Exam 2 Audit

d. An auditor may compensate for a weakness in internal control by increasing the extent of:

Substantive tests of details.

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.

l. Which of the following is most likely to be an overall response to fraud risks identified in an audit?

Use less predictable audit procedures.

Establishing and maintaining internal control is a responsibility of the stockholders of the company.

false

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.

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

Physical controls.

The department approving a sales transaction should be the billing department.

True

A documented audit plan is required on all audits.

true

Statistical sampling can be used to test all control activities.

true

Using ratio estimation, an auditor has taken a sample of 150 from a population's 50,000 items; that population has a book value of $250,000. She found that in her sample the average audited value was $4.50, while the average book value was $5.20. What is the estimated total audited value of the population?

$216,346.

The 3,000 accounts receivable of DEF Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $2,100. Using the difference estimation technique, Smith has properly estimated a projected misstatement of a $9,000 overstatement for the entire population. The estimated total audited value of the population is:

$51,000

a. The auditors are concerned about source documents that reflect valid transactions that have not been recorded in the journals. Which procedure would be most effective?

(1) Trace from source documents to journals.

c. Which of the following should not normally be included in the engagement letter for an audit?

A listing of the client's branch offices selected for testing.

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.

When a client engages in transactions involving derivatives, the auditor should:

Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative.

The Sarbanes-Oxley Act of 2002 requires that the audit committee:

Be directly responsible for the appointment, compensation, and oversight of the work of the CPA firm.

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.

If a company failed to record goods returned by customers near year end, the auditors would most likely discover this issue by:

Confirming accounts receivable.

Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts?

Confirming current (0-30 day) year-end accounts receivable.

Which of the following revenue related transactions is not linked to the accounts indicated?

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

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

Electronic processing of checks.

i. Which of the following is not an advantage of establishing an enterprise risk management system within an organization?

Eliminates all risks.

Accounts receivable that are written off should not be turned over to a collection agency.

False

Auditors should never spend more time on an audit than is called for in a conscientiously developed time budget.

False

b. The audit committee of a company must be made up of:

Members of the board of directors who are not officers or employees.

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

No reply to a positive confirmation request is received.

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:

Collection of receivables.

An auditor's flowchart of a client's internal control is a diagrammatic representation that depicts the auditors':

understanding of the system.

a. Tests of controls do not address:

How controls were originated.

Using difference estimation, an auditor has taken a sample of 150 from a population's 50,000 items; that population has a book value of $250,000. She found that in her sample the average audited value was $4.50, while the average book value was $5.20. What is the estimated total audited value of the population?

$215,000.

The Parmalat fraud case involved:

A fraudulent cash confirmation.

A dual purpose test simultaneously:

Functions as an analytical procedure and a substantive test.

Using mean-per-unit estimation, an auditor has taken a sample of 150 from a population's 50,000 items; that population has a book value of $250,000. She found that in her sample the average audited value was $4.50, while the average book value was $5.20. What is the estimated total audited value of the population?

$225,000.

Using the mean-per-unit estimation method an auditor has properly calculated the estimated total audited value of a population as $200,000. Her sample included 200 of the population's 40,000 items. She found that, in her sample the average audited value was $1 less than the average book value. What was the average audited value in the sample?

$5

Analytical procedures are optional procedures that may be useful to the auditors during the risk assessment stage of the audit.

false

For well-controlled operations, the same employee that maintains custody of assets should also keep the accounting records for the assets.

false

Auditors must communicate internal control significant deficiencies to:

the audit committee.

The establishment of sales terms is an example of a control.

true

The 4,000 accounts receivable of GHI Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,600. Using the mean-per-unit estimation technique, Smith has properly estimated a projected misstatement of a $8,000 overstatement for the entire population. The audited value of Smith's sample is:

1,300

The 3,000 accounts receivable of DEF Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $2,100. Using the difference estimation technique, Smith has properly estimated a projected misstatement of an overstatement of $6,000 for the entire population. The audited value of Smith's sample is:

1,900

The auditors expect a population deviation rate of billing errors of two percent, and have established a tolerable rate of five percent. The sampling approach most likely to be used is:

Attributes sampling.

Which of the following is a basic tool used by the auditors to control the audit work and review the progress of the audit?

Audit plan.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle?

Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

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.

Kiting would least likely be detected by:

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

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.

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.

h. The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as

Detection risk.

Which of the following would be least likely to be considered a benefit of effective internal control?

Enhancing profitability.

Once a CPA has determined that accounts receivable have increased due to slow collections in a "tight money" environment, the CPA would be likely to:

Expand tests of collectibility.

When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if:

Internal control over receivables is good.

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.

The auditors' failure to recognize a misstatement in an amount or a deviation in an internal control data processing procedure is described as a:

Nonsampling error.

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

Obtaining a receipt for every disbursement.

c. Tests of controls ordinarily are designed to provide evidence of:

Operating effectiveness.

The confirmation process may be performed using a(n): Paper form Electronic form A. Yes Yes B. Yes No C. No Yes D. No No

Option A

An important statistic to consider when using a statistical sampling audit plan is the population variability. The population variability is measured by the

Standard deviation.

d. Which portion of an audit is least likely to be completed before the balance sheet date?

Substantive procedures.

k. Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions.

Supervisory position.

Which of the following is consistent with effective internal control over sales transactions?

The billing department accounts for all shipping documents.

You were surprised to note that approximately 95% of returned positive accounts receivable confirmation requests indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that:

The cash receipts journal was held open after year-end.

When the auditors have decided to use statistical rather than nonstatistical sampling, a disadvantage is that:

The costs of training staff may be higher.

Which of the following statements is not correct regarding the auditor's determination of materiality?

The planning level of materiality will normally be the larger of the amount considered for the balance sheet versus the income statement.

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?

The request was mailed by the assistant treasurer.

If the projected misstatement in a nonstatistical sampling is $8,000, while the tolerable misstatement is $9,000, what would an auditor likely conclude?

The risk is high that the account is materially misstated.

Which of the following cash transfers is most likely to result in a misstatement of cash at December 31, 20X7? Bank Transfer Schedule Disbursement Receipt Recorded in books Paid by bank Recorded in books Received by 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

Transfer B.

CPAs use positive accounts receivable confirmation requests more frequently than negative accounts receivable confirmation requests.

True

Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable.

True

Tracing of a transaction from source documents to the accounting records is generally an audit procedure that is designed to establish:

completeness.

An audit committee's responsibilities normally would not include:

discussing all details of the audit plans of the independent auditors.

CPAs cannot ethically refuse to provide auditing services to any prospective client which the CPAs are competent to audit, if the prospective client is willing to pay the CPAs' standard audit fees.

false

Internal auditors normally are responsible for reconciling the company's bank accounts to monitor the controls over cash.

false

All material weaknesses are also control deficiencies.

not sure maybe false

Stratification of the population generally results in a more efficient sampling plan.

true