Auditing Exam 2 Multiple choice

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? a) A bank lockbox system. b) Pre-numbered remittance advices. c) Monthly bank reconciliations. d) Daily deposit of cash receipts.

a) A bank lockbox system. A bank lockbox is a post office box controlled by a company's bank at which cash remittances from customers are received. With such a system the bank collects the remittances, immediately credits the cash to the company's bank account, and forwards the remittance advices to the company. Use of a bank lockbox system makes it extremely difficult for employees to divert cash receipts since those cash receipts are sent directly to the post office box controlled by the bank. Answer (2) is incorrect because remittance advices may be prenumbered, but since they come from various customers, they do not have one overall sequence for the client. Answers (3) and (4), bank reconciliations, and daily deposit of cash receipts, are controls, but controls that ordinarily are not as effective at preventing the diversion of customer receipts.

The Parmalat fraud case involved: a) A fraudulent cash confirmation. b) Kiting of funds between banks in India and banks in Pakistan. c) A bank reconciliation performed by the client that systematically understated cash. d) Major unrecorded disbursements for equipment.

a) A fraudulent cash confirmation.

Hall Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The best person or persons to make periodic reviews of the investment activity would be: a) An investment committee of the board of directors. b) The chief operating officer. c) The corporate controller. d) The treasurer.

a) An investment committee of the board of directors. The investment committee of the board of directors is not involved in the routine of making buy and sell decisions and can therefore review the transactions objectively. On the other hand, the chief operating officer, the controller, and the treasurer may be closely associated on a daily basis with the financial executive responsible for the investment decisions.

The auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low: a) And accounts receivable are immaterial, or the use of confirmations would be ineffective. b) And accounts receivable are composed of large accounts. c) And the effectiveness of confirmations is absolutely determined. d) Or accounts receivable are from extremely reputable customers.

a) And accounts receivable are immaterial, or the use of confirmations would be ineffective. Receivables should be confirmed unless the combined assessment of inherent risk and controls risk is at the low level, receivables are immaterial, or the existence of circumstances in which the use of confirmations would be ineffective.

When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPA's procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should: a) Consider the organizational level to which the internal auditors report the results of their work. b) Review the internal auditors' work. c) Consider the qualifications of the internal audit staff. d) Review the training program in effect for the internal audit staff.

a) Consider the organizational level to which the internal auditors report the results of their work. The internal auditors' objectivity refers to their relative independence from the organizational units they have been evaluating. This may best be determined by considering the organizational level to which the internal auditors report. The other answers address the issues of the internal auditors' competence, not objectivity.

The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare the: a) Details of bank deposit slips with details of credits to customer accounts. b) Daily cash summaries with the sums of cash receipts journal entries. c) Individual bank deposit slips with the details of the monthly bank statements. d) Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded.

a) Details of bank deposit slips with details of credits to customer accounts. Lapping will result in a delay in the recording of specific remittance credits in the financial records, but the checks will be deposited in the bank as they are received. Therefore, a comparison of the checks deposited to the credits to customer accounts will likely uncover the scheme.

In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the: a) Efficiency of the audit. b) Effectiveness of the audit. c) Selection of the sample. d) Audit quality controls.

a) Efficiency of the audit. The risk of incorrect rejection and assessing control risk too high relate to the efficiency of the audit since the related errors result in additional, unneeded, audit procedures. The risks of incorrect acceptance and assessing control risk too low relate to audit effectiveness.

To have an adequate basis to issue a management report on internal control under Section 404(a) of the Sarbanes-Oxley Act, management must do all of the following, except: a) Establish internal control with no material weakness. b) Accept responsibility for the effectiveness of internal control. c) Evaluate the effectiveness of internal control using suitable control criteria. d) Support the evaluation with sufficient evidence.

a) Establish internal control with no material weakness. Management may issue a report on internal control regardless of whether the system has a material weakness.

A dual purpose test simultaneously: a) Functions as a substantive test and as a test of controls. b) Addresses two different accounts. c) Substantiates an ending balance and the transactions making up the balance. d) Functions as an analytical procedure and a substantive test.

a) Functions as a substantive test and as a test of controls.

A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with: a) Knowledge necessary to determine the nature, timing, and extent of further audit procedures. b) Audit evidence to use in reducing detection risk. c) A basis for modifying tests of controls. d) An evaluation of the consistency of application of management policies.

a) Knowledge necessary to determine the nature, timing, and extent of further audit procedures. Because the auditors' purposes are for considering internal control, and to obtain the necessary knowledge to (a) assess the risks of material misstatement, and (b) to determine the nature, timing, and extent of the tests to be performed, answer (1) is correct.

The auditors are using unstratified mean-per-unit sampling to audit accounts receivable as they did in the prior year. Which of the following changes in characteristics or specifications would result in a larger required sample size this year than that required in the prior year? a) Larger variance in the dollar value of accounts. b) Smaller population size. c) Larger tolerable misstatement. d) Higher risk of incorrect acceptance.

a) Larger variance in the dollar value of accounts. A larger variance in the dollar value of accounts (as measured by the standard deviation) results in a larger sample size because the standard deviation is in the numerator of the equation to calculate sample size—increasing the numerator increases sample size. The other factors all result in a smaller sample size.

An auditor needs to estimate the average highway weight of tractor-trailer trucks using a state's highway system. Which estimation method is most appropriate? a) Mean per unit. b) Difference. c) Ratio. d) Probability proportional to size.

a) Mean per unit Mean-per-unit estimation is best because no "book value" is available for the trucks. The difference, ratio, and MUS methods all require the comparison of a book value to an audited value.

Which of the following procedures would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? a) Observe the consistency of the employees' use of cash registers and tapes. b) Inquire about employees' access to recorded but undeposited cash. c) Trace deposits in the cash receipts journal to the cash balance in the general ledger. d) Compare the cash balance in the general ledger with the bank confirmation request.

a) Observe the consistency of the employees' use of cash registers and tapes. The use of cash registers and tapes helps assure that all sales of a retail store are recorded. Answer (2) is incorrect because the cash has already been recorded. Answer (3) is incorrect because the procedure only deals with recorded deposits and, therefore, the completeness assertion is not addressed as directly as in answer (1). Answer (4) is incorrect because one would not expect the cash balance in the general ledger to agree with the bank confirmation request due to items in transit and checks outstanding.

Which of the following is not a control that generally is established over cash transactions? a) Obtaining a receipt for every disbursement. b) Separating cash handling from recordkeeping. c) Depositing each day's receipts intact. d) Centralizing the receipt of cash.

a) Obtaining a receipt for every disbursement.

Reconciliation of the bank account should not be performed by an individual who also: a) Processes cash disbursements. b) Has custody of securities. c) Prepares the cash budget. d) Reviews inventory reports.

a) Processes cash disbursements. The individual who reconciles the bank account should not be involved in the processing of cash receipts or disbursements. Therefore, answer (1) is correct. All of the other functions are compatible with reconciliation responsibilities.

Which of the following is not confirmed on the standard confirmation form used for cash balances at financial institutions? a) Securities held for the client by the financial institution. b) Cash checking account balances. c) Loans payable. d) Cash savings account balances.

a) Securities held for the client by the financial institution.

Which of the following is not considered one of the five major components of internal control? a) Segregation of duties. b) Control activities. c) Monitoring. d) Risk assessment.

a) Segregation of duties.

Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely: a) Send positive confirmation requests. b) Send negative confirmation requests. c) Examine evidence of subsequent cash receipts. d) Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

a) Send positive confirmation requests.

To determine that all sales have been recorded, the auditors would select a sample of transactions from the: a) Shipping documents file. b) Sales journal. c) Accounts receivable subsidiary ledger. d) Remittance advices.

a) Shipping documents file. The goal is to determine the population to be sampled from to determine that all sales have been recorded; therefore, the sample should be taken from a population of source documents, here the shipping documents file. None of the other three answers represent source documents that may be sampled from to determine that all sales have been recorded.

In which of the following circumstances is it least likely that tests of controls will be performed? a) The expected deviation rate exceeds the tolerable deviation rate. b) The planned assessed level of control risk is at a level slightly below the maximum. c) The risk of assessing control risk too low is less than the expected deviation rate. d) The tolerable deviation rate exceeds the risk of assessing control risk too low.

a) The expected deviation rate exceeds the tolerable deviation rate. When the expected deviation rate exceeds the tolerable deviation rate it is unlikely that tests of controls will be performed. This is because in such a situation testing is only likely to reveal to the auditors that the system is not operating effectively as they expected.

Which of the following is accurate regarding tolerable misstatement? a) Tolerable misstatement is directly related to materiality. b) Tolerable misstatement cannot be determined until the sample results are evaluated. c) Tolerable misstatement does not affect sample size. d) Tolerable misstatement is a measure of reliability of the sample.

a) Tolerable misstatement is directly related to materiality. Tolerable misstatement is directly related to materiality. That is, as the measure of materiality increases, the tolerable misstatement allocated to the various accounts is increased. Tolerable misstatement is materiality at the account balance level.

There are many kinds of statistical estimates that an auditor may find useful, but basically every statistical estimate in auditing is of either a quantity or of an error rate. The statistical terms that roughly correspond to "quantities" and "occurrence rate," respectively, are: a) Variables and attributes. b) Constants and variables. c) Constants and attributes. d) Attributes and variables.

a) Variables and attributes.

The confirmation process may be performed using a(n): a) Yes; paper form. Yes; electronic form. b) Yes; paper form. No; electronic form. c) No; paper form. Yes; electronic form. d) No; paper form. No; electronic form.

a) Yes; paper form. Yes; electronic form.

Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable: a) Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. b) Write-offs must be approved by the accounts receivable department. c) Write-offs must be authorized by the shipping department. d) Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.

a). Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. Write-offs of receivables should be approved by a responsible officer after a review of the account by the credit department. Answer (Write-offs must be approved by the accounts receivable department.) is incorrect because accounts receivable, a recordkeeping function, should not authorize such entries. Answer (Write-offs must be authorized by the shipping department.) is incorrect because other procedures (e.g., a review of shipping documents) may be used to determine that the goods were received and because the shipping department would have no other information on whether the receivable is likely to be collectible. Answer (Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.) is incorrect because the account need not be overdue by several months as a "current" receivable may become worthless due to, for example, a bankruptcy.

Which of the following statistical sampling techniques is least desirable for use by the auditors? a) Random number table selection. b) Block selection. c) Systematic selection. d) Random number generator selection.

b) Block selection. Block sampling is least desirable. It consists of all items during a selected time period, numerical sequence, or alphabetical sequence. Due to the relatively large number of blocks needed to form a reasonable audit conclusion, block sampling cannot generally be relied upon to efficiently produce a representative sample.

Which assertion relating to sales is most directly address when the auditors compare a sample of shipping documents to related sales invoices? a) Existence or occurrence. b) Completeness. c) Rights and obligations. d) Presentation and disclosure.

b) Completeness.

Which of the following is an element of sampling risk? a) choosing an audit procedure that is inconsistent with the audit objective. b) Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement. c) Failing to detect an error on a document that has been inspected by an auditor. d) Failing to perform audit procedures that are required by the sampling plan.

b) Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement. Sampling risk is the risk of making a wrong decision based on a sample result. The other choices are elements of nonsampling risk.

Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? a) Checklist. b) Confirmation. c) Flowchart. d) Questionnaire.

b) Confirmation A confirmation is designed to obtain evidence from a third-party. It is not used to document internal control.

Of the following statements about internal control, which one is not valid? a) Because of the cost/benefit relationship, a client may not have control activities in place for absolute protection from fraud and waste. b) Control activities insure that collusion among employees cannot occur. c) No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. d) Transactions must be properly authorized before such transactions are processed.

b) Control activities insure that collusion among employees cannot occur.

Under SEC rules, which of the following is not among the criteria that ordinarily exist for revenue to be recognized? a) Collectibility is reasonably assured. b) Delivery has occurred or is scheduled to occur in the near future. c) Persuasive evidence of an arrangement exists. d) The seller's price to the buyer is fixed or determinable.

b) Delivery has occurred or is scheduled to occur in the near future.

Which of the following would be least likely to be considered an objective of internal control? a) Checking the accuracy and reliability of accounting data. b) Detecting management fraud. c) Encouraging adherence to managerial policies. d) Safeguarding assets

b) Detecting management fraud. Detecting management fraud is generally not considered to be an objective of internal control. In fact, one of the inherent limitations of internal control is that it is subject to override by management. All of the other answers represent valid objectives of internal control.

Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by: a) Employment of temporary personnel to aid in the separation of duties. b) Direct participation by the owner in key record-keeping and control activities of the business. c) Engaging a CPA to perform monthly write-up work. d) Delegation of full, clear-cut responsibility for a separate major transaction cycle to each employee.

b) Direct participation by the owner in key record-keeping and control activities of the business. Involvement of the owner in key control functions should be a major step toward preventing material errors or defalcations. Answer (1) would not be cost-effective. Answer (3) would provide some measure of control, but not as much as would daily participation by the owner. If it were feasible to hire additional employees, it would be cheaper to hire permanent employees rather than temporary. The need for internal control is permanent. Answer (4) would weaken, not strengthen internal control.

In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the: a) Audit quality controls. b) Efficiency of the audit. c) Effectiveness of the audit. d) Selection of the sample.

b) Efficiency of the audit.

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except : a) Bank confirmation. b) General ledger. c) Cutoff bank statement. d) Year-end bank statement.

b) General ledger.

A control deficiency that is less severe than a material weakness, but important enough to merit attention by those responsible for oversight of the company's financial reporting is referred to as a(n): a) Inherent limitation. b) Significant deficiency. c) Control deficiency. d) Reportable deficiency.

b) Significant deficiency.

To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is: a) Supported by a vendor's invoice. b) Stamped "paid" by the check signer. c) Prenumbered and accounted for. d) Approved for authorized purchases.

b) Stamped "paid" by the check signer. The auditors will determine whether each voucher is stamped "paid" by the check signer to avoid a situation in which supporting documents are used a second time to elicit a second payment.

A CPA examines a sample of copies of December and January sales involves for the initials of the person who verified the quantitative data. This is an example of a: a) Substantive test. b) Test of a control. c) Cutoff test. d) Statistical test.

b) Test of a control.

Discovery sampling is particularly effective when: a) There are a large number of errors in the population. b) The auditors are looking for critical deviations that are not expected to be frequent in number. c) The auditors know where deviations are likely to occur. d) The population is large in size.

b) The auditors are looking for critical deviations that are not expected to be frequent in number. Discovery sampling is a modified case of attributes sampling. Its purpose is to detect at least one deviation, with a predetermined risk of assessing control risk too low, if the deviation rate in the population is greater than the specified tolerable deviation rate. It is effectively used when auditors are looking for critical deviations that are not expected to be frequent in number.

The best way to verify the amounts of dividend revenue received during the year is: a) Re-computation. b) Verification by reference to dividend record books. c) Confirmation with dividend-paying companies. d) Examination of cash disbursements records.

b) Verification by reference to dividend record books. Comparing the recorded amount of dividend revenue with dividend record books (published by investment advisory services) provides evidence of the amount of dividend revenue that should have been received during the year. It is virtually impossible to confirm the receipt of dividends with the company paying those dividends.

The auditors have sampled 50 accounts from a population of 1,000 accounts receivable. The sample items have a mean book value of $200 and a mean audited value of $203. The book value in the population is $198,000. What is the estimated total audited value of the population using the difference method? a) $198,000. b) $200,000. c) $201,000. d) $203,000.

c) $201,000 When calculating the estimated audited value of the population using the difference method the average misstatement is first calculated as $203 - $200 = $3. The projected misstatement is then calculated by multiplying the average misstatement times the number of accounts in the population, or $3 x 1000 = $3000. Because the average misstatement is an understatement, the projected misstatement of $3000 is added to the population book value of $198,000 to calculate the estimated audited value of $201,000.

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? a) Prenumbered remittance advices. b) Approval of all disbursements by an individual independent of cash receipts. c) A bank lockbox system. d) Monthly bank cutoff statements.

c) A bank lockbox system.

The auditors' primary objective in selecting a sample of items from an audit population is to obtain: a) A random sample. b) A stratified sample. c) A representative sample. d) A large sample.

c) A representative sample. A sample that is representative of the audit population must be obtained. The sample is "representative" in the sense that it allows the auditor to project sample results to the overall population. The sample may, but need not be random, stratified, or large.

To test the existence assertion for recorded receivables, the auditors would select a sample from the: a) Sales orders file. b) Customer purchase orders. c) Accounts receivable subsidiary ledger. d) Shipping documents (bills of lading) file.

c) Accounts receivable subsidiary ledger. The objective is to determine the population the auditors would sample from to test the existence assertion for recorded receivables. The direction of testing should be from the accounts receivable subsidiary ledger to the available support, such as sales invoices, bills of lading, sales orders, and customers' orders.

The auditors who physically examine securities should insist that a client representative be present in order to: a) Detect fraudulent securities. b) Lend authority to the auditors' directives. c) Acknowledge the receipt of securities returned. d) Coordinate the return of securities to the proper locations.

c) Acknowledge the receipt of securities returned. Because of the liquidity of many securities, the auditor should insist that a client representative be present in order to acknowledge the receipt of securities returned. In the event of subsequent "disappearance" of a security the auditor will not be a suspect.

Which of the following sampling techniques is typically used for tests of controls? a) Mean-per-unit sampling. b) Difference sampling. c) Attribute sampling. d) Probability-proportional-to-size sampling.

c) Attribute sampling. Attribute sampling is used for test of controls since it is a plan that enables auditors to estimate the rate of deviation in a population.

You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to: a) Count the cash in advance of the balance sheet date in order to disclose any kiting operation at year-end. b) Coordinate the count of cash with the cutoff of accounts payable. c) Coordinate the count of cash with the count of marketable securities and other negotiable assets. d) Count the cash immediately upon the return of the confirmation letters from the financial institution.

c) Coordinate the count of cash with the count of marketable securities and other negotiable assets. Unless all negotiable assets are verified at one time, an opportunity exists for a dishonest officer or employee to conceal a shortage by transferring it from one asset category to another a step ahead of the auditors. For example, marketable securities could be pledged as collateral for a loan. The cash thus obtained could be included with other cash being counted by the auditors. After the cash count, the cash derived from the securities could be removed and used to redeem the pledged securities which would then be available for counting by the auditors. Of course, this type of manipulation could hardly be carried on unless there were weaknesses in internal control. Answer (1) is incorrect because counting cash in advance of the balance sheet date does not relate to kiting. Answer (2) is not persuasive because accounts payable cannot be substituted for cash as can negotiable assets. Answer (4) is not correct because there is no particular significance to the amount of cash on hand on the day the bank confirmation letters happen to be returned.

Which of the following revenue related transactions is NOT linked to the accounts indicated? a) Don't record discounts given to customers-cash, sales discounts, accounts receivable. b) Understate allowance for doubtful accounts-bad debt expense, allowance for doubtful accounts. c) Don't write off uncollectible receivables-sales returns, sales discounts. d) Recognize revenues too early-accounts receivable and revenue.

c) Don't write off uncollectible receivables-sales returns, sales discounts.

Which of the following is not an advantage of establishing an enterprise risk management system within an organization? a) Reduces operational surprises. b) Provides integrated responses to multiple risks. c) Eliminates all risks. d) Identifies opportunities.

c) Eliminates all risks. An enterprise risk management system cannot eliminate all risks.

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts? a) Foot the receivables lead schedule. b) Examine dates of purchase orders. c) Examine cash receipts received after year-end. d) Confirm receivables.

c) Examine cash receipts received after year-end.

Buff Bob embezzled $10,000 from his company's account in Bank A. At year-end, he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This is an example of: a) Lapping. b) Related party transactions. c) Kiting. d) Effective cash management.

c) Kiting.

In the consideration of internal control, the auditor is basically concerned that it provides reasonable assurance that: a) Controls have not been circumvented by collusion. b) Operational efficiency has been achieved in accordance with management plans. c) Material misstatements have been prevented or detected. d) Management cannot override the system.

c) Material misstatements have been prevented or detected.

In testing accounts receivable, an auditor sends out positive confirmation requests to 100 randomly selected customers. A customer returns the confirmation indicating that the balance is correct when, in fact, the balance is overstated. This is an example of: a) Projected misstatement. b) Sampling error. c) Nonsampling error. d) Standard error.

c) Nonsampling error.

Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control? a) Segregation of duties over cash disbursements. b) Requiring approval of purchase transactions. c) Preparing bank reconciliations. d) Maintaining backup copies of key transactions.

c) Preparing bank reconciliations. Preparing bank reconciliations will detect a variety of misstatements related to cash and is a detective control in the sense that it does not prevent the misstatement from occurring, but may detect it. Answers (1) and (2) are incorrect because segregating duties and requiring approvals are primarily designed to prevent misstatements. Answer (4) is incorrect because the primary purpose of keeping backup copies of key transactions (or all transactions) is prevent loss of information in the event of an information system failure.

An auditor may compensate for a weakness in internal control by increasing the extent of: a) Tests of controls. b) Detection risk. c) Substantive tests of details. d) Inherent risk.

c) Substantive tests of details. An increase in the substantive procedures will decrease detection risk, and thereby compensate for the increased level of control risk due to a weakness in internal control. Answer (1) is incorrect because if the weakness exists, increasing the extent of tests will only provide more evidence on the weakness—not evidence that compensates for the weakness. Answers (2) and (4) are incorrect because a decrease in detection risk or inherent risk, not an increase, would compensate. Also, in the case of inherent risk, it may not be possible to change the assessment since it is a function of the firm's environment.

When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they should: a) Modify their report for any significant deficiencies identified. b) Use a "bottom-up" approach to identify controls to test. c) Test controls for all significant accounts. d) Perform a separate assessment of controls over operations.

c) Test controls for all significant accounts. In an audit of internal control performed under PCAOB standards the auditors must test controls for all significant accounts.

The auditors have sampled 50 accounts from a population of 1,000 accounts receivable. The sample items have a mean book value of $200 and a mean audited value of $203. The book value in the population is $198,000. What is the estimated audited value of the population using the mean-per-unit method? a) $198,000. b) $200,000. c) $201,000. d) $203,000.

d) $203,000 The estimated total audited value of the population using the mean-per-unit method is calculated as $203 (mean audited value in sample) x 1000 accounts = $203,000.

Which of the following would provide the most assurance concerning the valuation of accounts receivable? a) Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. b) Compare receivable turnover ratios to industry statistics for reasonableness. c) Inquire about receivables pledged under loan agreements. d) Assess the allowance for uncollectible accounts for reasonableness.

d) Assess the allowance for uncollectible accounts for reasonableness. Answer (4) is correct because receivables are valued at net realizable value, and assessing the allowance for uncollectible accounts for reasonableness will help the auditor determine the proper amount. Answer (1) is incorrect because the limited information in the accounts receivable ledger will not make possible tracing details to the shipping documents—also, the shipping documents may not even capture the total sales price that is included in the accounts receivable ledger. Answer (2) is incorrect because while comparing turnover ratios may provide some information on the collectibility of receivables, it is very imprecise. Answer (3) is incorrect because it relates to presentation and disclosure more directly than valuation.

Which of the following statistical selection techniques is least desirable for use by an auditor? a) Stratified selection. b) Systematic selection. c) Sequential selection. d) Block selection.

d) Block selection.

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: a) Cutoff bank statement. b) Year-end bank statement. c) Bank confirmation. d) General ledger.

d) General ledger The general ledger will not have information on the balance per bank. The cutoff bank statement, year-end bank statement and bank confirmation will all include information on the balance per bank.

Which of the following would most likely to detected by an auditor's review of the client's sales cutoff? a) Excessive goods returned for credit. b) Unrecorded sales discounts. c) Lapping of year-end accounts receivable. d) Inflated sales for the year.

d) Inflated sales for the year.

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: a) Reviews the monthly bank reconciliation. b) Returns the checks to accounts payable. c) Is denied access to the supporting documents. d) Is responsible for mailing the checks.

d) Is responsible for mailing the checks. When checks are signed they should not be returned to the accounting department. This control is used so as to avoid a situation in which the accounts payable department fabricates documents, and then collects the checks. Not returning the checks makes it more difficult for this sort of fraud in that the perpetrator must also establish a "safe" address for the check to be mailed to. Answer (1) is incorrect because control is stronger if individuals who are otherwise independent of the cash function prepare and review the monthly bank reconciliation. Answer (2) is incorrect because, as discussed, the checks should not be returned to accounts payable. Answer (3) is incorrect because the individual signing the checks needs access to the supporting documents so he or she can determine whether the expenditure is proper.

An entity's ongoing monitoring activities often include: a) Periodic audits by internal auditors. b) The audit of the annual financial statements. c) Approval of cash disbursements. d) Management review of weekly performance reports.

d) Management review of weekly performance reports. Management review of weekly performance reports is an ongoing monitoring activity that may detect errors or fraud. Answer (1) is incorrect because while periodic audits by internal audit represent a monitoring activity, they are best classified as separate evaluations, and not ongoing monitoring activities. Answer (2) is incorrect because the audit of the annual financial statements is the function of the external auditors. Answer (3) is incorrect because approvals of cash disbursements represent a control activity.

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? a) Restrictions places on sales by laws and regulations. b) Decline in sales due to economic declines. c) Decline in sales due to product obsolescence. d) Over-recorded sales due to a lack of control over the sales entry function.

d) Over-recorded sales due to a lack of control over the sales entry function. Over-recorded sales due to a lack of control over the sales entry function relates to control risk not inherent risk. The other three replies all relate to inherent risk.

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? a) Inaccurate billing due to a lack of controls. b) Lapping of accounts receivable. c) Misbilling a client due to a data input error. d) Recording sales when the customer is likely to return the goods.

d) Recording sales when the customer is likely to return the goods. A sale either shouldn't be recorded, or a proper allowance for returns should be established when a customer is likely to return the goods. Thus, simply recording the sale is an example of fraudulent financial reporting when the customer is likely to record the goods. Answers (1) and (3) are examples of errors, while answer (2) is an example of misappropriation of assets.

In order to guard against the misappropriation of company-owned marketable securities, which of the following is the best course of action that can be taken by a company with a large portfolio of marketable securities? a) Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. b) Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. c) Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. d) Require that the safekeeping function for securities be assigned to a bank or stock-broker that will act as a custodial agent.

d) Require that the safekeeping function for securities be assigned to a bank or stock-broker that will act as a custodial agent. Having the securities held in safekeeping by a bank or stockbroker provides strong internal control because they are not available to employees responsible for maintaining the accounting records of the securities. Thus the separation of the custody of securities from the accounting function is complete.

When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables? a) The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year-end. b) The auditors will in general use negative rather than positive confirmation requests. c) Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports. d) The account balances as of year-end will generally be confirmed.

d) The account balances as of year-end will generally be confirmed.

Which of the following is an example of misappropriation of assets relating to sales? a) Accidentally recording cash that represents a liability as revenue. b) Holding the sales journal open to record next year's sales as having occurred in the current year. c) Intentionally recording cash received from a new debt agreement as revenue. d) Theft of cash register sales.

d) Theft of cash register sales. Theft of cash register sales is an example of misappropriation of assets. Answer (1) is an example of an error while answers (2) and (3) are examples of fraudulent financial reporting.

If the auditors do not perform tests of controls for certain assertions: a) They have performed a substandard audit. b) They must issue a qualified opinion. c) They are not required to communicate significant deficiencies relating to those accounts to management and the board of directs. d) They must assess control risk at the maximum level for those assertions.

d) They must assess control risk at the maximum level for those assertions.

Which of the following is not a control that generally is established over cash receipts? a) To prevent theft of cash, use a cash register. b) To prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel. c) To prevent theft of cash, receipts should be deposited daily. d) To insure accurate posting, the accounts receivable clerk should open customer payments, record the customers' receipts from customers' checks, and deposit the checks.

d) To insure accurate posting, the accounts receivable clerk should open customer payments, record the customers' receipts from customers' checks, and deposit the checks.