Audit Exam 2: Review

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 disclaimer of opinion.

Which of the following control activities is not usually performed in the accounts payable department?

Accounting for unused prenumbered purchase orders and receiving reports.

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable is most likely to obtain evidence concerning management's assertions relating to

Accuracy, valuation or allocation

An auditor's primary consideration regarding an entity's internal controls is whether they:

Affect the financial statement assertions

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?

An unqualified report.

Which of the following represents the correct sequence of audit steps that come after first obtaining an understanding and documenting the entity's internal control?

Assess Control Risk, Test of Controls, Reassess Control Risk, Determine Extent of Substantive Testing.

To determine whether the entity's internal control operated effectively to minimize the likelihood of failing to bill a customer for a shipment of goods, the auditor should begin by selecting a sample of transactions from the population represented by the

Bill of lading (shipping report) file.

Which of the following statements best describes how the requirements under Sarbanes-Oxley changed the auditor's responsibility for issuing an opinion in connection with the audits of most public companies?

CPA firms are now required to issue a second opinion related to their evaluation of the effectiveness of internal controls in addition to an opinion on the overall fairness of the financial statements.

For nonpublic companies with preliminary control risk assessments set at high, auditors are likely to:

Complete little or no tests of controls.

Customers are more likely to complain to the entity if which of the following assertions for cash receipts is violated?

Completeness

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?

Completeness

All of the following controls may mitigate the risk of fraud and management override except:

Controls related to executive compensation.

Which of the following controls would most likely be tested during an interim period?

Controls that operate on a continuous basis.

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?

Controls to monitor the inventory taking process.

"Remediation" refers to

Corrective actions taken by management to eliminate a material weakness.

Which of the following comparisons would be most useful to an auditor in evaluating the overall results of an entity's sales efforts?

Current year sales to current year budgeted sales.

Tracing bills of lading (shipping reports) to sales invoices as a test of controls related to the sales and collection process provides evidence that

Customers were billed for goods shipped to them.

An auditor gathers receiving reports from the few days before and after year-end to determine that purchases made before the end of the current year have not been recorded in the following year to provide assurance about management's assertion of

Cutoff.

Auditors obtain an understanding of a nonpublic entity's internal control for the primary purpose of:

Determining the nature, extent, and timing of subsequent audit procedures to be performed.

Internal control is a process designed to provide reasonable assurance regarding the achievement of which objective?

Effectiveness and efficiency of operations, reliability of financial reporting, compliance with applicable laws and regulations

Which of the following steps or procedures is least likely to be performed as part of management's assessment of the effectiveness of internal controls?

Engaging the external auditors to conduct cutoff tests.

The role of the registered independent auditing firm relative to its clients' internal controls under the Sarbanes-Oxley Act of 2002 is to

Express an opinion on the effectiveness of the entity's internal control.

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?

General Controls

Which of the following is not a requirement for management under Section 404 of the Sarbanes-Oxley Act of 2002?

Guarantee effectiveness of the entity's ICFR.

The effectiveness of internal control is reduced by:

Human errors or mistakes.

Which of the following is not one of the five major components of internal control?

Human resource background checks.

In order to be able to set control risk at a lower level, the auditor must do all of the following except:

Identify all general IT controls.

According to FASB ASC 606, which of the following is not one of the five-step approach required for revenue recognition?

Identify if cash is received.

Generalized audit software (GAS) would likely be used in the audit of accounts receivable for all of the following except:

Identifying weaknesses in the documentation of entity controls.

Which of the following procedures would an auditor most likely perform related to year-end accounts receivable confirmations when the auditor does not receive replies even after second requests?

Inspect related shipping records and sales invoices documenting the merchandise sold to customers.

An auditor may need to obtain a service auditor's report when an entity receives accounting services such as payroll from a service organization. Which of the following statements is true regarding this service audit report?

It should include an opinion.

The negative request form of an accounts receivable confirmation is particularly useful when Number of Small account balances is ____, assessed level of CR related to receivables is ____, and Consideration by the recipient is ______.

Many Low Likely

The requirements of Section 404 of the Sarbanes-Oxley Act of 2002 apply to

Most publicly-held companies.

With regard to entities that have locations or business units that are judged to have financial reporting risks, the auditor

Must first determine whether those risks are adequately addressed by entity-level controls.

Which of the following statements regarding auditor documentation of the entity's internal control is correct?

No one particular form of documentation is necessary, and the extent of documentation may vary.

A reliance strategy is chosen when the auditor:

Plans on conducting tests of controls, has set the control risk at a lower level

Which of the following controls would most effectively ensure that recorded purchases are free of material misstatements?

Purchase orders, receiving reports, and vendor invoices are independently matched when preparing vouchers.

Which of the following types of audit reports would not be appropriate for an auditor to issue on the effectiveness of an entity's internal controls?

Qualified ​[a significant deficiency exists].

Which of the following is not considered a general control?

Reconciliation of payroll record count with the number of active employees.

An entity erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this in a timely, efficient manner?

Reconciling monthly statement received from the vendor with the accounts payable subsidiary ledger.

Internal controls are designed to achieve company objectives in all of the following areas except:

Reduction of debt financing costs.

If tolerable misstatement for the accounts receivable balance is $75,000 and the aggregate factual misstatement found by the auditor is $82,000, the auditor is most likely to

Request that the entity adjust its accounts receivable balance by $82,000.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

Which of the following procedures is least likely to be performed before the balance sheet date?

Search for unrecorded liabilities.

Which of the following internal controls would be most likely to deter the lapping of collections from customers?

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

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?

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

Which of the following is the population the auditor is most likely to draw from in order to test the cutoff assertion for revenue?

Shipping documents.

The auditor must report the following to the audit committee or others charged with governance:

Significant deficiencies and material weaknesses.

The negative request form of accounts receivable confirmation is useful particularly when:

The Assessed Level of Control Risk Relating to Receivables Is LOW. The Number of Small Balances Is HIGH. Consideration by the Recipient Is LIKELY.

Which of the following is not a key segregation of duties in the revenue process?

The accounts receivable function should be segregated from the invoice preparation function.

Which of the following statements concerning control deficiencies is true?

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

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?

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

Which of the following statements is false concerning the audit requirements of the Sarbanes-Oxley Act of 2002 and AS5 related to internal controls?

The auditor should provide recommendations to the audit committee for improving internal control as part of the auditor's assessment.

Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded?

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

Which of the following is not considered a key segregation of duties in the purchasing process?

The check signing function should be segregated from the check mailing function.

Which of the following statements about internal control is correct?

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

Understanding each of the components of internal control provides knowledge about:

The design of tests of controls, factors that affect the risk of material misstatement

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?

The financial statement amounts exposed to the deficiency.

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?

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

Which of the following is not a factor that an auditor would consider when assessing the inherent risk associated with sales transactions?

The nature of the credit authorization process.

Which of the following is a proper reason for not conducting tests of controls for nonpublic companies?

The procedures require more audit effort than the projected benefits to be obtained from lowering the control risk.

Which of the following most likely represents a weakness in internal control of an IT system:

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

Which of the following statements is false regarding the use of the test data approach in the evaluation of an accounting system?

The test data should consist of only valid conditions.

All of the following factors should be considered by the auditor when deciding on the extent of controls testing except:

The time the auditor has to test controls before a report must be issued.

Which of the following statements concerning control deficiencies is true?

The two dimensions of control deficiencies are likelihood of occurrence and magnitude.

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?

The walkthrough of the control system conducted at interim.

Which of the following would not be considered a test in the area of accounts receivable that relates to the existence assertion?

Trace the record of shipping to inclusion in the accounts receivable subsidiary ledger.

For effective internal control purposes, which of the following individuals should be responsible for mailing signed checks?

Treasurer.

An auditor's flowchart of an entity's accounting system is a diagrammatic representation that depicts the auditor's:

Understanding of the system

Which of the following actions would best conceal the theft of cash collections from sales on account?

Understating the sales journal amounts.

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?

Understating the sales journal.

Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff?

Unrecorded sales for the year.

Which of the following is not a typical procedure performed related to other non-trade receivables?

Write-off of receivables from officers against their bonus pay as those arrangements are inappropriate.

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:

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

SOC 1, Type 2 reports issued by the service organization's auditor typically:

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

After obtaining an understanding of an entity's internal control system, an auditor may set control risk at high for some assertions because the auditor:

believes the internal controls are unlikely to be effective.

Assessing control risk below high involves all of the following except:

concluding that controls are ineffective.

A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a:

deficiency in operation.

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:

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.

In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition, and receiving report are verified. The next step in the system is

entering of the voucher into the voucher register.

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:

fictitious sales in the current year.

The auditor may document the achieved level of control risk using all of the following except:

flowcharts

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:

no reply to a positive confirmation request is received.

The highest-quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by:

observation by the auditor of the employees performing control activities.

Purchase cutoff procedures should be designed to test whether all inventory

purchased and received before the end of the year was recorded.

Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the

receiving department.

Auditors perform a test to verify that all merchandise received has been recorded, in part, to satisfy the completeness assertion with regard to accounts payable. Which of the following would represent the population of documents for this test?

receiving reports.

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all

receiving reports.

In a properly designed purchasing process, the same employee most likely would match vendors' invoices with receiving reports and also

recompute the calculations on vendors' invoices.

Significant deficiencies and material weaknesses must be communicated to an entity's audit committee because they represent

significant deficiencies in the design or operation of internal control.

Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent:

significant deficiencies in the design or operation of the internal control.

Regardless of the assessed level of control risk, an auditor would perform some:

substantive procedures to restrict detection risk for significant transaction classes.

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because:

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

When goods are received, the receiving clerk should match the goods with

the vendor shipping document and the purchase order.

A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to:

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.

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:

valuation and allocation.

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be

vendors with whom the entity has previously done business.

For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve:

write-offs of customer accounts.