Audit Test 2

Which of the following statements is an auditor most likely to add to the negative form of confirmation of accounts receivable to encourage timely consideration by the recipient

"If you do not report any differences within 15 days, it will be assumed that this statement is correct"

Which of the following statements about evidence is true

A client's accounting records cannot be considered sufficient appropriate audit evidence on which to base the auditor's opinion

Which of the following documentation is not required for an audit in accordance with auditing standards

A client's letter that details the auditors; s planned field work

In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely will be included with the client's confirmation letter?

A client-prepared statement of account showing the details of the customer's account balance

The primary purpose of obtaining an understanding of the entity and its environment including its internal control, is to provide an auditor with

A frame of reference within which to plan the audit

Which of the following statements about internal control is true

A limitation of internal control is that management makes judgements about the extent of controls if implements

Which of the following would not necessarily be a related party transaction

A sale to another corporation with a similar name

Which of the following is usually included or shown in the audit documentation

A summary of how significant findings were addressed

A CPA is conducting the first audit of an nonissuer's finical statements. The CPA hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the predecessor's audit documentation. This procedure is

Acceptable of the client and the predecessor auditor agree to it

It is important for the auditor to consider the competence of the audit clients employees, because their competence bears directly and importantly upon the

Achievement of the objectives of internal control

In an audit of financial statements, an auditor's primary consideration regarding an internal control is whether the control

Affects management's financial statement assertions

Which of the following presumptions is least likely to relate to the reliability of audit evidence

An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost

Control activities constitute one of the five components of internal control described in COSO model. Control activities do not encompass

An internal auditing function

Although the quantity and content of audit documentation vary with each engagement, an auditor's permanent files most likely include

Analyses of capital shock and other owners' equity accounts

Which of the following in a predecessor's audit documentation is the auditor lest likely to be interested in reviewing

Analysis of income statement accounts

Transaction authorization within an organization may be either specific or general. An example of specific transaction authorization is the

Approval of a detailed construction budget for a warehouse

When auditing related party transactions, an auditor places primary emphasis on

Assessing the risks of material misstatement of related party transactions

Using personal computers in auditing may affect the methods used to review the work of staff assistants because

Audit documentation may not contain readily observable details of calculations

Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to provide a reasonable basis for an opinion

Auditor judgement

An auditor referred to the findings of an auditor's external specialist in the auditor's report. This may be an appropriate reporting practice if the

Auditor's report contains a qualified opinion

The most reliable forms of documentary evidence are those documents that are

Authorized by a responsible official

The PCAOB's AS 1215, Audit Documentation, requires that a complete and final set of audit documentation be assembles for retention as of a date not more than 45 days after the audit report release date. After that date, audit documentation may

Be added but no audit documentation may be deleted or discarded

A secondary result of the auditor's understanding of internal control for a nonissuer is that the understanding may

Bring to the auditor's attention possible control conditions required to be communicated to the client

Which of the following statements indicates the wrong way to use an internal control questionnaire

Clarifying all answers with written remarks and explanations

An auditor's audit documentation will least likely show how the

Client's schedules were prepared

For which of the following transactions would the auditor ordinarily have the greatest difficulty in obtaining assurance that internal control objectives are met

Collection of contributions from the public by a non-for-profit organization

If the auditors plan to use the work of the internal auditors to obtain audit evidence or to provide direct assistance, they should assess the internal auditors'

Competence and Objectivity

The auditors understanding of internal control is documented to substantiate

Compliance with generally accepted auditing standards

Which of the following procedures is not used in tests of control over purchases

Confirm inventory held in public warehouses

Which of the following is an unusual procedure that may be deemed necessary to discover the effect of a related party transaction

Confirm significant information with third parties other that banks or attorneys

Before performing substantive analytical procedures at an interim date prior to the balance sheet date, an auditor should

Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable

An auditor is assessing the appropriateness of management's rationale for selecting a model to measure the fair value of debt securities. If, during the current year, an active trading market for the debt security was introduced, the auditor should validate each of the following criteria, except whether the valuation model is

Consistently applied from prior periods

Which of the following best describe the interrelated components of internal control

Control Environment; risk assessment process; control activities; the information system; including related business process; monitoring of controls

After obtaining an understanding of the entity and its environment, including its internal control, the auditor assesses

Control risk and inherit risk to determine the acceptable level of detection risk

The design operation of a control may not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. According the AU-c 265 this circumstance is

Controlling deficiency

Monitoring of controls is an important component of internal control. Which of the following items is not an example of monitoring

Data processing management regularly reconciles batch control totals for items processed with batch controls for items submitted

Which of the following best reflects the basic elements of a data flow diagram

Data source, data destination, data flows, transformation processes, and data storage

The diamond-shaped symbol is commonly used in flowcharting to show or represent a

Decision point, conditional testing, or branching

Internal auditing can affect the scope of the external auditor's audit of financial statements by

Decreasing the external auditor's ned to perform detailed tests

Audit documentation that records the procedures used by the auditor to gather evidence should be

Designed to meet the circumstances of the particular engagement

In obtaining an understanding of internal control, the auditor may trace several transactions through the control process, including how the transactions interface with any service organizations whose services are part of the information system. The primary purpose of this task is to

Determine whether the controls have been implemented

Each of the following might, by itself, from a valid basis for an auditor to decide to omit a procedure except for the

Difficulty and cost involved in testing a particular item

Standardized working papers are often used, chiefly because they allow audit documentation to be prepared more

Efficiently

Internal control cannot be designed to provide reasonable assurance regarding the achievement of objectives concerning

Elimination of all fraud

Directors, management, external auditors, and internal auditors all play important roles in creating proper control processes. Senior management is primarily responsible for

Establishing risk management and control processes

After identifying a significant related party transaction outside the entity's normal course of business, an auditor should

Evaluate the business purpose of the transaction

The objective of tests of details of transactions performed as tests of controls is to

Evaluate whether internal controls operated effectively

As part of the audit of fair value estimates and disclosures an audit may need to test the entity's significant assumptions. In these circumstances the auditor should

Evaluate whether the assumptions individually and as a whole form a reasonable basis for the basis for the fair value estimates

A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be dissociated from the resolution of the matter. The audit documentation would probably be

Expanded to detail the assistants auditor's position and how the difference of opinion was resolved

The risks os material misstatement (RMMs) should be assessed in terms of

Financial statement assertions

A document flowchart represents the

Flow of forms that relate to a particular transaction through an organization

The organization chart is a graphic representation of the

Formal authority structure

A well-designed internal control questionnaire should

Help evaluate the effectiveness of internal control

The following steps in the financial statement audit process I. Prepare flowchart II. Gather exhibits of all documents III. Interview personnel The logical sequence of steps is

III, II, I

Which of the following is a step in an auditor's decision to rely on internal controls

Identify specific controls that are likely to prevent, or detect and correct, material misstatements and perform test controls

In the course of the audit of financial statements for the purpose of expressing an opinion, the auditors will normally prepare a schedule of uncorrected misstatements. The primary purpose served by this schedule is to

Identify the potential financial statements effects of misstatements that were not considered clearly trivial when discovered

An entity should consider the cost of a control in relationship to the risk. Which of the following controls best reflects this philosophy for a large dollar investment in heavy machine tools?

Imprinting a controlled identification number on each tool

Which if the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control

Incompatible duties

Which of the following steps should an auditor perform first to determine the existence of related parties

Inquire about the existence of related parties from management

Which of the following procedures would provide the most reliable audit evidence

Inspection of bank statements obtained directly from the clients financial institution

In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity's financial statements most likely would consider the

Internal Auditing standards developed by the Institute of Internal Auditors

Which of the following is not considered an auditors specialist

Internal Auditor

A CPA's understanding of internal control in a financial statement audit of a nonissuer

Is usually more limited than that made in an audit of internal control integrated with an audit of financial statements

Observation is considered a reliable audit procedure but one that is limited in usefulness. However, it is used in a number of different audit situations. Which of the following statements is true regarding observation as an audit technique

It is most persuasive about the performance of a process nut is limited to the moment in time at which the observation takes place

The audit woking part that reflects the major components of an amount reported in the financial statements is the

Lead schedule

Decision tables differ from program flowcharts in that decision tables emphasize

Logical relationships among conditions and actions

The negative request form of accountants receivable confirmation may be used when the Risk of Material Misstatement is Number of small balances is Consideration by the recipient is

Low, Many, Likely

According to AU-C 315, Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement, not all controls are relevant to a financial statement audit. Which one of the following would most likely be considered in an audit?

Maintenance of control over unused checks

A small private entity may use less formal means to ensure that internal control objectives are achieved. For example, extensive accounting procedures, sophisticated accounting records, or formal controls are least likely to be needed if

Management is closely involved in operations

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely will significantly increase opportunities for fradulent financial reporting when

Management is dominated by one individual who is also a shareholder

When obtaining an understanding of an entity's internal control, an auditor should concentrate on their substance rather than their form because

Management may establish appropriate controls but not enforce compliance with them

Internal controls are designed to provide reasonable assurance that

Material errors or fraud will be provided, or detected and corrected, within a timely period by employees in the course of performing their assigned duties

The ultimate purpose of understanding internal control is to contribute to the auditor's evaluation of the risk that

Material misstatements may exist in the financial statements

The ultimate purpose of understanding the entity and its environment and assessing the risks of material misstatement is to continue to the auditor's assessment of the risk that

Material misstatements may exist in the financial statements

If an auditor conducts an audit of financial statements in accordance with applicable auditing standards, which of following will the auditor most likely detect

Misposting of recorded transactions

In the absence of evidence of the contrary, transactions with related parties should not be assumed to be outside the normal course of businesses. The auditor should, however, be aware of the possibility that transactions with related parties may have been motivated solely or in large part by extraordinary conditions. which of the following is not normally a condition motivating a transaction outside the normal course of business

Mutual benefit to both parties

For which of the following judgements may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective Materiality of misstatements Evaluation of significant accounting estimates

NO, NO

Which of the following are considered control environment factors Detection Risk Human Resources Policies and Practices

NO, YES

Which of the following statements regarding auditor documentation of the understanding of the client's internal control components obtained to plan the audit correct

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

You have been assigned to audit the maintenance department of an organization. Which of the following is likely to produce the least reliable audit evidence

Notes on discussions with mechanics in the maintenance operation

An auditor wishes to evaluate the design and perform tests of controls over a client's cash disbursements procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by

Observation and inquiry

Which of the following procedures concerning accounts receivable is an auditor most likely to perform to obtain evidence in support of the effectiveness of controls

Observing an entity's employee prepare the schedule of past due accounts receivable

Audit evidence concerning undocumented monitoring controls ordinarily is best obtained by

Observing employees as they apply controls

When performing procedures to identify and asses the risks of material misstatement for accounting estimates the auditor should

Obtain an understanding of how management develop its estimates

As part of understanding internal control relevant to the audit of a non issuer, an auditor does not need to

Obtain knowledge about the operating effectiveness of internal control

Most of the auditor's work in forming an opinion on financial statements consists of

Obtaining and evaluating audit evidence

The auditor should perform tests of controls when the auditor's risk assessment includes an expectation

Of the operating effectiveness of internal control

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?

One of the cashiers has been covering a personal embezzlement by lapping

Control activities include physical controls over access to and use of assets and records. A departure from the purpose os such procedures is that

Only storeroom personnel and line supervisors have access to the raw material storeroom

Audit working papers are indexed by means of reference numbers. The primary purpose of indexing is to

Permit cross-referencing and simplify supervisory review

Proper segregation of duties reduces the opportunities to allow persons to be in positions both to

Perpetrate and conceal fraud and error

Which of the following is not a medium that can normally be used be an auditor to record information concerning internal control

Procedures Manual

An auditor should obtain an understanding of an entity's information system, including

Process used to prepare significant accounting estimates

Organizational charts are useful to an independent external auditor because they

Provide a starting point for assessing the risk of material misstatement

An advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaire is that system flowcharts

Provide a visual depiction of clients' activities

The primary reason to establish internal control is to

Provide reasonable assurance that that objectives of the organization are achieved

In assessing the competence of an internal auditor, an independent CPA most likely would obtain information about the

Quality of the internal auditor's documentation

An auditor ordinarily uses a working trial balance resembling the financial statements without notes but containing columns for

Reclassification and adjustments

A proper segregation of duties requires that an individual

Recording a transaction not compare the accounting record of the asset with the asset itself

Effective internal control

Reduces the need for management to review exception reports on a day-to-day basis

In gathering evidence in the performance of substantive procedures, the auditor most likely

Relies on persuasive rather than conclusive evidence in the majority of cases

An auditor would be most likely to consider modifying an otherwise unmodified opinion id the client's financial statements include a note on related party transactions

Representing without substantiation that certain related party transactions were on terms equivalent to those obtainable in transactions with unrelated parties

The confirmation of accounts receivable, the auditor would most likely

Request confirmation of a sample of inactive accounts

The PCAOB's AS 2201 states that internal controls mat be preventative and detective. Which of the following controls is preventative

Requiring two person to open mail

Internal control is a function of management and effective control is based upon the concept of charge and discharge responsibility and duty. Which of the following is one of the overriding principles of internal control

Responsibility for the performance of each duty must be fixed

Ajax, Inc., is an affiliate of the audit client and is audited by another audit firm. Which of the following is most likely to be used by the auditor to obtain assurance that all guarantees by the client of the affiliate's indebtedness have been detected?

Review client minutes and obtain representation letter

Which of the following procedures will most likely assist an auditor in determine wether management has identified all accounting estimates that could be material to the financial statements

Review the lawyer's letter for information about litigation

Two assertions for which confirmation of accounts receivable balances provides primary evidence are

Rights and obligation and existence

Which of the following statements about the auditor's response to assessed risks of material misstatement in a financial statement audit is true

Risk assessment procedures performed to obtain an understanding of an entity's internal control also may serve as tests of control

The appropriateness of evidence available to an auditor is least likely to be affected by the

Sampling method employed by the auditor to obtain a sample of such evidence

In obtaining an understanding of internal control in a financial statement audit, an auditor is not obligated to

Search for significant deficiencies in the operation of internal control

Assuming a low assessed risk of material misstatement, which of the following audit procedures would be least likely to be performed?

Search for unrecorded cash receipts

Basic to a proper control environment are the quality and integrity of personnel who must perform the prescribed procedures. Which is not a factor in providing for competent personnel?

Segregation of duties

In obtaining an understanding of an issuer's internal control, an auditor does all the following except

Send confirmations to customers

US, GAAP ordinarily require material related party transactions

Separately disclosed but not accounted for differently from transactions between unrelated parties

If internal control is properly designed, the same employee may be permitted to

Sign checks and also cancel supporting documents

The auditor should perform tests of controls when the auditors assessment of the risks of material misstatement includes an expectation of operating effectiveness of internal control or when

Substantive procedures alone cannot provide sufficient appropriate audit evidence at the relevant assertion level

Regardless of the assessed risks of material misstatement, an auditor should perform some

Substantive procedures to restrict detection risk for significant transaction classes

Which of the following statements is most accurate regarding sufficient and appropriate documentation

Sufficient and appropriate documentation should include evidence that it has been reviewed

A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year-end, the auditor would be most concerned about

Suspense debits that management believes will benefit future operations

When documenting internal control, the independent auditor sometimes uses a systems flowchart, which can best be described as

Symbolic representation of a system or series of sequential processes

The graphic patronal of the flow of data and the information processing of a system, including computer hardware, is best displayed in a

System flowchart

A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed?

Test of controls and tests of details

In using the work of an auditor's external specialist, an agreement should exist between the auditor and the specialist as to the nature of the specialist's work. This agreement most likely should include

The applicability of the same confidentiality requirements to the auditor and the specialist

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 a management's specialist has assumed full responsibility for taking the client's physical inventory, reliance on the specialist's work is acceptable if

The auditor concluded the same audit tests and procedures as would have been applicable id the client employees took the physical inventory

A financial statement auditor is considering internal control for a client with an information system that makes extensive use of information technology. Which of the following statements is related to the understanding of internal controls for this client is false

The auditor muse possess all the information technology skills necessary to complete the engagement

Which of the following statements is true about related party transactions

The auditor should consider wether an identified related party transaction outside the normal course of business is appropriately accounted for and disclosed

Which of the following statements is true about the use of the work of an auditor's specialist

The auditor should obtain an understanding of the methods and assumptions used by the specialist

An auditor searching for related party transactions should obtain an understanding of each subsidiary's relationship to the total entity because

The business structure may be deliberately designed to obscure relate party transactions

Confirmation of accounts receivable is a generally accepted auditing procedure. The presumption is that an auditor will request confirmation of accounts receivable. Confirmation is necessary when

The combined assessed level of inherent and control risk is high

Internal control can provide only reasonable assurance of achieving an entity's control objectives. The likelihood of achieving those objectives is affected by which limitation inherent to internal control

The cost of internal control should not exceed its benefits

The client has equity securities classified as available for sale. The auditor is most concerned about controls related to

The determination of the fair value measurements of the securities

Although substantive tests may support the accuracy of underlying information used in monitoring, these tests may provide no affirmative evidence of the effectiveness of monitoring controls because

The information used is monitoring may be accurate even though it is subject to ineffective control

Which of the following is a false statement about the relationship of the internal auditor and the scope of the external audit of a company's financial statements

The internal auditors may determine the extent to which audit procedures should be employed by the external auditor

The frequency of the comparison of recorded accountability with assets (with the purpose of safeguarding assets) should be determined by

The nature and amount of the asset and the cost of making the comparison

Auditors may use positive or negative forms of confirmation requests. An auditor most likely will use

The negative form for small balances

In performing tests of controls, the auditor will normally find that

The rate of deviations in the sample exceeds the rate of error in the accounting records

Which of the following is a false statement about the relationship of financial statements assertions and audit procedures

The relationship between financial statements assertions and audit procedures should be one-to-one

Based on an understanding of internal control completed at an interim date, the auditor assessed the risks of material misstatement at the relevant assertion level and performed interim substantive procedures. The records will most likely be tested again at year end if

The remaining period is long

AU-C 500 describes five generalizations about the reliability of evidence. The situations given below indicate the relative degrees of assurance provided by two types of evidence obtained in different situations. Which describes an exception to one of the generalizations?

The report of an auditor's specialist regarding the valuation of a collection pf paintings held as an investment provides greater assurance than the auditor's physical observation of the paintings

In assessing the competence and objectivity of an entity's internal auditor, an independent auditor would lead likely consider information obtained from

The results of analytical procedures

Which of the following statements about audit evidence is true

The sufficiency and appropriateness of audit evidence is a matter of professional judgement

The independent auditor should understand the internal audit function as it relates to internal control because

The work preformed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditors procedures

An auditor might consider the procedures performed by the internal auditors because

They are employees whose work may affect the nature, timing, and extent of audit procedures

The normal sequence of documents and operations on a well-prepared system flowchart is

Top to bottom and left to right

The primary difference between audit of the balance sheet and an audit of the income statement is that the audit of the income statement is that the audit of the income statement deals with the verification of

Transactions

During the audit of fair value estimates and disclosures, the auditor most likely should

Use the understanding of the audited entity's process for determining fair value estimates to assess the risks of material misstatement.

During the process of confirming receivables as of December 31, Year 1, a positive confirmation was returned indicating the "balance owed as of December 31 was paid on January 9, Year 2". The auditor would most likely

Verify that the amount was received

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would

Verify the sources and contents of the faxes in telephone calls to the senders

Test of controls are concerned primarily with each of the following questions except

Were the controls approved by the board of directors

After audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up audit documentation review. This second review usually focuses on

Whether the financial statements are consistent with the auditor's understanding of the entity

When assessing the risks of material misstatement at a low level, an auditor is required to document the auditor's Understanding of the entity's control environment Overall responses to assessed risks

YES, YES

During an audit, an internal auditor may provide direct assistance to an independent CPA in Obtaining an understanding of internal control Performing tests of controls Performing Substantive tests

Yes, Yes, Yes

Test of controls in a financial statement audit are least likely to be omitted with regard to

accounts representing many transactions

To test the effectiveness of controls, an auditor ordinarily selects from a variety of techniques, including

comparison and confirmation

When an auditor plans to rely on the controls that have changed since they were last tested, which of the following courses of action would be most appropriate

test the operating effectiveness of such controls in the current audit