from which financial statements are prepared.

c. Significant deficiencies in the design or operation of the internal control.

6-17 Regardless of the assessed level of control risk, an auditor would perform some a. Tests of controls to determine the effectiveness of internal controls. b. Analytical procedures to verify the design of internal controls. c. Substantive procedures to restrict detection risk for significant transaction classes. d. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

c. Substantive procedures to restrict detection risk for significant transaction classes.

10-20 Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because a. A majority of recipients usually lack 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 evidence that is statistically quantifiable.

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

7-21 Which of the following is not a factor that might affect the likelihood that a control deficiency could result in a misstatement in an account balance? a. The susceptibility of the related assets or liability to loss or fraud. b. The interaction or relationship of the control with other controls. c. The financial statement amounts exposed to the deficiency. d. The nature of the financial statement accounts, disclosures, and assertions involved.

c. The financial statement amounts exposed to the deficiency.

10-12 For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve a. Employee overtime wages. b. Credit granted to customers. c. Write-offs of customer accounts. d. Cash disbursements

c. Write-offs of customer accounts.

5-25 The current file of the auditor's working papers should generally include a.A flowchart of the accounting system. b.Organization charts. c.A copy of the financial statements. d.Copies of bond and note indentures.

c.A copy of the financial statements.

5-18 In testing the existence assertion for an asset, an auditor ordinarily works from the a.Financial statements to the potentially unrecorded items. b.Potentially unrecorded items to the financial statements. c.Accounting records to the supporting documents. d.Supporting documents to the accounting records.

c.Accounting records to the supporting documents.

5-28 The primary objective of final analytical procedures is to a.Obtain evidence from details tested to corroborate particular assertions. b.Identify areas that represent specific risks relevant to the audit. c.Assist the auditor in assessing the validity of the conclusions reached on the audit. d.Satisfy doubts when questions arise about an entity's ability to continue in existence.

c.Assist the auditor in assessing the validity of the conclusions reached on the audit.

5-29 The substantive analytical procedure known as trend analysis is best described by a.The comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data. b.Development of a model to form an expectation using financial data, nonfinancial data, or both to test account balances or changes in account balances between accounting periods. c.The examination of changes in an account over time. d.The comparison of common-size financial statements over time.

c.The examination of changes in an account over time.

7-33 A primary advantage of using generalized audit software packages to audit the financial statements of an entity that uses an IT system is that the auditor may a. Consider increasing the use of substantive tests of transactions in place of analytical procedures. b. Substantiate the accuracy of data through self-checking digits and hash totals. c. Reduce the level of required tests of controls to a relatively small amount. d. Access information stored on computer files while having a limited understanding of the entity's hardware and software features.

d. Access information stored on computer files while having a limited understanding of the entity's hardware and software features.

6-12 An auditor's primary consideration regarding an entity's internal controls is whether they a. Prevent management override. b. Relate to the control environment. c. Reflect management's philosophy and operating style. d. Affect the financial statement assertions.

d. Affect the financial statement assertions.

6-14 Internal control is a process designed to provide reasonable assurance regarding the achievement of which objective? a. Effectiveness and efficiency of operations. b. Reliability of financial reporting. c. Compliance with applicable laws and regulations. d. All of the above are correct.

d. All of the above are correct.

6-21 SOC 1, Type 2 reports by the service organization's auditor typically a. Provide reasonable assurance that their financial statements are free of material misstatements. b. Ensure that the entity will not have any misstatements in areas related to the service organization's activities. c. Ensure that the entity is billed correctly. d. Assess whether the service organization's controls are suitably designed and operating effectively.

d. Assess whether the service organization's controls are suitably designed and operating effectively.

10-17 If accounts receivable turnover (credit sales/receivables) was 7.1 times last year compared to only 5.6 times in the current year, it is possible that there were a. Unrecorded credit sales in the current year. b. Unrecorded cash receipts last year. c. More thorough credit investigations made by the company late last year. d. Fictitious sales in the current year.

d. Fictitious sales in the current year.

6-23 An auditor anticipates assessing control risk at a low level in an IT environment. Under these circumstances, on which of the following controls would the auditor initially focus? a. Data capture controls. b. Application controls. c. Output controls. d. General controls.

d. General controls.

7-19 The Sarbanes-Oxley Act of 2002 requires management to include a report on the effectiveness of ICFR in the entity's annual report. It also requires auditors to report on the effectiveness of ICFR. Which of the following statements concerning these requirements is false? a. The auditor should evaluate whether internal controls over financial reporting are designed and operating effectively. b. Management's report should state its responsibility for establishing and maintaining an adequate internal control system. c. Management should identify material weaknesses in its report.

d. The auditor should provide recommendations for improving internal control in the audit report.

10-13 Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? a. The billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the customer's authorized credit limit and current account balance. b. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account each month. 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.

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

6-15 Monitoring is a major component of the COSO Internal Control— Integrated Framework. Which of the following is not correct in how the company can implement the monitoring component? a. Monitoring can be an ongoing process. b. Monitoring can be conducted as a separate evaluation. c. Monitoring and other audit work conducted by internal audit staff can reduce external audit costs. d. The independent auditor can serve as part of the entity's control environment and continuous monitoring.

d. The independent auditor can serve as part of the entity's control environment and continuous monitoring.

7-26 When auditors report on the effectiveness of internal control "as of" a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the additional evidence to gather for the remaining period? a. Any significant changes that occurred in internal control subsequent to the interim date. b. The length of the remaining period. c. The specific controls tested prior to the "as of" date and the results of those tests. d. The walkthrough of the control system conducted at interim.

d. The walkthrough of the control system conducted at interim.

7-25 A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to a. Tour the organization's facilities and locations before beginning any audit work. b. Trace a transaction from every class of transactions from origination through the entity's information system. c. Trace a transaction from each major class of transactions from origination through the entity's information system. d. Trace a transaction from each major class of transactions from origination through the entity's information system until it is reflected in the entity's financial reports.

d. Trace a transaction from each major class of transactions from origination through the entity's information system until it is reflected in the entity's financial reports.

5-26 The permanent file section of the working papers that is kept for each audit client most likely contains a.Review notes pertaining to questions and comments regarding the audit work performed. b.A schedule of time spent on the engagement by each individual auditor. c.Correspondence with the entity's legal counsel concerning pending litigation. d.Narrative descriptions of the entity's accounting system and control procedures.

d.Narrative descriptions of the entity's accounting system and control procedures.