162 Ex3 Ch 5, 6, 7

What are the 5 elements of control activity?

1. Authorization 2. Segregation 3. Documentation (Authorization/Recording/Custody) 4. Safeguard 5. Independent check

What are the steps in testing internal controls?

1. Understand design of ICS and policies/procedures 2. Document your understanding 3. Assess RMM 4. Test of Controls 5. Reassess 6. Document conclusion

Place the general sequence of steps of the audit process (shown below) in the correct order for an audit of cash. 1. Use the understanding of the client and its environment to consider inherent risks related to cash. 2. Obtain an understanding of internal control over cash. 3. Assess the risks of material misstatement and design further audit procedures (tests of controls). 4. Perform further audit procedures--tests of controls. 5. Perform further audit procedures--substantive procedures for cash transactions and balances.

12345

For each error/control objective, identify the assertion about classes of transactions and events most benefited by the control. Goods shipped to a bad credit risk customer

Accuracy

For each error/control objective, identify the assertion about classes of transactions and events most benefited by the control. Sales billed at the wrong price or wrong quantity

Accuracy

For each of the tests of controls for sales and receivables, indicate the assertion: For a sample of recorded sales, determine whether credit was approved.

Accuracy

For each of the tests of controls for sales and receivables, indicate the assertion: Perform arithmetic recalculation of a sample of recorded sales invoices.

Accuracy

What methods are used to assess risk?

Analytical procedures Inquiries Inspection Observation

What duties need to be segregated for a good internal control?

Authorization Recording Custody Reconciliation

For each error/control objective, identify the assertion about classes of transactions and events most benefited by the control. Product line A sales recorded as Product line B

Classification

For each error/control objective, identify the assertion about classes of transactions and events most benefited by the control. Failure to post charges to customers for sales

Completeness

For each error/control objective, identify the assertion about classes of transactions and events most benefited by the control. Goods shipped, sales not recorded

Completeness

For each of the tests of controls for sales and receivables, indicate the assertion: Scan sales invoices for missing numbers in sequence.

Completeness

For each of the tests of controls for sales and receivables, indicate the assertion: Trace a sample of credit memos to postings in customers' accounts.

Completeness

For each error/control objective, identify the assertion about classes of transactions and events most benefited by the control. January sales recorded in December

Cutoff

What methods used in understanding ICS process?

Inquiry Observation Inspection Review

What is control environment?

Management sets the tone at the top of the organization which influences control consciousness of its employees and sets the foundation for all other components of internal control.

What is risk assessment?

Management's identification and analysis of relevant risks to achieve its objective

What is monitoring?

Management's process that assesses the quality of the internal control's performance over time

For each error/control objective, identify the assertion about classes of transactions and events most benefited by the control. Sales recorded, goods not shipped

Occurence

For each of the tests of controls for sales and receivables, indicate the assertion: Select a sample of customer accounts and vouch debits to sales invoices.

Occurrence

What methods are used to perform test of controls?

Reperformance Inspection Inquiry Observation - most effective

What is control activity?

Specific actions that mgt and employees take to ensure mgt directives are carried out

What is information and communication?

The identification, capture and exchange of information in the form that enables people to carry out their responsibilities

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.

a

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.

a

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.

a

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.

a

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.

a

The assertion that auditors will probably emphasize in the revenue and collection cycle is: a. occurrence. b. completeness. c. accuracy. d. classification.

a

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

a

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.

a

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.

a

Which of the following control activities could prevent a paid disbursement voucher from being presented for payment a second time? a. The official signing the check should compare it with the voucher and should stamp "paid" on the voucher documents. b. Vouchers should be prepared by individuals who are responsible for signing disbursement checks. c. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment. d. Disbursement vouchers should be approved by at least two responsible management officials.

a Cancellation of vouchers by stamping them PAID prevents the voucher from mistakenly being paid a second time.

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. Inflating sales for the year. b. Lapping year-end accounts receivable. c. Kiting bank balances. d. Misappropriating merchandise.

a False sales journal entries made near the end of the year may have shipping or other documents that reveal later dates or show lack of sufficient documentation.

Which of the following combinations is a good way to conceal employee fraud but an ineffective means of perpetrating management (financial reporting) fraud? a. Overstating sales revenue and overstating bad debt expense. b. Overstating sales revenue and overstating customer accounts receivable balances. c. Omitting the disclosure information about related-party sales to the president's relatives at below-market prices. d. Understating interest expense and understating accrued interest payable.

a Overstating sales revenue and overstating bad debt expense by the same amount does not overstate net income or total assets (which is often a goal of financial reporting fraud). However, this action would help to hide a manager's theft of assets (i.e., embezzlement).

Cutoff bank statements include activity for the period _______the period being audited.

after

Cash confirmations need to be mailed under the control of the __________.

auditor

A material weakness is a situation in which a. It is probable that an immaterial financial statement misstatement would not be detected on a timely basis. b. It is reasonably possible that a material misstatement would not be detected on a timely basis. c. There is a remote likelihood that a material misstatement would be detected on a timely basis. d. It is reasonably possible that an immaterial misstatement would not be detected on a timely basis.

b

According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to a. Determine whether the company's controls are processing company data effectively. b. Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed. c. Determine that the company's employees are processing the controls according to the policy and procedures manuals at the company.

b

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.

b

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.

b

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.

b

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.

b

Tracing shipping documents to pre-numbered 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.

b

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.

b

Immediately upon receipt of cash, a responsible employee should a. Prepare a deposit slip in triplicate. b. Prepare a remittance listing. c. Update the subsidiary accounts receivable records. d. Record the amount in the cash receipts journal.

b Effective control of cash requires that receipts be recorded promptly. For mail receipts, a listing of remittance advices by an employee not performing incompatible functions is a standard control activity. If the customer does not return the remittance advice, one should be prepared at the time the mail is opened. If remittance advices are not used, a list of receipts should still be made when the mail is opened.

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 the cashier who is in a position to know whether the receivables have, in fact, been collected. b. Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence. c. Write-offs must be authorized by company field sales employees who are in a position to determine customers' financial standing. d. Write-offs must be supported by an aging schedule showing that only receivables overdue several months have been written off.

b Impropriety of write offs can be controlled by the review and approval of someone outside the credit department.

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 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 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.

b Reviewing the changes in pricing during the year and ensuring that customers were charged the new prices provides sufficient, reliable evidence to support the sales manager's representation.

Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances? a. The cashier prepares the daily deposit. b. The cashier posts the receipts to the accounts receivable subsidiary ledger cards. c. The cashier makes the daily deposit at a local bank. d. The cashier endorses the checks.

b The auditor would consider it incompatible because the cashier would have both custody of cash and record-keeping responsibility and, hence, could steal money and fix the records without interference by anyone else. The cashier could steal and then conceal!

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.

c

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.

c

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.

c

To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except for: a. Inspection of documentation. b. Inquiry of client personnel. c. Confirmation of balances. d. Observation of company operations.

c

Which of the following audit procedures is the most effective in testing sales for understatement? a. Analyze the aged trial balance of recorded accounts receivable. b. Confirm recorded accounts receivable. c. Trace a sample of shipping documents to sales invoices recorded in the sales journal. d. Vouch a sample of recorded sales from the sales journal to shipping documents.

c

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.

c

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.

c

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.

c

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.

c

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.

c

Which report would not be appropriate for a public accounting firm to provide on financial reporting controls? a. Unqualified—no material weaknesses found. b. Disclaimer of opinion—unable to perform all necessary procedures. c. Disclaimer of opinion—significant deficiencies exist. d. Adverse—material weaknesses exist.

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 subsequent bank statements. c. Prepare a schedule of the bank transfers. d. Review the composition of authenticated deposit slips.

c Kiting involves a mismatching of dates of recording cash transactions around year-end, and the schedule of bank transfers is designed to show all the relevant dates so the auditor can see that the entries were made in the proper periods.

When auditing with "fraud awareness," auditors should especially notice and follow up employee activities under which of these conditions? a. Management has published a company code of ethics and sends frequent communication newsletters about it. b. The board of directors reviews and approves all investment transactions. c. The company always estimates the inventory but never takes a complete physical count. d. The petty cash box is always locked in the desk of the custodian.

c Risk is high when the company always estimates the inventory but never takes a complete physical count.

If the auditor believes that a misstatement is or might be intentional and the effect on the financial statements could be material or cannot be readily determined, the auditor should do which of the following? a. Inquire of management as to the possibility of fraud. b. Discuss with the audit committee what should be done to prevent possible future misstatements. c. Perform procedures to obtain additional audit evidence to determine whether fraud has occurred or is likely to have occurred. d. Inquire of management as to the possibility of fraud and discuss with the audit committee what should be done to prevent possible future misstatements.

c Since the auditor believes that a discovered misstatement is or might be intentional, he/she should first perform additional procedures to obtain additional evidence to determine whether fraud has actually occurred.

During an audit of cash, the auditor is most concerned with the management assertion of a. Valuation or allocation. b. Occurrence. c. Existence. d. Rights and obligations.

c The existence of cash is always a relevant assertion for cash because an overstatement of cash might indicate that fraudulent revenue was recorded.

It is important to verify ______ of both cash receipts and cash disbursements.

cutoff

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. 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.

d

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.

d

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.

d

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.

d

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.

d

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 pre-numbered shipping documents with entries in the sales journal.

d

Which of the following does not accurately summarize auditors' requirements regarding internal control? Public Entity Nonpublic Entity 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 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.

d

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.

d

Upon receipt of customers' checks in the mail room, a responsible employee should prepare a remittance list that is forwarded to the cashier. A copy of the list should be sent to the a. Treasurer to compare the list with the monthly bank statement. b. Entity's bank to compare the list with the cashier's deposit slip. c. Internal auditor to investigate the list for unusual transactions. d. Accounts receivable bookkeeper to update the subsidiary accounts receivable records.

d The individuals with record-keeping responsibility should not have custody of cash. Hence, those individuals should use either the remittance advices or a list of the remittances to make entries to the cash and accounts receivable control account and to the subsidiary accounts receivable records. Indeed, having different people make entries in the control account and in the subsidiary records is an effective control.

Which of these arrangements of duties could most likely lead to an embezzlement or theft? a. 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. b. The financial vice president received checks made out to suppliers and the supporting invoices, signed the checks, and mailed the checks. c. 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). d. The inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records.

d The inventory warehouse manager could steal inventory and then manipulate the records to cover up the theft. This arrangement would violate proper segregation of duties because the manager has custody of assets and access to the records. The manager can steal and then conceal!

Auditors are often concerned with the _______of cash, as this is where most misstatements occur.

overstatement

Cash reconciliations can be tested via _________.

reperformance