exam 2 atg 457

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Explain two ways that an auditor might determine the risk of assessing control risk too low

1) Use the same risk for assessing control risk too low for all items 2) The lower the planned assessed level of control risk, the lower the risk assessing control risk too low

Identify the 3 steps involved in quantitatively evaluating sample results (CDD)

1) calculate sample deviation rate 2) determine the upper deviation limit 3) determine the allowance for sampling risk

Describe the factors that influence sample size when using statistical attribute sampling for tests of controls (9-5) (TREP)

1) tolerable deviation rate 2) risk of assessing control risk too low 3) expected population deviation rate 4) population size when auditing small population

Scope limitations

A restriction that prevents the auditors from being able to apply all of the audit procedures that they consider necessary in the circumstances. They may be client imposed or may be imposed by other circumstances.

Difference estimation sampling

A sampling plan that uses the difference between the audited (correct) values and book values of items in a sample to calculate the estimated total audited value of the population. Could be used in audit situations where the auditors wish estimate the dollar value of 1,000 inventory items that have been priced by the client; the auditors expect a moderately high misstatement rate in the client's pricing of the items

Representation letter

A single letter or separate letters prepared by officers of the client company at the auditors' request setting forth certain representations about the company's financial position or operations.

Confidence level?

also termed the reliability level, is the complement of the applicable sampling risk factor. If the allowable risk of of assessing control risk too low is 5%, the auditor's desired confidence level is 95%, but if the risk of incorrect rejection is 5%, then the auditor's desired confidence level is 95%

to estimate the total audited dollar value of the population of 10,000 items, using the mean per unit estimation method, one would multiply the sample mean audited value times 10,000

What are the auditor's responsibilities for the detection and evaluations of various types of subsequent events?

type 1 and type 2

Name 3 subcategories of information and processing controls in a computerized system (GAU)

1) General controls 2) Application controls 3) User controls

Identify and explain 6 areas in which judgment may be exercised by a CPA in planning a statistical sampling test (SSDDDD)

1) Select sampling method (attributes or discovery) 2) Specify the attributes that relate to the effectiveness of the IC 3) Determine the objectives (Identify IC's interested in) 4) Define the population & sampling unit 5) Determine sample size 6) Determine sample selection method (Random # or Systematic)

Describe several advantages of computer processing of accounting information over manual systems (UMP)

1) Uniformly subjects all transactions to the same controls 2) More timely reports for management to use in analyzing and supervising 3) Provides greater consistency

A ___________ allows auditors to examine checks listed as outstanding and the details of deposits in transit on the company's reconciliation a. Cutoff bank statement b. Bank reconciliation c. Statement of cash flows d. None of the above

A check that is written incorrectly and therefore defaced to eliminate the possibility of further use is called a ____________ check. a. voided b. canceled c. reconciled

As compared to manual processing, electronic processing of cash transactions generally makes kiting: a. more difficult to accomplish. b. impossible to accomplish. c. neither easier, nor more difficult to accomplish. d. easier to accomplish.

Auditors confirm cash balances directly with financial institutions in order to substantiate the __________ of the amount of cash shown on the balance sheet. a. existence b. cutoff c. completeness

Most misstatements of assets involve: a. Overstatement b. Understatement

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees?

A bank lockbox system.

Mean-per-unit estimation sampling

A classical method that uses only the audited values of items in the sample (not the book values) to obtain an estimated total audited value

ratio estimation sampling

A classical method that uses the ratio of audited to book values of items in the sample to obtain an estimated total audited value

Disclaimer of opinion

A form of report in which the auditors state that they do not express an opinion on the financial statements

The Parmalat fraud case involved:

A fraudulent cash confirmation.

Qualified opinion

A modification of the auditors' standard report, employing a clause such as except for to limit the auditors' opinion on the financial statements. Indicates that, except for the effects of some limitation on the scope of the audit or some departure from GAAP, the financial statements are fairly presented.

Emphasis of a matter

A paragraph included in the auditors' report that is required by GAAS or is included at the auditors' discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to users' understanding of the financial statement.

Loss contingency

A possible loss, stemming from past events that will be resolved as to existence and amount by some future event. Loss contingencies should be disclosed in notes to the financial statements if there is a reasonable possibility that a loss has been incurred. When loss contingencies are considered probable and can be reasonably estimated, they should be accrued in the accounts.

Lock box

A post office box controlled by a company's bank at which cash remittances from customers are received. The bank picks up the remittances, immediately credits the cash to the company's bank account, and forwards the remittance advices to the company.

Attributes sampling

A sampling plan enabling the auditors to estimate the rate of deviation (occurrence) in a population.

Discovery sampling

A sampling plan for locating at least 1 deviation, providing that the devaition occurs in the population with a specified frequency.

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally NOT be able to detect:

A second payment of an account payable which had already been paid in full two months earlier.

Going concern problem

A significant issue for users of financial statements, because assets and liabilities are normally recorded and classified on the assumption that the company will continue to operate.

Dual purpose test

A test designed to test a control and to substantiate the dollar amount of an account using the same sample.

Probability-proportional-to-size (PPS) sampling

A variables estimation procedure that uses attributes theory to express a conclusion in monetary (dollar) amounts. Also known as "dollar unit sampling".

By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor will generally be able to detect: A) An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation. B) A cash sale which was not recorded on the books and was stolen by a bookkeeper. C) An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank. D) A credit sale which has been recorded twice in the sales journal.

A) An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.

Standard Confirmation January 1-10 Cutoff Form Statement A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes

Which of the following factors does an auditor need to consider in planning a particular audit sample for a test control?

Acceptable level of risk of assessing control risk too low

The auditors should insist that a representative of the client be present during the physical examination of securities in order to:

Acknowledge the receipt of securities returned.

General risk contingency

An element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements.

Projected misstatement

An estimate of the most likely amount of monetary misstatement in a population.

Subsequent events

An event occurring after the date of the balance sheet but prior to completion of the audit and issuance of the audit report.

Adverse opinion

An opinion that the financial statements do not fairly present financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. This situation occurs when the auditors believe that departures from GAAP are both material and pervasive.

By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor WILL generally be able to detect:

An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect:

An unrecorded deposit made at the bank at the end of the month.

Auditors can use __________ procedures to test the reasonableness of the amounts of recorded dividend and interest income.

Analytical

Management assertions

Any declaration, or set of related declarations taken as a whole, made by management. In the context of compliance attestation, it deals with the entity's compliance with specified requirements, the effectiveness for the entity's internal control over compliance, or both.

Information and processing controls is one category of control activities. What risks do these controls address?

Authorization, completeness, and accuracy of transactions

Identify good cash handling practices. a. permit one trusted employee to handle specific transactions from beginning to end b. encourage customers to obtain receipts and observe cash register totals c. have monthly bank reconciliations prepared by employees responsible for custody of cash

When reviewing financial investments, auditors need to review: a. only purchases and sales of investments b. beginning and ending balances, and changes c. only ending balances of investments

Which of the following represents a correct statement concerning the risk of misappropriation of cash for SSC? a. This is not a major concern since sales are made on credit. b. Deposit of cash into a lockbox system decreases the risk of misappropriation. c. Misappropriation of cash is not a significant problem in a commercial company. d. The success of QSand increases the risk that cash will be misappropriated.

A practical and effective audit procedure for the detection of lapping is: A) Preparing an interbank transfer schedule. B) Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank. C) Tracing recorded cash receipts to postings in customers' ledger cards. D) Preparing a proof of cash.

B) Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank.

B) Kiting.

An auditor may obtain information on the December 31 month-end balance per bank in which of the following? Dec 31 Bank Statement Schedule of Bank (Cash) Transfer A) Yes Yes B) Yes No C) No Yes D) Yes No A) Option A B) Option B C) Option C D) Option D

B) Option B

(E) Auditor should insist representative of client be present during physical exam of securities in order to: a. Lend authority of auditors directives b. Detect forged securities c. Acknowledge the receipt of the securities returned

(E) What is the answer to question #39?

A statement covering a specified number of business days following the end of the client's fiscal year is a a. Financial statement b. Bank reconciliation c. Cutoff bank statement d. None of the above

An employee with access to securities fraudulently converts them for personal use. This act could have been prevented by: a. formal investment policies b. competent personnel c. segregation of duties

In a restaurant setting, control over cash sales are best handled when: a. the sales ticket is prepared by an employee who also receives cash from the customer and deposits cash to bank daily b. the sales ticket is prepared by an employee who also receives cash from the customer c. the sales ticket is prepared by a separate employee and cash is received from a centrally located cashier

Inspect reports by internal auditors on their review of securities and derivatives is an example of: a. Ensure transactions are recorded and classified properly b. Ensure policies written are being followed c. Verify that internal auditors' observations are consistent with those of external auditors d. Ensure reports tie to client activity

Sometimes auditors may ______securities on hand. a. consider b. disallow c. inspect d. purchase e. sell

The internal control weakness that allowed a bookkeeper to embezzle cash receipts from customers and write off the related receivables, is which of the following? a. inadequate controls for reconciling bank accounts b. inadequate controls for reconciling cash register tapes and accounting records c. lack of segregation of duties

Which of the following is not a control over cash disbursements? A) Disbursements should be made by check. B) A check protecting machine should be used. C) Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse. D) Voided checks should be defaced and filed with paid checks.

C) Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse.

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? A) The cashier prepares the daily deposit. B) The cashier makes the daily deposit at a local bank. C) The cashier posts the receipts to the accounts receivable subsidiary ledger. D) The cashier endorses the checks.

C) The cashier posts the receipts to the accounts receivable subsidiary ledger.

As compared to manual processing, electronic processing of cash transactions generally makes kiting: A) impossible to accomplish. B) easier to accomplish. C) more difficult to accomplish. D) neither easier, nor more difficult to accomplish.

C) more difficult to accomplish.

A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the: B) cashier. C) internal auditors. C) treasurer. D) chief accountant.

C) treasurer.

The clients' financial institution can handle incoming cash receipts including: (Select all that apply) a. petty cash requests and reconciliations b. voucher authorization sheets c. credit cards and debit cards d. lockbox systems e. electronic transfer of funds by customers

C, D, E

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department?

Canceling supporting documentation after payment.

What is the principal hardware component in an IT system?

Central processing unit which consists of 1) control unit 2) internal storage unit 3) arithmetic logic unit

On receiving the bank cutoff statement, the auditor should trace:

Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

Kiting would least likely be detected by:

Comparing customer remittance advices with recorded disbursements in the cash disbursements journal.

Which of the following is the best audit procedure for the detection of lapping?

Comparison of postings of cash receipts to accounts with the details of cash deposits.

Which of the following statements is not correct?

Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date.

Block selection

Consists of all items in a selected time period, numerical sequence, or alphabetical sequence.

The auditors' count of the client's cash should be coordinated to coincide with the:

Count of investment securities.

(E) Which of the following are not confirmed on standard bank confirmation form used for cash balances at financial institutions? a. Checking account balances b. Savings balance c. Loans payable d. Securities held for client by financial institution

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 stockbroker that will at as a custodial agent

Inspect monthly brokerage reports on securities owned, purchased, and sold is an example of: a. Ensure transactions are recorded and classified properly b. Ensure policies written are being followed c. Verify that internal auditors' observations are consistent with those of external auditors d. Ensure reports tie to client activity

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

A company's decision to use the fair value option for valuation of marketable securities is most likely to affect which of the following assertions the most? A) Completeness. B) Existence. C) Fairness. D) Presentation and Disclosure.

D) Presentation and Disclosure.

Properly designed internal control will permit the same employee to: A) Receive and deposit checks, and also approve write-offs of customer accounts. B) Approve vouchers for payment, and also receive and deposit cash. C) Reconcile the bank statements, and also receive and deposit cash. D) Sign checks, and also cancel supporting documents.

D) Sign checks, and also cancel supporting documents.

A financial instrument whose value is dependent upon another investment or asset is called a(n) ____________.

Derivative

Define computer general controls and explain their purpose (8-4)

Designed to control/support computer applications Purpose is to control program development, program changing, computer operations, secure access to programs and data

In which of the following areas are the auditors least likely to use the work of a specialist?

Determination of the existence of a complex financial instrument.

It is necessary to ______ the client's cutoff of cash transactions. a. modify b. observe c. perform d. recreate e. verify

Which of the following has made it difficult to engage in kiting in recent years?

Electronic processing of checks.

What factors should be considered in qualitatively evaluating sample results?

Evidence of management override , collusion, and fraud

The auditor suspects that vouchers were prepared and processed by an accounting department employee for merchandise that was neither ordered nor received by the entity.

Examine the supporting purchase orders and receiving reports for selected paid vouchers.

Auditors send a confirmation request to investment brokers to confirm __________ and ownership.

Existence

Many companies require employees to submit ___________ with receipts and explanations for their business expenditures.

Expense reports

T/F Auditors usually attempt to directly control the risk of assessing control risk too high?

A client has $100,000 on deposit at year-end and owes the bank $250,000 on a note payable. The borrowing agreement calls for the client to maintain a minimum (compensating) balance of $40,000 on deposit during the life of the bank loan. On the balance sheet, the asset cash should be stated at $60,000, the excess of the deposit over the compensating balance. True False

False

Auditors normally verify the amount of dividends earned on the client's security investments by writing directly to the companies which paid the dividends. True False

False

Cash should be deposited weekly so it can be counted several times before being sent to the bank. True False

False

In relation to its materiality, the audit of cash requires little audit time. True False

False

Lapping of accounts receivable by an employee is not possible when there is adequate segregation of duties with respect to cash disbursements. True False

False

Signed checks should be returned to the cash disbursements clerk for mailing. True False

False

T or F: Good internal control over financial investments requires that the treasurer obtain certificates for all securities and keep them in the company safe.

False

T or F: In relation to its materiality, the audit of cash requires little audit time.

False

T or F: The inspection of securities on hand should be coordinated with the verification of inventories because both involve counting and inspection and can conveniently be combined.

False

The audit working paper known as a "proof of cash" is a means of proving that checks paid by the bank during the test period were not in excess of authorized cash receipts during that same test period. True False

False

T or F: An improper bank reconciliation designed to conceal a cash shortage is more likely to overstate than understate the amount of outstanding checks.

False (outstanding checks = liability)

Derivative

Financial instrument that "derives" its value from other financial instruments, underlying assets, or indexes. (Examples are option, forward contracts, and futures contracts)

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.

General Ledger

The auditors prepare a list of all the client's cash accounts and related information. This information is traced and reconciled to the ___________.

General ledger

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except:

General ledger.

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.

Which of the following could not be more efficiently performed with data analytics?

Identification of an unrecorded cash deposit.

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 stockbroker that will act as a custodial agent.

While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of:

Incorrect Rejection

For purposes of an audit of financial statements, electronic confirmation of cash balances

Is acceptable when properly controlled.

Kiting

Statistical sampling generally may be applied to test internal control when the client's internal control procedures:

Leave an audit trail in the form of evidence of compliance

Why do auditors spend large portion of audit on cash (despite small balance)?

Liabilities, revenues, and expenses flow through cash It is the most liquid asset which makes more temptation for misappropriation and is high risk

Kiting

Manipulations causing an amount of cash to be included simultaneously in the balance of two or more bank accounts. These kind of schemes are based on the float period - the time necessary for a check deposited in one bank to clear the bank on which it was drawn.

When performing a test of a control over cash disbursements, a CPA may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population:

May occur in a systematic pattern and destroy the sample randomness

The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that:

No discrepancies exist between the data on the checks and the data in the journal.

The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that: Answer No discrepancies exist between the data on the checks and the data in the journal. Proper cash purchase discounts have been recorded. Recorded cash disbursement transactions are properly authorized. Cash disbursements are for goods and services actually received. `

No discrepancies exist between the data on the checks and the data in the journal.

An auditor suspects that the controller wrote several checks and recorded the cash disbursements just before year-end but did not mail the checks until after the first week of the subsequent year.

Obtain the cutoff bank statement and compare the cleared checks to the year-end bank reconciliation.

Which of the following is not a control that generally is established over cash transactions?

Obtaining a receipt for every disbursement.

The auditor suspects that a kiting scheme exists because an accounting department employee who can issue and record checks seems to be leading an unusually luxurious lifestyle.

Prepare a bank transfer schedule.

Explain the purposes and nature of access controls

Prevent unauthorized use of IT equipment, data files, and computer programming Accomplish this- physical assess controls, logical access controls, and procedural safeguards

Why is documentation important to management and the auditor?

Provides primary source of information about the flow of transactions. It assists in reviewing the system, training new employees, and revising existing systems

To document auditors understanding of internal controls over cash, auditors often use a flowchart or internal control __________.

Questionnaire

Internal control over financial investments should require that securities are ____________ in the name of the company.

Registered

What are documentation controls in IT department?

Relate to documentation and records maintaining by a company to describe computer processing activities

Variables sampling

Sampling plans designed to estimate a numerical measurement of a population, such as a dollar value.

In November, two months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to interest revenue. The most effective method for detecting this type of error is:

Send a bank confirmation as of year-end.

Which of the following statistical sampling techniques involves taking samples in a series of stages?

Sequential Sampling

Properly designed internal control will permit the same employee to:

Sign checks, and also cancel supporting documents.

Properly designed internal control will permit the same employee to: Answer Sign checks, and also cancel supporting documents. Reconcile the bank statements, and also receive and deposit cash. Receive and deposit checks, and also approve write-offs of customer accounts. Approve vouchers for payment, and also receive and deposit cash.

Sign checks, and also cancel supporting documents.

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 the 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 writeoffs are actually recorded.

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.

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

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?

The cashier posts the receipts to the accounts receivable subsidiary ledger.

Reliability

The complement of the risk of incorrect acceptance.

Tolerable deviation rate

The maximum population rate of deviations from a prescribed control that the auditor will tolerate without modifying the planned assessment of control risk.

Unmodified opinion

The opinion expressed by the auditors when they conclude that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework (e.g., GAAP)

The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except: Answer Date due of a direct liability. The principal amount paid on a direct liability. The interest rate of a direct liability. Description of collateral for a direct liability.

The principal amount paid on a direct liability

The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except:

The principal amount paid on a direct liability.

Control Risk

The risk that a misstatement could occur and not be prevented or detected by the client's internal control

Risk of incorrect rejection

The risk that sample results will indicate that a population is materially misstated when in fact, it is not.

Sampling risk

The risk that the auditor's conclusion based on a sample might be different from the conclusion they would reach if the test were applied to the entire population. For tests of controls, sampling risks include the risks of assessing control risk too high and too low; for substantive testing, sampling risks include the risks of incorrect acceptance and rejection.

Ratio estimation

The sample net misstatement divided by the book value of the items in the sample.

Risk of assessing control risk too low

This most important risk is the possibility that the assessed level of control risk based on the sample is less than the true operating effectiveness of the controls.

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.

Distinguish between the traditional file and database methods for organizing data

Traditional- separate files of data are created for each processing application, they are organized into master files and transaction files Database- stores all data in one central file and allows each user access to portion needed

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: Answer Treasurer. Controller. Executive Committee. Board of Directors.

Treasurer

T or F: A cutoff bank statement addresses whether checks outstanding at year‑end were included in the list of outstanding checks in the year‑end bank reconciliation.

True

T or F: A derivative is a financial instrument that derives its value from another financial instrument, an underlying asset, or indices.

True

T or F: An employee who prepares checks and submits them with supporting documents to the official authorized to sign checks should not be responsible for mailing the signed checks.

True

T or F: The "lapping" of cash receipts is most likely to occur when one person has both responsibility for recordkeeping for cash receipts and custody of cash.

True

T or F: The omission of an outstanding check may be indicative of either an error or fraud.

True

The practice of "kiting" as a means of overstating cash is possible only if the client maintains two or more bank accounts. True False

True

The standard financial institution confirmation request used by the auditors is a means of obtaining documentary evidence about both assets and liabilities. True False

True

Verification of cash and other liquid assets on the same date may prevent substitution of one form of asset for another. True False

True

Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements?

Understatement of outstanding checks.

The best way to verify the amounts of dividend revenue received during the year is: A. Recomputation. B. Verification by reference to dividend record books. C. Confirmation with dividend-paying companies. D. Examination of cash disbursements records.

Verification by reference to dividend record books.

The auditor suspects that selected employees of the entity received unauthorized raises from the entity's payroll supervisor, who has access to payroll records.

Vouch data in the payroll register to documented authorized pay rates in the human resources department's files.

Non-statistical sampling

When the auditors use professional judgment rather than statistical techniques.

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. Prenumbered remittance advices. c. Monthly bank reconciliations. d. Daily deposit of cash receipts.

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.

Which of the following would most likely be 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.

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.

An auditor may obtain information on the December 31 month-end balance per bank in which of the following? December 31 Bank Statement Schedule of Bank (Cash) Transfers A. Yes Yes B. Yes No C. No Yes D. No No

Yes No

a different between nonstatisitcal and statistical sampling is reflected in the methods used to interpret sample results

Ways in which auditors may test controls in an IT environment are:

a. To test application control activities auditors often use computer assisted auditor techniques (CAAT) such as test data, integrated test facilities, controlled programs, and tagging/tracing transactions b. Generalized audit software is often used to perform substantive procedures applied to computerized records. It is used to test the clerical accuracy of records, make comparisons of related data, and select random samples

The risk of incorrect ____________ is the risk that the sample supports the conclusion that the balance is not misstated when it is misstated Relates more to the audit _____________ than to efficiency

acceptance, effectiveness

Adding and subtracting the _________ ___ _________ ____ to and from the estimated total audited value creates an interval within which the true value of the population is likely to lie

allowance for sampling risk

Internal control over cash receipts is weakened when an employee who receives customer mail receipts also: a. prepares bank deposit slips for all mail receipts. b. records credits to individual accounts receivable. c. prepares initial cash receipts records. d. maintains a petty cash fund.

b. records credits to individual accounts receivable.

Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? a. Evaluation of ratio of cash to current liabilities. b. Bank reconciliation. c. Proof of cash. d. Cash confirmation.

c. Proof of cash.

As compared to manual processing, electronic processing of cash transactions generally makes kiting: a. neither easier, nor more difficult to accomplish. b. easier to accomplish. c. more difficult to accomplish. d. impossible to accomplish.

c. more difficult to accomplish.

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: a. board of directors. b. executive committee. c. treasurer. d. controller.

c. treasurer.

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.

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.

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 stockbroker that will act as a custodial agent.

d) Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

The auditors who are engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: a. verify the cash balance reported on the standard financial institution confirmation form. b. detect kiting. c. detect lapping. d. verify reconciling items on the client's bank reconciliation.

d. verify reconciling items on the client's bank reconciliation

Probability-proportional-to-size (PPS) sampling, which is also referred to as _______ ____ ________, is used to estimate the total dollar amount of misstatement in a population

dollar unit sampling

In the message acknowledgement technique, known as ________ ________, a receiving device sends a message back to the sending device that verifies a transmission

echo check

The risk of assessing control risk too high relates to ________ of the audit process?

efficiency

Audit ________ is an instance where the auditor said that the F/S were fairly stated when in fact, they were not. The term generally indicated that the audit firm did not do enough audit work and didn't gather enough evidence to provide an unqualified opinion

failure

when using sampling with replacement an item

from the population may be selected two or more times for inclusion in the sample

if the variability of the population increases, as measured by the standard deviation, the required sample size increases

What are the auditor's post-audit responsibilities?

immediately investigate subsequently discovered facts; advise clients to make disclosures to anyone relying on the report; if the client refuses to make disclosures, CPA should inform the board of directors; CPA should also notify applicable regulatory agencies and, if practicable, each person known to be relying on the financial statements

What does assessing control risk too low result in?

inappropriately reducing the substantive procedures, which reduces the effectiveness of the audit

In classical variables sampling, greater variability among the item values in the population _________ required sample size?

increases

In variables sampling, as the variability of the population _________, as measured by the standard deviation, the required sample size increases

increases

What hardware components are peripheral to the principal hardware component?

input devices and output devices and auxiliary storage devices

Attribute sampling is often used in conjunction with tests of the client's _______ _______

internal control

update of the wrong master file of accounts

internal file label

Changes in sampling risk?

inverse relationship; the lower the sample risk, the bigger the population must be

What must an auditor consider in evaluating audit findings?

known misstatements, projected misstatements, and other estimated misstatements

processing a traction that is unreasonable in amount

limit tests

unauthorized entry of data after business hours

locking operating switch

The tolerable misstatement is an estimate of the ________ ________ ______________ that may exist in an account and still not lead to a material misstatement in the financial statement

maximum monetary misstatement

Sampling without replacement?

means that once an item is drawn for a sample, it cannot be included again results in a smaller sample size because the population is treated as finite

interception of data when it is transmitted

private lines

The number of personnel in an information system may limit the extent to which segregation of duties is feasible. what is the minimum amount of segregation of duties that will permit satisfactory internal control?

programmer must be separate from operating computer and controlling input operates should not have custody or details knowledge of programs

Explain the nature and functions of computer software

programs and routines that facilitate operations

In performing tests of controls, the auditors are primarily concerned with the critical aspect of sampling risk known as the ____ __ __________ _______ ____ __ ___.

risk of assessing control risk to low

in performing tests of controls, the auditors are primarily concerned with the critical aspect of sampling risk known as the

risk of assessing control risk too low

variables sampling

sampling plans designed to estimate a numerical measurement of a population, such as a dollar value

When using _______ ____ ___________ an item from the population may be selected two or more times for inclusion in the sample

sampling with replacement

List the types of procedures that are necessary to complete an audit?

search for unrecorded liabilities; review the minutes of meetings; perform final analytical procedures; perform procedures to identify loss contingencies; perform the review of subsequent events; obtain the letter of representation

selecting every 50th invoice for inclusion in a sample is termed systematic sampling

an error when entering an account number

self checking numbers

Distinguish between systems programs and application programs

systems- preform generalized functions for one or more application programs applications- contain instructions that enable the user to perform data processing tasks such as payroll calculations

Stratification selection?

technique of dividing a population into relatively homogenous subgroups called *strata*

the allowance for sampling risk for a substantive procedure is determined based in part on the tolerable misstatement in the account

to use attributes sampling tables, the auditors must stipulate

the desired risk of assessing control risk too low, the expected deviation rate in the population, the desired tolerable deviation rate

Sampling risk?

the possibility that auditors will make an erroneous decision based on a sample risk

Risk of assessing control risk too high?

the possibility that the sample results will cause the auditors to assess control risk at a higher level than is warranted based on the actual operating effectiveness of the control

if the variability of a population increases, as measured by the standard deviation

the required sample size for the population will increase

Nonsampling risk?

the risk of erroneous conclusions by the auditors based on any factor other than sampling

the risk of incorrect rejection relates to the efficiency of a substitute procedures, but not to the effectiveness of the test

systematic selection

the technique of selecting a sample by drawing every nth item

Type 1 subsequent event?

those providing additional evidence about facts existing *on or before* the balance sheet date; requires financial statement amounts be adjusted to reflect the changes in estimates resulting from additional evidence

attributes sampling plans are typically used for tests of controls

whereas variables sampling plans are typically used for substantive tests

Marketable equity securities should be valued at cost. T/F

False

What items should be included in IT documentation? (DOCD)

1) Descriptions/flowcharts 2) Operating instructions 3) Control procedures for operators & users 4) Descriptions and samples of inputs and outputs

How can CPAs be sure the computer programs presented to them are actually used by the client?

1) consider clients general controls 2) observe processing of data 3) request program on a surprise basis

Proof of cash

An audit procedure that reconciles the bank's record of cash activity with the client's accounting records for a test period. The working paper used for this is a four-column bank reconciliation.

The auditor's count of the client's cash should be coordinated to coincide with the: A) Consideration of the internal controls with respect to cash. B) Close of business on the balance sheet date. C) Count of investment securities. D) Count of inventories.

C) Count of investment securities.

The financial management of a company should take steps to see that company's investment securities are protected. Which of the following is not a step that is designed to protect investment securities? A) Securities should be registered in the name of the owner. B) Access to securities should be vested in more than one person. C) Custody of securities should be assigned to persons who have the accounting responsibility for securities. D) Securities should be properly controlled physically in order to prevent unauthorized usage.

C) Custody of securities should be assigned to persons who have the accounting responsibility for securities.

Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? Answer Comparing recorded dividends with amounts appearing on federal information form 1099s. Tracing recorded dividend income to cash receipts records and validated deposit slips. Comparing recorded dividends with a standard financial reporting service's record of dividends. Utilizing analytical techniques and statistical sampling.

Comparing recorded dividends with a standard financial reporting service's record of dividends.

T or F: Marketable equity securities should be valued at cost.

False - FV

T or F: Cash should be deposited weekly so it can be counted several times before being sent to the bank.

False - daily

T or F: Auditors must be present to perform a count of securities and cash on the balance sheet dates.

False - not always possible to count on BS date

Which of the following is not a universal rule for achieving internal control over cash?

Separate recordkeeping from accounting for cash to the extent possible.

Selecting every 50th invoice for inclusion in a sample is termed ________ ________

systematic selection

Deviation rate

A defined rate of departure from prescribed controls. Also referred to as "occurrence rate" or "exception rate".

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.

Kiting would least likely be detected by: Comparing customer remittance advices with recorded disbursements in the cash disbursements journal. Analyzing details of large cash deposits around year end. Preparing a four-column bank reconciliation for all major cash accounts. Preparing a schedule of interbank transfers by using the client's records and bank statements around year end.

Comparing customer remittance advices with recorded disbursements in the cash disbursements journal.

Audit Risk =

Inherent Risk X Control Risk X Detection Risk

Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation? Answer Prepare a four column bank reconciliation using the year-end bank statement. Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal. Receive a cutoff statement directly from the client's bank. Confirm the year end balance using the standard form to confirm account balance information with financial institutions.

Receive a cutoff statement directly from the client's bank.

Comparative financials

A complete set of financial statements for one or more prior periods included for comparison with the financial statements of the current period.

Sequential (stop-or-go) sampling

A sampling plan in which the sample is selected in stages, with the need for each subsequent stage being conditional on the results of the previous stage.

The auditors should insist that a representative of the client be present during the physical examination of securities in order to: A) Lend authority of the auditor's directives. B) Detect forged securities. C) Coordinate the return of all securities to proper locations. D) Acknowledge the receipt of securities returned.

D) Acknowledge the receipt of securities returned.

Which of the following is not confirmed on the standard form used for cash balances at financial institutions? A) Cash checking account balances. B) Cash savings account balances. C) Loans payable. D) Securities held for the client by the financial institution.

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

Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements? Answer Overstatement of outstanding checks. Understatement of outstanding checks. Overstatement of bank services charges. Understatement of deposits in transit.

Understatement of outstanding checks.

An investment committee is a standing committee of _______. a. development staff b. employees c. executives d. human resources e. the board of directors

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

Securities held for the client by the financial institution.

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to:

Verify reconciling items on the client's bank reconciliation.

loss of data as it is processed internally by the computer

parity check

steps involved in using sample evaluation tables

1) select corresponding table 2) locate column that contains the actual # of deviations 3) Locate row that contains the sample size 4) Read the upper deviation limit from the intersection of the row and column

After performing test of controls, auditors should reassess the level of __________ for each financial statement assertion regarding cash. a. control risk b. business risk c. audit risk

Lapping

A concealment of cash shortage by delaying the recording of cash receipts. It is most easily carries on when an employee who receives collections from customers is responsible for the posting of customers' accounts.

Contingent liability

A possible liability, stemming from past events that will be resolved as to existence and amount by some future event.

Rollover approach

An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements (including projecting misstatements where appropriate) only during the current year.

The least crucial element of internal control over cash is: A) separation of cash record keeping from custody of cash. B) separation of cash receipts from preparing deposits. C) canceling the supporting documents for disbursements. D) preparation of the monthly bank reconciliation.

B) separation of cash receipts from preparing deposits.

Which of the following is correct relating to kiting?

It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment.

An advantage of using statistical sampling techniques is that such techniques:

Mathematically measure risk

The auditor suspects that the entity is inappropriately increasing the cash reported on its balance sheet by drawing a check on one account and not recording it as an outstanding check on that account and simultaneously recording it as a deposit in a second account.

Prepare a bank transfer schedule.

The auditors who are engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: a. verify reconciling items on the client's bank reconciliation. b. detect kiting. c. verify the cash balance reported on the standard financial institution confirmation form. d. detect lapping.

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

Which of the following is the best audit procedure for the detection of lapping? A) Comparison of postings of cash receipts to accounts with the details of cash deposits. B) Confirmation of the cash balance. C) Reconciliation of the cash account balances. D) Preparing a proof of cash.

A) Comparison of postings of cash receipts to accounts with the details of cash deposits.

Iron curtain approval

An approach to making materiality judgments that quantifies the total likely misstatements as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the year, irrespective of whether the misstatements occurred in the current year or previous years.

The entity's cash receipts of the first few days of the subsequent year were properly deposited in its general operating account after the year-end. However, the auditor suspects that the entity recorded the cash receipts in its books during the last week of the year under audit.

Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips.

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate:

Treasurer.

Which of the following is a frequent control over cash disbursements? a. Checks should be signed by the controller and at least one other employee of the company. b. Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations. c. Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation. d. Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement.

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.

Explain the effects of changes in various population characteristics and changes in sampling risk on required sample size (9-4)

sampling error- possibly selecting a sample that is not representative of the population, difference between the actual rate and that of the sample allowance of sampling risk- precision, an interval around the sample results in which the true population characteristic is excepted to lie tolerable misstatement- an estimate of materiality for the particular audit test precision- same as allowance for sampling risk expected population deviation rate-advance estimate of deviation rate, necessary for determining the required sample size in an attributes sampling plan

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

A fraudulent cash confirmation.

Which of the following best illustrates the concept of sampling risk?

A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest

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

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

B - comparing revenue with books

alteration of data by an unauthorized terminal user

passwords

The term _____________ refers to the process of dividing a population into relatively homogeneous subgroups called _____

stratification, strata

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.

Acknowledge the receipt of securities returned.

Risk of assessing control risk too high

This risk is the possibility that the assessed level of control risk based on the sample is greater than the true operating effectiveness of the control.

inherent in the use of sampling is the risk of

sampling error which is the possibility of selecting a sample that is not representative of the populations

Checks payable to officers should be carefully reviewed by the auditors to determine whether the transactions were properly: (Select all that apply) a. authorized b. confirmed c. calculated d. disclosed e. recorded

A, D, E

An improper bank reconciliation designed to conceal a cash shortage is more likely to overstate than understate the amount of outstanding checks. True False

False

When reviewing of client's client prepared bank reconciliations, auditors should directly confirm ___________ with the financial institution. a. bank balances b. book balances c. reconciling items

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

A bank lockbox system.

The auditors who are engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: A) detect lapping. B) detect kiting. C) verify reconciling items on the client's bank reconciliation. D) verify the cash balance reported on the standard financial institution confirmation form.

C) verify reconciling items on the client's bank reconciliation.

Tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading) provides evidence about the: Completeness of recording of sales transactions. Presentation of payables. Billing of all sales transactions. Occurrence of sales transactions.

Occurrence of sales transactions.

Which of the following correctly identifies a risk facing SSC that might affect its ability to continue as a going concern over the long run? a. Competition from several competitors. b. Your CPA firm's decision to issue standard unmodified audit reports not mentioning the goingconcern status during the past five years. c. Obsolescence of all products due to rapid changes in technology in the industry. d. The nature of inventory items—small in size, high in value.

Dividend record book

A reference book published monthly by investment advisory services reporting detailed information concerning all listed and many unlisted securities; includes dividend dates and amounts, current prices of securities, and other condensed financial data.

After the auditors identify and assess risks of material misstatement for the assertions about cash, they can plan appropriate __________ procedures that address them.

Substantive

Select the audit procedure with the error or fraud that the procedure is likely to detect. a. Preparing and verifying a schedule of bank transfers. b. Tracing remittance advices to postings in the accounts receivable records. c. Comparing the serial numbers of securities on hand to numbers recorded in the prior year's audit working papers. d. Review of the bank cutoff statement. e. Preparing a "proof of cash" for the entire audit period. "Kiting" of cash.

T or F: An official of the client company took securities from the safe deposit box and sold them to obtain cash to meet a personal financial crisis. Even with proper internal control, if the official purchased identical securities before the year-end and placed them in the safe deposit box, this improper "borrowing" would probably go undetected during the annual audit.

False

Your client left the cash receipts journal open after year-end for an extra day and included January 1 cash receipts in the 12/31/XX totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the year XX financial statements?

Net income is overstated.

In auditing through a computer, CPAs may use test data (8-6) what are test data? Why do CPAs use test data?

Set of data representing a range of simulated transactions some of which may have errors 1) gain better understanding of how compute process 2) test accuracy by comparing manual results 3) test whether or not the system is capable of detecting errors

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor suspects that selected employees of the entity received unauthorized raises from the entity's payroll supervisor, who has access to payroll records. (Select only 1 procedure.)

Designating the cashier to be custodian of the petty cash fund is more acceptable from the standpoint of internal control than making the cashier responsible for maintenance of accounts receivable records. True False

True

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that Answer Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

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.

Application control activities may be classified as either ____________ or _____________

manual programmed

5 general controls and state common attribute (OSHAD)

1) Organization and operation 2) System development and documentation 3) Hardware and software 4) Access 5) Data and procedural IT environment and all it's activities rather than to a single IT application

Auditors examine financial investments to gain an understanding of the client and its environment, and to assess __________ risks including the risk of fraud. a. inherent b. business c. audit

Cutoff bank statements include activity for the period _______the period being audited. a. after b. before c. disclosing d. inclusive of e. overlapping

The inspection of securities on hand should be coordinated with the verification of inventories because both involve counting and inspection and can conveniently be combined. True False

False

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. Prenumbered remittance advices c. Monthly bank reconciliations d. Daily deposit of cash receipts

T or F: The audit working paper known as a "proof of cash" is a means of proving that checks paid by the bank during the test period were not in excess of authorized cash receipts during that same test period.

False - reconciles bank and client activity

The "lapping" of cash receipts is most likely to occur when one person has both responsibility for record keeping for cash receipts and custody of cash. True False

True

the tolerable misstatement is an estimate of the maximum monetary amount that may exist in an account and still not lead to a material misstatement in the financial statement

when the auditors estimate sampling risk using professional judgement rather than by using the laws of probability,

they are said to be using nonstatisitcal sampling

Risk of assessing control risk too low?

this *more important risk* is the possibility that the sample results will cause the auditors to assess control risk at a lower level than is warranted based on actual operating effectiveness of the control

If the variability of a population increases, as measured by the ________ ____________, the required sample size for the population will ________

Standard deviation, increases

Auditors working papers for cash typically include: (Select all that apply) a. lead schedule b. bank confirmations c. aged trial balance d. cash count sheets e. petty cash reconciliations

A, B, D

Auditors design test of controls and substantive procedures that: (Select all that apply) a. verify the cutoff of cash transactions b. test all internal controls related to cash transactions c. determine the accuracy of cash transactions d. review all cash transactions

A, C

Auditors inspect the client's securities by: (Select all that apply) a. checking serial numbers against prior years working papers b. counting securities held by the client at the end of the fieldwork c. confirming securities are registered in the company's name d. reviewing statements provided by the client's managements

A, C

The auditors should count small petty cash funds at year-end to make sure that balance is not understated on the financial statements. True False

False

T or F: When the confirmation process is not performed electronically, confirmation requests should be mailed by the auditors in envelopes bearing the auditors' return address.

True

T or F: The standard financial institution confirmation request used by the auditors is a means of obtaining documentary evidence about both assets and liabilities.

True - deposits and loans

Rank the following audit of cash steps in order from first to last step completed. 1. perform further audit procedures - test of controls 2. obtain understanding of internal control over cash 3. assess risks of material misstatement and design further audit procedures 4. perform further audit procedures - substantive procedures

2, 3, 1, 4

Which of the following is not one of the auditors' primary objectives in an examination of investments in securities? a. To determine whether all securities are in proper, secure, files at year-end. b. To determine whether securities are properly classified on the balance sheet. c. To determine whether securities actually exist. d. To determine whether securities are the property of the client.

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. Prenumbered remittance advices. C. Monthly bank reconciliations. D. Daily deposit of cash receipts.

A bank lockbox system

Mean-per-unit (MPU) estimation

A classical variables sampling plan enabling the auditors to estimate the average dollar value (or other variable) of items in a population by determining the average value of items in a sample.

Modified opinion

A qualified opinion, an adverse opinion, or a disclaimer of opinion.

To establish the existence and ownership of a large long-term investment in the common stock of a publicly traded company, the auditors ordinarily perform a security count or:

Confirm the number of shares owned that are held by an independent custodian.

Internal control over cash receipts is weakened when an employee who receives customer mail receipts also: A) maintains a petty cash fund. B) records credits to individual accounts receivable. C) prepares bank deposit slips for all mail receipts. D) prepares initial cash receipts records.

B) records credits to individual accounts receivable.

The financial management of a company should take steps to see that company's investment securities are protected. Which of the following is not a step that is designed to protect investment securities? a. Securities should be properly controlled physically in order to prevent unauthorized usage. b. Securities should be registered in the name of the owner. c. Access to securities should be vested in more than one person. d. Custody of securities should be assigned to persons who have the accounting responsibility for securities.

The least crucial element of internal control over cash is: a. separation of cash record keeping from custody of cash. b. preparation of the monthly bank reconciliation. c. canceling the supporting documents for disbursements. d. separation of cash receipts from preparing deposits.

Which of the following is correct concerning "window dressing" for cash? Answer It generally involves manipulation of inventory. It is illegal, and an audit is designed to provide reasonable assurance of its detection. A segregation of duties within the cash function effectively eliminates its occurrence. Many forms of it require no action by the auditors.

Many forms of it require no action by the auditors.

Which of the following statistical selection techniques is least desirable for use by an auditor?

Block Selection

A derivative is a financial instrument that derives its value from another financial instrument, an underlying asset, or indices. True False

True

After auditing cash, it is important to evaluate proper financial statement presentation and __________ of cash. a. adjusting b. counting c. disclosure d. inventory e. misstatement

Voucher

A document authorizing a cash disbursement. It usually provides space for employees to initial after they have performed approval functions. (The term may also be applied to the group of documents supporting a cash disbursement)

Non-statistical sampling

(auditor's opinion) the risk of error is estimated by the auditors by judgement rather than by laws of probability advantage: faster, no training of auditors disadvantage: provides no means of quantifying sampling risk (they could be taking a costly sample size without knowing it)

Statistical sampling

(logic) the risk of error quantified through the use of mathematics and laws of probability advantage: reliable and designed effective disadvantage: extra training and cost of audit staff, sometimes inconsistent because of the auditor training

SEC registration statement

A document including audited financial statements that must be filed with the SEC by any company in order to sell its securities to the public through the mails or interstate commerce.

Describe the nature of various types of information technology based systems (8-2) An IT system may possess one or more of the following elements: (BODIE)

1) Batch processing - input data is gathered and processed in separate groups called batches 2) Online capabilities - allows users to have direct (online) assess to the data stored in the system 3) Database storage - method for storing info, each application has its own application data file 4) IT networks - computers linked together through telecommunications 5) End user computing - the user departments are responsible for the development and execution of certain IT applications

Describe the risks of computer processing of accounting information over manual systems (FCOMM)

1) Files and records are usually in machine readable form and cannot be read without computer 2) Changes in systems are often difficult to implement and control 3) Often their is less documentary evidence of the performance of control procedures 4) Maybe vulnerable to ply. disasters, unauthorized manipulation, and machine malfunction 5) May produce a transaction trail available for audit only for a short time

Discuss 6 types of control that would apply to this microcomputer application

1) programs and operating processing should be documented 2) operators should be well trained 3) operators should not be in a position to create errors or prevent their detection 4) log work of station use 5) system of authorization 6) back up

An example of a test of controls would be to compare the details of a sample of recorded disbursements in the __________ journal to accounts payable postings, purchase orders, receiving reports, invoices, and paid checks. a. cash disbursements b. cash receipts c. sales

Cut off bank statement

A bank statement covering a specified number of business days (usually 7 to 10) after the client's balance sheet date. Auditors use this statement to determine that checks issued on or before the balance sheet date and paid during the cutoff period were listed as outstanding on the year-end bank reconciliation. Another use is to determine that reconciling items shown on the year-end bank reconciliation have cleared the bank within a reasonable amount of time.

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

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.

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect: A) An unrecorded deposit made at the bank at the end of the month. B) A second payment of an account payable which had already been paid in full two months earlier. C) An embezzlement of cash receipts not recorded in the cash receipts journal before they had been deposited into the bank. D) A receivable collected that had previously been written off as uncollectible.

A) An unrecorded deposit made at the bank at the end of the month.

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 the 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 writeoffs 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.

When a client engages in transactions involving derivatives, the auditor should: A) Develop an understanding of the economic substance of each derivative. B) Confirm with the client's broker whether the derivatives are for trading purposes. C) Notify the audit committee about the risks involved in derivative transactions. D) Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative.

A) Develop an understanding of the economic substance of each derivative.

Which of the following is not a universal rule for achieving internal control over cash? A) Separate recordkeeping from accounting for cash to the extent possible. B) Deposit each day's cash receipts intact. C) Separate cash handling from record keeping. D) Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks.

A) Separate recordkeeping from accounting for cash to the extent possible.

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor suspects that a lapping scheme exists because an accounting department employee who has access to cash receipts also maintains the accounts receivable ledger and refuses to take any vacation or sick days. (Select only 2 procedures.)

A, J

The auditors should insist that a representative of the client be present during the physical examination of securities in order to: Lend authority of the auditor's directives. Detect forged securities. Acknowledge the receipt of securities returned. Coordinate the return of all securities to proper locations.

Acknowledge the receipt of securities returned.

Allowance for sampling risk

Also referred to as precision, an interval around the sample results in which the true population characteristics is expected to lie.

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.

An investment committee of the board of directors.

__________ ________ plans are typically used for tests of controls, whereas variables sampling plans are typically used for ___________ _____

Attribute sampling, substantive tests

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

Auditor

A bookkeeper prepares a check to herself and records it as having been issued to a major supplier is an example of which type of misstatement? a. unrecorded disbursements b. inaccurate recording of a disbursement c. duplicate payment of purchases

Agreements to maintain compensating balances should be ___________ in the financial statements. a. recorded b. disclosed c. adjusted

Analyzing bank transfers at the end of the period being audited and the beginning of the next period helps detect ____________. a. confirmation b. kiting c. modification d. reconciliation e. transfers

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally not be able to detect: A) An unrecorded deposit made at the bank at the end of the month. B) A second payment of an account payable which had already been paid in full two months earlier. C) An unrecorded check cashed during that month. D) A bank charge during the month not recorded on the books.

B) A second payment of an account payable which had already been paid in full two months earlier.

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department? A) Comparing the vendor's invoice with the receiving report. B) Canceling supporting documentation after payment. C) Verifying the mathematical accuracy of the vendor's invoice. D) Preparing the check for signature by an authorized person.

B) Canceling supporting documentation after payment.

The auditors use a bank cutoff statement to compare: A) Deposits in transit on the year-end cash general ledger account to deposits in the cash receipts journal. B) Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. C) Deposits listed on the cutoff statement to disbursements in the cash disbursements journal. D) Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank statement.

B) Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

An important step in testing investments is to ensure all persons with access to investments are properly ______. a. adjusted b. audited c. bonded d. measured e. observed

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting? A) Review composition of authenticated deposit slips. B) Review subsequent bank statements and canceled checks received directly from the banks. C) Prepare a schedule of bank transfers. D) Prepare year-end bank reconciliations.

C) Prepare a schedule of bank transfers.

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: A) controller. B) executive committee. C) treasurer. D) board of directors.

C) treasurer.

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department? Answer Preparing the check for signature by an authorized person. Verifying the mathematical accuracy of the vendor's invoice. Canceling supporting documentation after payment. Comparing the vendor's invoice with the receiving report.

Canceling supporting documentation after payment.

Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the: Answer Check Clearing for the 21st Century Act Foreign Corrupt Practices Act. Public Company Accounting Oversight Board's Standard No. 2. Sarbanes-Oxley Act

Check Clearing for the 21st Century Act

Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the:

Check Clearing for the 21st Century Act.

The auditors use a bank cutoff statement to compare:

Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

A practical and effective audit procedure for the detection of lapping is

Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank.

T or F: The practice of "kiting" as a means of overstating cash is possible only if the client maintains two or more bank accounts.

True

A practical and effective audit procedure for the detection of lapping is: Answer Preparing an interbank transfer schedule. Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank. Preparing a proof of cash. Tracing recorded cash receipts to postings in customers' ledger cards.

Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank.

Garcia was engaged to audit the financial statements of Delta Corporation for the year ended September 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?

Comparing recorded dividends with a standard financial reporting service's record of dividends.

Anderson embezzled $20,000 from her company's account in Bank X. At year-end, she hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. She has not recorded the transaction on the books. Which of the following is most likely to be effective in detecting this fraud?

Comparison of bank cutoff statement to the cash receipts and disbursements records.

Jones 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. Which of the following is most likely to be effective in detecting this fraud? Answer Comparison of bank cutoff statement to the cash receipts and disbursements records. Bank transfer schedule prepared using only the cash receipts and cash disbursements journals. Receivable confirmation. Bank confirmation.

Comparison of bank cutoff statement to the cash receipts and disbursements records.

Which of the following is the best audit procedure for the detection of lapping? Comparison of postings of cash receipts to accounts with the details of cash deposits. Reconciliation of the cash account balances. Preparing a proof of cash. Confirmation of the cash balance.

Comparison of postings of cash receipts to accounts with the details of cash deposits.

Which of the following statements is not correct? Answer Payroll cash account balances kept on an imprest basis are more easily controlled than others not so kept. Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date. Reviewing interbank transfers is important to the auditor because of the possibility that the client may be engaged in kiting. Cash is important to the audit process because of its vulnerability to misappropriation, despite the fact that the balance at the balance sheet date may be immaterial.

Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date.

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 operations 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.

Coordinate the count of cash with the count of marketable securities and other negotiable assets.

Auditors are often concerned with the _______of cash, as this is where most misstatements occur. a. disclosure b. existence c. inventory d. overstatement e. understatement

Cash analyses need to be _______ to the general ledger. a. closed b. confirmed c. counted d. reconciled e. transferred

In order to avoid the misappropriation of company-owned financial investments, which of the following is the best course of action that can be taken by the management of a company with a large portfolio of financial investments? 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 securities broker who will act as a custodial agent.

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the best evidence on operating effectiveness? A) Select and examine receiving reports and test whether the related canceled checks are dated no earlier than the receiving reports. B) Select and examine receiving reports and test whether the related canceled checks are dated no later than the receiving reports. C) Select and examine canceled checks and test whether the related receiving reports are dated no earlier than the checks. D) Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.

D) Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.

Which of the following is not a control over cash disbursements?

Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse.

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.

Is responsible for mailing the checks.

Which of the following is correct relating to kiting? Answer It is ordinarily used to understate cash. It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment. It is a lapping approach performed using receivable accounts. It is seldom, if ever, used.

It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment.

Which of the following is correct concerning "window dressing" for cash?

It may increase but not falsify cash position.

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor suspects that the entity's controller has overstated sales and accounts receivable by recording fictitious sales to regular customers in the entity's books. (Select only 2 procedures.)

J, L

Kiting.

Net income is overstated.

The auditor suspects that fictitious employees have been placed on the payroll by the entity's payroll supervisor, who has access to payroll records and to the paychecks.

Observe payroll check distribution on a surprise basis.

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.

Observe the consistency of the employees' use of cash registers and tapes

An auditor may obtain information on the December 31 month-end balance per bank in which of the following? Standard Conformation Form Jan 1-10 Cutoff Statement A) Yes Yes B) Yes No C) No Yes D) Yes No A) Option A B) Option B C) Option C D) Option D

Option A

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting?

Prepare a schedule of bank transfers

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting? Answer Prepare year-end bank reconciliations. Review subsequent bank statements and canceled checks received directly from the banks. Prepare a schedule of bank transfers. Review composition of authenticated deposit slips.

Prepare a schedule of bank transfers.

A company's decision to use the fair value option for valuation of marketable securities is most likely to affects which of the following assertions the most? Answer Presentation and Disclosure Completeness. Fairness. Existence.

Presentation and Disclosure

A company's decision to use the fair value option for valuation of marketable securities is most likely to affect which of the following assertions the most?

Presentation and Disclosure.

Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation?

Receive a cutoff statement directly from the client's bank.

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.

Confirmation requests should be mailed by the auditors in envelopes bearing the auditors' return address. True False

True

The details of invoices for equipment repairs were not clearly identified or explained to the accounting department employees. The auditor suspects that the bookkeeper incorrectly recorded the repairs as fixed assets.

Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization.

Which of the following is not confirmed on the standard confirmation form used for cash balances at financial institutions?

Securities held for the client by the financial institution.

Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.

Distinguish between sequential methods of data processing and direct access processing

Sequential- files are arranged sequentially and transaction data are sequenced before processing. The entire file must be read each time a transaction is processed Direct assess- file data are not maintained in any particular order, Not necessary to read entire file to update

Check 21 Act

This act allows financial institutions to create and process electronic "substitute checks" in place of customer written hard-copy checks. The purpose of this act is to decrease the time for check clearing.

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.

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) Prenumbered remittance advices. c) Monthly bank reconciliations. d) Daily deposit of cash receipts.

a) A bank lockbox system.

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.

Tolerable deviation rate is the maximum rate of __________ the auditor is willing to accept without altering the planned assessed level of control risk. Deviations increase the likelihood of misstatements in the accounting records

deviations

Random selection?

every item in the population has an equal chance of being selected for inclusion in the sample

detection risk may be separated into two risks

one relating to analytical procedures and the other is the allowable risk of tests of details

Plan, perform, and evaluate samples for tests of controls using statistical and non-statiscial methods (9-5)

risking of assessing control risk too high-the auditors perform more substantive testing that is necessary in circumstance risking of assessing control risk too low- they will inappropriately reduce the extent of their substantive procedures

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) Prenumbered remittance advices. C) Monthly bank reconciliations. D) Daily deposit of cash receipts.

A) A bank lockbox system. A bank lock box 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 as a bank lockbox system.

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The entity's cash receipts of the first few days of the subsequent year were properly deposited in its general operating account after the yearend. However, the auditor suspects that the entity recorded the cash receipts in its books during the last week of the year under audit. (Select only 1 procedure.)

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.

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The details of invoices for equipment repairs were not clearly identified or explained to the accounting department employees. The auditor suspects that the bookkeeper incorrectly recorded the repairs as fixed assets. ( Select only 1 procedure.)

Intentional misstatements of the value of closely held investments could have been prevented by which of the following internal controls? a. segregation of duties b. effective audit committee c. formal investment policies

It is important to verify ______ of both cash receipts and cash disbursements. a. consideration b. cutoff c. deviation d. disclosure e. existence

After the auditors have performed an adequate test of controls over financial investments, they will most likely: a. assess the risk of material misstatement b. consider inherent risks, including fraud risks c. perform substantive procedures

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 case in advance of the balance sheet date in order to disclose any kiting operations at year-end b. Coordinate the count of cash with the cutoff of accounts payable c. Coordinate the count of case 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

Jones 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 in the books. Which of the following is most likely to be effective in detecting this fraud? A) Bank confirmation. B) Bank transfer schedule prepared using only the cash receipts and cash disbursements journals. C) Comparison of bank cutoff statement to the cash receipts and disbursements records. D) Receivable confirmation.

C) Comparison of bank cutoff statement to the cash receipts and disbursements records.

Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? a. Evaluation of ratio of cash to current liabilities. b. Cash confirmation. c. Bank reconciliation. d. Proof of cash.

Which of the following correctly identifies a risk facing SSC that might adversely affect cash receipts during the coming years? a. Establishment of the audit committee. b. Increase in the popularity of home swimming pools. c. Sales to many different customers. d. Sales to Wingo.

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. An auditor suspects that the controller wrote several checks and recorded the cash disbursements just before yearend but did not mail the checks until after the first week of the subsequent year. (Select only 1 procedure.)

In a manufacturing company which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date? A) Confirmation from the broker. B) Inspection of year-end brokers' statements. C) Vouching all changes during the year to brokers' advises and statements. D) Examination of paid checks issued in payment of securities purchased.

D) Examination of paid checks issued in payment of securities purchased.

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor suspects that a kiting scheme exists because an accounting department employee who can issue and record checks seems to be leading an unusually luxurious lifestyle. (Select only 1 procedure.)

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor suspects that the entity is inappropriately increasing the cash reported on its balance sheet by drawing a check on one account and not recording it as an outstanding check on that account and simultaneously recording it as a deposit in a second account. (Select only 1 procedure.)

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 stockbroker that will act as a custodial agent.

Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

Probability-proportional-to-size- sampling (dollar-unit sampling)?

applies attributes sampling theory to develop an estimate of the total dollar amount of misstatement in a population A method that defines the sampling unit as each individual dollar Could be used in audit situations where the auditors wish to estimate the value of accounts receivable by confirmation; the auditors expect a very low deviation rate in recorded amounts

Changes in population characteristics

as population increases in size, the sample size necessary to estimate the population with a specified sampling risk and allowance for sampling risk will *increase*; when population size is above 500, an increase is only a very small amount

Discovery sampling is a form of attributes sampling designed to locate __ _____ ___ deviation (exception) in the population

at least one

attributes sampling is often used in conjunction with tests of the clients internal control

Describe the auditing approach referred to as "auditing around the computer" (8-6) Under what conditions do CPAs decide to audit through the computer instead of around the computer?

auditors manually process samples of transactions and compare the results with computer results 1) IT application become complex 2) Auditors trail becomes partly obscured or hidden 3) When it is more efficient

Understand the different types of sampling plans used in auditing (9-3) (PACD)

1) Probability-proportional-to-size sampling - expresses a conclusion in monetary dollar amounts 2) Attributes sampling- would estimate the the % of extensions that are in error, estimating the rate of deviation in a population 3) Classical variables sampling - estimate of numerical quantity 4) Discovering sampling - planned for locating at least 1 deviation, providing that the deviation occurs in the population with a specified frequency

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 - or receipts

If the auditor wants to achieve a low control risk assessment, what is an appropriate tolerable deviation rate?

2%-7%

Auditors verify deposits in transit as shown on the YE bank reconciliation appear as credits on the bank statement on the first business day of the new year to verify proper ___________ of cash receipts. a. cutoff b. valuation c. rights

Electronics funds transfer (EFT)

A computer system that transmits and processes funds-related cash disbursement and receipt transactions. Increasingly, companies are electronically transferring funds between bank accounts rather than issuing checks.

Standard confirmation form

A confirmation form, agreed to by the AICPA, the American Bankers Association, and the Bank Administration Institute, that is designed to provide corroborating evidence about the client's account balances and outstanding loans.

Other matter paragraph

A paragraph included in the auditors' report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditors' judgment, is relevant to users' understanding of the audit, the auditors' responsibilities, or the auditors' report.

Explanatory paragraph

A paragraph inserted in an auditors' report to explain a matter or to describe the reasons for giving an opinion that is other than unmodified. This term is still used in PCAOB standards, but has been replaced in AICPA standards by an emphasis of matter paragraph and an other matter paragraph.

By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor will generally be able to detect: Answer A cash sale which was not recorded on the books and was stolen by a bookkeeper. An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank. A credit sale which has been recorded twice in the sales journal. An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.

An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation.

Define computer application controls and explain their purpose (8-4)

Apply to the processing of individual applications Purpose is to ensure reliability and accuracy of processing by using programmed controls (limit test, validity test, item count, cash total)

(E) 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

(E) Which of following not correct? a. Cash important to audit process bc vulnerability to misappropriate b. Payroll cash account balances on impress basis are more easily controlled than others not so kept c. Confirmation of cash only performed as of BS date bc auditor express opinion as of that date

A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the: a. cashier. b. chief accountant. c. treasurer. d. internal auditors.

When using a statistical sampling plan, the auditors would probably require a smaller sample if the:

Desired risk of incorrect acceptance increases

Stratification

Dividing a population into two or more relatively homogeneous subgroups. It increases the efficiency of most sampling plans by reducing the variability of items in each stratum. The sample size necessary to evaluate the strata separately is smaller than would be needed to evaluate the total population.

Which of the following is not a control over cash disbursements? Answer Voided checks should be defaced and filed with paid checks. A check protecting machine should be used. Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse. Disbursements should be made by check.

Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse.

Cash reconciliations can be tested via __________. a. counting b. disclosure c. observation d. physical inventory e. reperformance

Non-sampling errors

Errors due to factors not directly caused by sampling.

T or F: A client has $100,000 on deposit at year-end and owes the bank $250,000 on a note payable. The borrowing agreement calls for the client to maintain a minimum (compensating) balance of $40,000 on deposit during the life of the bank loan. On the balance sheet, the asset cash should be stated at $60,000, the excess of the deposit over the compensating balance.

False

T or F: Auditors normally verify the amount of dividends earned on the client's security investments by writing directly to the companies that paid the dividends.

False

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.

Process cash disbursements

The auditor discovered an unusually large receivable from one of the entity's new customers. The auditor suspects that the receivable may be fictitious because the auditor has never heard of the customer and because the auditor's initial attempt to confirm the receivable has been ignored by the customer.

Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. & Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer.

Audit sampling

The process of selecting and evaluating a sample of items (whether statistical or non-statistical) from a population of audit relevance such that the auditors expect the sample to be representative of some characteristic of the population.

The request was mailed by the assistant treasurer.

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.

Which of the following is not a control that generally is established over cash receipts?

To ensure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks.

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.

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.

A cutoff bank statement provides assurance to the auditors that all checks outstanding at year-end were included in the list of outstanding checks in the year-end bank reconciliation. True False

True

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? a. Restrictions placed 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.

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.

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 operations 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.

Which of the following is a frequent control over cash disbursements? a. Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation. b. Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations. c. Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement. d. Checks should be signed by the controller and at least one other employee of the company.

b. Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.

audit sampling

can be defined as the process of applying auditing procedures to under 100% of different items in an organization's account balance in a way that every single unit might have an equal probability of being selected. Could be used in audit situations where the auditors apply an audit procedure to less than 100% of a population

Block selection?

consists of all items in a selected time period, numerical sequence, or alphabetical sequence

When the auditors estimate sampling risk using professional judgment rather than by using the laws of probability, they are said to be using _______________ sampling

non-statistical

adding and subtracting the allowance for sampling risk to and from the estimated total audited value

creates an interval within which the true value of the population is likely to lie

The financial management of a company should take steps to see that company's investment securities are protected. Which of the following is not a step that is designed to protect investment securities? a. Access to securities should be vested in more than one person. b. Securities should be registered in the name of the owner. c. Securities should be properly controlled physically in order to prevent unauthorized usage. d. Custody of securities should be assigned to persons who have the accounting responsibility for securities.

d. Custody of securities should be assigned to persons who have the accounting responsibility for securities.

The only type of program documentation that should be provided to the computer operator is the ____________ _________ that contains processing instructions

operations manual

In addition to the risk factor identified in the preceding question, another risk factor relating to misstatements arising from fraudulent financial reporting is: a. Earnings this year are lower than management had hoped. b. Accounts payable are limited to commercial suppliers. c. Sales are made to residential, commercial, and governmental purchasers. d. The industry faces great technological changes in almost all of its products.

The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer check 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 the 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

To verify cutoff of financial investments, auditors will review: a. transactions for 2 weeks after the balance sheet date b. transactions for 2 weeks prior to the balance sheet date c. transactions during the audit fieldwork d. a sample of transactions during the year

Trace several transactions for purchases and sales of investments through the accounting system is an example of: a. Ensure transactions are recorded and classified properly b. Ensure policies written are being followed c. Verify that internal auditors' observations are consistent with those of external auditors d. Ensure reports tie to client activity

When internal control over the recording of cash receipts and disbursements is considered weak, the auditors may prepare a ___________, which reconciles cash transactions occurring during a specific period. a. proof of cash b. bank cutoff statement c. standard confirmation form

Which of the following correctly identifies a risk facing SSC that might adversely affect sales during the coming years? a. A general slowdown in the economy. b. Sales to many smaller customers other than Wingo Corporation. c. Increased attention to developing new products. d. A board of directors dominated by management.

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

A) A bank lockbox system.

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.

Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the: A) Check Clearing for the 21st Century Act. B) Public Company Accounting Oversight Board's Standard No. 2. C) Foreign Corrupt Practices Act. D) Sarbanes-Oxley Act.

A) Check Clearing for the 21st Century Act.

FASB ASC 320 divides securities into three portfolios including: (Select all that apply) a. trading securities b. held-to-maturity securities c. available-for-sale securities d. liquid securities

A, B, C

For purposes of an audit of financial statements, electronic confirmation of cash balances: A) Is acceptable when properly controlled. B) Is acceptable, but only when combined with a non-electronic approach. C) Is only acceptable for immaterial accounts. D) Is not acceptable.

A) Is acceptable when properly controlled.

Which of the following is correct relating to kiting? A) It is ordinarily used to understate cash. B) It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment. C) It is a lapping approach performed using receivable accounts. D) It is seldom, if ever, used.

A) It is ordinarily used to understate cash.

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.

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500 imprest petty cash fund? A) Reimbursement occurs twice each week. B) Reimbursement vouchers are not prenumbered. C) The custodian occasionally uses the cash fund to cash employee checks. D) The custodian endorses reimbursement checks.

A) Reimbursement occurs twice each week.

Incoming customer checks are opened by mailroom employees who: (Select all that apply) a. send the remittance advices and a copy of the control listing to the employee responsible for the customer's accounts b. send a copy of the control listing and the cash receipts to the controller c. endorse the checks "for deposit only"

A, C

Concerning overstated cash, a shortage may have been concealed by the insertion of a(n) ____ in the cash on have at year-end, or by the omission of a(n)____ from the year-end bank reconciliation a. outstanding check, fictitious check b. fictitious check, outstanding check

Internal control over cash receipts is weakened when an employee who receives customer mail receipts also: a. prepares initial cash receipts records. b. records credits to individual accounts receivable. c. prepares bank deposit slips for all mail receipts. d. maintains a petty cash fund.

Of the following, the most significant risk factor relating to the risk of misstatement arising from fradulent financial reporting for SSC is that: a. Company officers serve on the board of directors. b. The company must refinance a significant portion of its debt. c. The company operates in the Bisbee, Arizona, area. d. The company paid no dividend this year.

Payroll, petty cash, and savings accounts are all classified as __________ accounts. a. LT assets b. Cash c. Investment

Review and test reports of investment activity for the investment committee is an example of: a. Ensure transactions are recorded and classified properly b. Ensure policies written are being followed c. Verify that internal auditors' observations are consistent with those of external auditors d. Ensure reports tie to client activity

The auditors should review cutoff bank statements for any paid checks issued on or before the BS date but not listed as outstanding on the client's YE bank reconciliation, in order to determine that the amount of cash shown on the BS date was not ____________. a. understated b. overstated

The best substantive procedure to verify cutoff is to: a. make independent computations of revenue b. send confirmations to holders and counterparties c. evaluate the method of accounting for investments

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500 imprest petty cash fund? a. The custodian occasionally uses the cash fund to cash employee checks. b. Reimbursement occurs twice each week. c. The custodian endorses reimbursement checks. d. Reimbursement vouchers are not prenumbered.

On receiving the bank cutoff statement, the auditor should trace: A) Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. B) Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation. C) Deposits listed on the cutoff statement to deposits in the cash receipts journal. D) Checks dated subsequent to year end to the outstanding checks listed on the year-end bank reconciliation.

B) Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation.

Which of the following is a frequent control over cash disbursements? A) Checks should be signed by the controller and at least one other employee of the company. B) Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations. C) Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation. D) Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement.

B) Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.

Kiting would least likely be detected by: A) Analyzing details of large cash deposits around year-end. B) Comparing customer remittance advices with recorded disbursements in the cash disbursements journal. C) Preparing a four-column bank reconciliation for all major cash accounts. D) Preparing a schedule of interbank transfers by using the client's records and bank statements around year-end.

B) Comparing customer remittance advices with recorded disbursements in the cash disbursements journal.

In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to miscellaneous revenue. Select the most effective method for detecting this type of error. A) Foot the cash receipts journal for October. B) Send a bank confirmation as of year-end. C) Prepare a bank reconciliation as of year-end. D) Prepare a bank transfer schedule as of year-end.

B) Send a bank confirmation as of year-end.

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

The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except: A) Date due of a direct liability. B) The principal amount paid on a direct liability. C) Description of collateral for a direct liability. D) The interest rate of a direct liability.

B) The principal amount paid on a direct liability.

Which of the following is not a control that generally is established over cash receipts? A) To prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel. B) To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks. C) To insure accuracy of the accounts receivable records, the records should be reconciled monthly to the accounts receivable controlling account. D) To prevent theft of cash, receipts should be deposited daily.

B) To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks.

Which of the following cash transfers is most likely to result in a misstatement of cash at December 31, 19X7? Bank Transfer Schedule Disbursement Receipt Recorded Paid by Recorded Paid by in books bank in books bank A) 12/31/X7 1/4/X8 12/31/X7 12/31/X7 B) 1/4/X8 1/5/X8 12/31/X7 1/4/X8 C) 12/31/X7 1/5/X8 12/31/X7 1/4/X8 D) 1/4/X8 1/11/X8 1/4/X8 1/4/X8 A) Transfer A B) Transfer B C) Transfer C D) Transfer D

B) Transfer B

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: A) Board of Directors. B) Treasurer. C) Controller. D) Executive Committee.

B) Treasurer.

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that: A) Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. B) Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. C) The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. D) Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

B) Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

The best way to verify the amounts of dividend revenue received during the year is: A) Recomputation. 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.

To verify the client is not overstating cash balances, auditors should analyze bank transfers for the: (Select all that apply) a. the fieldwork period b. first week in the year following the audit c. last week of the audit year d. entire period being audited

B, C

When considering the risk that YE cash is correct, but should be higher, the auditors should focus on confirming that: (Select all that apply) a. sales on account are recorded in correct period based on shipping information b. cash payments were properly authorized and for a legitimate business purpose c. the client's records reflect all cash transactions that took place during the year

B, C

Auditors will prepare a schedule that lists all of the client's cash accounts, including: (Select all that apply) a. YE balance per bank b. bank name c. YE balance per books d. account number

B, C, D

Important internal controls over cash disbursements include: (Select all that apply) a. reconciliation of monthly banks statements by the employee who signs checks b. using computers to print checks and maintain item counts and control totals c. use of voucher system assembled by mailroom employees d. using prenumbered checks and accounting for all numbers in the series

B, D

The major elements of adequate internal control over financial investments include which of the following? (Select all that apply) a. regular review by the company's BOD b. an investment committee that authorizes and reviews financial investment activities c. authorization by internal audit personnel for all investment transactions d. complete detailed records of all securities and derivative instruments owned

B, D

The petty cash funds and change funds may be counted at any time before or after the __________ date.

Balance sheet

Which of the following statements is not correct? A) Cash is important to the audit process because of its vulnerability to misappropriation, despite the fact that the balance at the balance sheet date may be immaterial. B) Payroll cash account balances kept on an imprest basis are more easily controlled than others not so kept. C) Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date. D) Reviewing interbank transfers is important to the auditor because of the possibility that the client may be engaged in kiting.

C) Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date.

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 operations 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 can not 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.

A proof of cash is an audit procedure that is performed on almost every engagement. True False

False

Which of the following is not one of the auditors' primary objectives in an examination of investments in securities? A) To determine whether securities are the property of the client. B) To determine whether securities actually exist. C) To determine whether all securities are in proper, secure, files at year-end. D) To determine whether securities are properly classified on the balance sheet.

C) To determine whether all securities are in proper, secure, files at year-end.

The auditors objectives in the audit of cash and cash transactions are to: (Select all that apply) a. ascertain there are no misstatements of cash b. analyze business risks related to the company's cash c. obtain an understanding of internal control over cash d. consider inherent risks, including fraud risks, related to cash

C, D

On receiving the bank cutoff statement, the auditor should trace: Answer Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. Checks dated subsequent to year end to the outstanding checks listed on the year-end bank reconciliation. Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation. Deposits listed on the cutoff statement to deposits in the cash receipts journal.

Checks dated prior to year end to the outstanding checks listed on the year-end bank reconciliation.

The auditor suspects that a lapping scheme exists because an accounting department employee who has access to cash receipts also maintains the accounts receivable ledger and refuses to take any vacation or sick days.

Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. & Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date.

The entity borrowed funds from a financial institution. Although the transaction was properly recorded, the auditor suspects that the loan created a lien on the entity's real estate that is not disclosed in its financial statements.

Confirm the terms of borrowing arrangements with the lender.

The auditors' count of the client's cash should be coordinated to coincide with the: Answer Consideration of the internal controls with respect to cash. Count of inventories. Count of investment securities. Close of business on the balance sheet date.

Count of investment securities

Internal control over marketable securities is enhanced when:

Custody of securities is maintained by a stockbroker or bank.

(E) Your client left cash receipts journal open at YE for extra day and included 1/1 cash receipts in december totals. Cash sales. What likely happened? a. Sales understated b. A/R understated c. Inventory overstated d. Net income overstated

After testing internal controls related to investments, it may be necessary to ______the risk of material misstatement. a. delete b. erase c. ignore d. modify e. skip

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: a. controller. b. board of directors. c. executive committee. d. treasurer.

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 - not returned to accounting department

Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? A) Tracing recorded dividend income to cash receipts records and validated deposit slips. B) Utilizing analytical techniques and statistical sampling. C) Comparing recorded dividends with amounts appearing on federal information form 1099s. D) Comparing recorded dividends with a standard financial reporting service's record of dividends.

D) Comparing recorded dividends with a standard financial reporting service's record of dividends.

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

D) General ledger.

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.

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.

Which of the following is correct concerning "window dressing" for cash? A) A segregation of duties within the cash function effectively eliminates its occurrence. B) It generally involves manipulation of inventory. C) It is illegal, and an audit is designed to provide reasonable assurance of its detection. D) Many forms of it require no action by the auditors.

D) Many forms of it require no action by the auditors.

D) Net income is overstated.

The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that: A) Recorded cash disbursement transactions are properly authorized. B) Proper cash purchase discounts have been recorded. C) Cash disbursements are for goods and services actually received. D) No discrepancies exist between the data on the checks and the data in the journal.

D) No discrepancies exist between the data on the checks and the data in the journal.

Which of the following is not a control that generally is established over cash transactions? A) Separating cash handling from record keeping. B) Centralizing the receipt of cash. C) Depositing each day's receipts intact. D) Obtaining a receipt for every disbursement.

D) Obtaining a receipt for every disbursement.

Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? A) Cash confirmation. B) Bank reconciliation. C) Evaluation of ratio of cash to current liabilities. D) Proof of cash.

D) Proof of cash.

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 stockbroker that will act as a custodial agent.

D) Require that the safekeeping function for securities be assigned to a bank or stockbroker 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.

In order to avoid the misappropriation of company-owned financial investments, which of the following is the best course of action that can be taken by the management of a company with a large portfolio of financial investments? A) Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. B) Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. 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 securities broker who will act as a custodial agent.

D) Require that the safekeeping function for securities be assigned to a securities broker who will act as a custodial agent.

Internal control over marketable securities is enhanced when: A) Securities are held by the cashier. B) Securities are registered in the name of the custodian. C) Detailed records of securities are maintained by the custodian of the securities. D) Securities are held under joint control of two or more officials.

D) Securities are held under joint control of two or more officials.

An auditor's analytical procedures have revealed that the accounts receivable of a client have doubled since the end of the prior year. However, the allowance for doubtful accounts, as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor? A) Credit standards were liberalized in the current year. B) Twice as many accounts receivable were written off in the prior year as compared to this year. C) A greater percentage of accounts were currently listed in the "more than 90 days overdue" category than in the prior year. D) The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

D) The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

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 the 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 writeoffs are actually recorded.

Details of bank deposit slips with details of credits to customer accounts.

When a client engages in transactions involving derivatives, the auditor should Answer Notify the audit committee about the risks involved in derivative transactions. Confirm with the client's broker whether the derivatives are for trading purposes. Develop an understanding of the economic substance of each derivative. Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative.

Develop an understanding of the economic substance of each derivative.

A sample internal control questionnaire question may ask about _________ inherent in the investment policy. a. clients b. dollars c. money d. people e. risk

n a manufacturing company which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date? Answer Confirmation from the broker. Inspection of year-end brokers' statements. Vouching all changes during the year to brokers' advises and statements. Examination of paid checks issued in payment of securities purchased.

Examination of paid checks issued in payment of securities purchased

Examination of paid checks issued in payment of securities purchased.

A compensating balance agreement always requires that cash be reclassified as a noncurrent asset. True False

False

An official of the client company took securities from the safe deposit box and sold them to obtain cash to meet a personal financial crisis. Even with proper internal control, if the official purchased identical securities before the year-end and placed them in the safe deposit box, this improper "borrowing" would probably go undetected during the annual audit. True False

False

Auditors should never count a cash fund with the custodian present because the custodian might be able to influence the count. True False

False

Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end. True False

False

For investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the fair value of the investments. True False

False

Good internal control over financial investments requires that the treasurer obtain certificates for all securities and keep them in the company safe. True False

False

Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily. True False

False

Marketable equity securities should be valued at cost. True False

False

T or F: Auditors should never count a cash fund with the custodian present because the custodian might be able to influence the count.

False

PCAOB Auditing Standards

General Standards (TIC) Technical training Independent mental attitude Care (due professional) Standards of Fieldwork (PIE) Plan the work & supervise assistants Internal Control Evidential matter (to support opinion) Standards of Reporting (GCIDO) GAAP Consistency (in principles) Informative Disclosures Opinion (or an assertion)

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The entity borrowed funds from a financial institution. Although the transaction was properly recorded, the auditor suspects that the loan created a lien on the entity's real estate that is not disclosed in its financial statements. (Select only 1 procedure.)

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor discovered an unusually large receivable from one of the entity's new customers. The auditor suspects that the receivable may be fictitious because the auditor has never heard of the customer and because the auditor's initial attempt to confirm the receivable has been ignored by the customer. (Select only 2 procedures.)

K, L

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor suspects that fictitious employees have been placed on the payroll by the entity's payroll supervisor, who has access to payroll records and to the paychecks. (Select only 1 procedure.)

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

Securities held for the client by the financial institution.

In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to miscellaneous revenue. Select the most effective method for detecting this type of error. Answer Send a bank confirmation as of year-end. Foot the cash receipts journal for October. Prepare a bank reconciliation as of year-end. Prepare a bank transfer schedule as of year-end.

Send a bank confirmation as of year-end.

The auditor suspects that the entity's controller has overstated sales and accounts receivable by recording fictitious sales to regular customers in the entity's books.

Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. & Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer.

Various factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size

Smaller measure of tolerable misstatement

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.

Stamped "paid" by the check signer

Non-sampling risk

The aspects of audit risk not due to sampling. This risk normally relates to "human" rather than "statistical" errors.

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.

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

The cashier posts the receipts to the accounts receivable subsidiary ledger.

As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a confirmation request for a bank account that had been closed during the year. After the client's treasurer has signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure? Answer Sending the request was meaningless because the account was closed before the year end. The request was mailed by the assistant treasurer. The confirmation request was signed by the treasurer. The CPA did not sign the confirmation request before it was mailed.

The request was mailed by the assistant treasurer.

Risk of incorrect acceptance

The risk that sample results will indicate that a population is not materially misstated when, in fact, it is materially misstated.

Define computer user controls and explain their purpose (8-4)

They apply to processing of individual applications and are performed by users Designed to test the completeness and accuracy of IT-processed transactions, their purpose is to ensure reliability of output

Explain the manner in which auditors obtain understanding of internal control in an information technology environment (8-5) (WIF)

They can use a 1) Written Narrative - audito'r's documentation of the client's IT based system, advantage: explains precise control applicable to each examination, disadvantage: time and difficulty of clear writing 2) Internal Control Questionnaire- contains a separate section for each major transaction cycle, enabling work of completing the questionnaire to be divided conveniently among several audit staff members, advantage: distinction between major and minor control weaknesses, disadvantage: lack of flexibility 3) Flowcharts - symbolic representation of a system in a specified sequence, advantage: more specific clearer understanding of client's system, disadvantage: internal control weaknesses are not identified as clear as questionnaire

An auditor plans to examine a sample of 20 checks for counter signatures as prescribed by the client's control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and:

Treat the missing check as a deviation for the purpose of evaluating the sample

A salesperson who uses a cash register to record over the counter sales should, at the end of each workday, turn over to a supervisor the cash register tape and a corresponding amount of cash. T/F

True

A salesperson who uses a cash register to record over-the-counter sales should, at the end of each work day, turn over to a supervisor the cash register tape and a corresponding amount of cash. True False

True

An employee who prepares checks and submits them with supporting documents to the official authorized to sign checks should not be responsible for mailing the signed checks. True False

True

T or F: A salesperson who uses a cash register to record over the counter sales should, at the end of each workday, turn over to a supervisor the cash register tape and a corresponding amount of cash.

True

T or F: Designating the cashier to be custodian of the petty cash fund is more acceptable from the standpoint of internal control than making the cashier responsible for maintenance of accounts receivable records.

True

For the item below, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization. C. Perform analytical procedures that compare documented authorized pay rates to the entity's budget and forecast. D. Obtain the cutoff bank statement and compare the cleared checks to the yearend bank reconciliation. E. Prepare a bank transfer schedule. F. Inspect the entity's deeds to its real estate. G. Make inquiries of the entity's attorney concerning the details of real estate transactions. H. Confirm the terms of borrowing arrangements with the lender. I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charges. J. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. L. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer. M. Inspect the entity's correspondence files for indications of customer disputes for evidence that certain shipments were on consignment. N. Perform edit checks of data on the payroll transaction tapes. O. Inspect payroll check endorsements for similar handwriting. P. Observe payroll check distribution on a surprise basis. Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department's files. R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and payment of payroll checks. S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate employee. T. Determine that the details of selected prenumbered vouchers match the related vendors' invoices. U. Examine the supporting purchase orders and receiving reports for selected paid vouchers. The auditor suspects that vouchers were prepared and processed by an accounting department employee for merchandise that was neither ordered nor received by the entity. (Select only 1 procedure.)

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that:

Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

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 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 the 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 writeoffs are actually recorded.

a) Details of bank deposit slips with details of credits to customer accounts.

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.

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 best way to verify the amounts of dividend revenue received during the year is: a) Recomputation. 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.

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.

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 operations 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.

In attributes sampling, sample size increases as...?

expected population deviation rate increases

in attribute sampling, the risk of assessing control risk too high is often not controlled when using statistical sampling

Type 2 subsequent event?

involves conditions that arose *after* the date of financial statements; do not require adjustments to the dollar amount shown in the financial statements; should be disclosed in the financial statement notes if the statements otherwise would be misleading

Systematic selection?

involves selecting every *n*th item in the population following one or more random starting points

loss of transaction during processing data

item counts

Haphazard selection?

items selected on an arbitrary basis, but without any conscious bias

In well-staffed computer systems, a librarian should maintain of _____________ and __________ that may be checked out to the ___________ __________ when processing is to be performed

programs and files computer operator

The risk of incorrect _________ is the risk that the sample supports the conclusion that the balance is misstated when it is not misstated Relates more to the audit __________ than to effectiveness

rejection, efficiency

the term stratification refers to the process of dividing a population into

relatively homogenous subgroups called strata

What are the 3 major factors that determine sample size for attributes sampling?

risk of assessing control risk too low; the tolerable deviation rate; and the expected deviation rate

Inherent in the use of sampling is the risk of ______ _____ which is the possibility of selecting a sample that is not representative of the __________

sampler error, population

Classical variables sampling?

sampling applications that provide the auditors with an estimate of a numerical quantity, such as the dollar balance of an account

Attributes sampling?

sampling plan enabling the auditors to estimate the rate of deviation (occurrence) in a population Also it is the most frequently used general method that arrives at an estimated deviation rate Could be used in audit situations where the auditors wish to test the operating effectiveness of a control, and expect a 2% deviation rate in the population

Discovery sampling?

sampling plan for locating at least one deviation, providing that the deviation occurs in the population with specified frequency Also it is a method that is most effective in circumstances in which auditors expects a very low rate of occurrence of some critical deviation (e.g., a fraudulent cash disbursement) Could be used in audit situations where the auditors wish to test for the existence of a critical deviation in internal control

Two types of software used by a computer system are known as ____________ software and ________________ software

system application

Describe the methods of selecting a representative sample (9-2) (SSSRP)

systematic selection- drawing every nth item from the population sampling without replacement - once that item is drawn for a sample it cannot be included again, it results in a smaller sample size because the population is treated as finite sampling with replacement - it is immediately replaced into the population of eligible items and may be selected a second time making the population as infinite random sampling- every item has an equal chance of being included physical representation of the the population- recorded value that represents the entire population, population from which auditors sample

A _________ ________ is an input __________ check that involves the comparison of an account number against a master file of account numbers to test its authenticity

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