Exam 2 MC
As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter? (1)To increase the efficiency of the audit by eliminating the need for other audit procedures. (2)To remind the client's management of its primary responsibility for the financial statements. (3)To document in the audit working papers the client's responses to certain verbal inquiries made by the auditors during the engagement. (4)To provide evidence in those areas dependent upon management's future intentions.
1
Performing analytical procedures may help an auditor to: (1)Achieve audit objectives related to a particular assertion. (2)Develop an effective system of quality control. (3)Meet PCAOB requirements that analytical procedures be performed relating to every major account. (4)Increase the level of detection risk.
1
The cost of analytical procedures in terms of time needed to perform, when compared to other tests, is ordinarily considered: (1)Low. (2)High. (3)Identical. (4)Indeterminate.
1
Which of the following is not a function of audit working papers? (1)Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles. (2)Assist audit team members responsible for supervision in reviewing the work. (3)Assist auditors in planning future engagements. (4)Assist peer reviewers and inspectors in performing their roles.
1
Analytical procedures are most likely to detect: (1)Weaknesses of a material nature in internal control. (2)Unusual transactions. (3)Noncompliance with prescribed control activities. (4)Improper separation of accounting and other financial duties.
2
In using the work of a specialist, the auditors referred to the specialist's findings in their report. This would be an appropriate reporting practice if the: (1)Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist. (2)Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements. (3)Client understands the auditors' corroborative use of the specialist's findings in relation to the representations in the financial statements. (4)Auditors, as a result of the specialist's findings, decide to indicate a division of responsibility with the specialist.
2
In what section of the audit working papers would a long-term lease agreement be filed? (1)Current working paper file. (2)Permanent working paper file. (3)Lead schedule file. (4)Corroborating documents file.
2
Which of the following statements best describes why auditors investigate related party transactions? (1)Related party transactions generally are illegal acts. (2)The substance of related party transactions may differ from their form. (3)All related party transactions must be eliminated as a step in preparing consolidated financial statements. (4)Related party transactions are a form of management fraud.
2
Analytical procedures performed near the end of the audit to assist the auditor in forming an overall conclusion on the financial statements are aimed primarily at: (1)Gathering evidence concerning account balances that have not changed from the prior year. (2)Retesting internal control procedures. (3)Considering unusual or unexpected account balances that were not previously identified. (4)Performing a test of transactions to corroborate management's financial statement assertions.
3
In developing an expectation for analytical procedures, the auditors are least likely to consider: (1)Financial information for comparable prior periods. (2)Relationships between financial information and relevant nonfinancial data. (3)Anticipated costs of audit completion. (4)Relationships among elements of financial information within a period.
3
Of the following, which is the least reliable type of audit evidence? (1)Confirmations mailed by outsiders to the auditors. (2)Correspondence between the auditors and suppliers. (3)Copies of sales invoices inspected by the auditors. (4)Canceled checks returned in the year-end bank statement directly to the client.
3
What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts? (1)Trend analysis. (2)A detailed test of balance analysis. (3)Ratio analysis. (4)Risk analysis.
3
Which of the following is not a primary approach to auditing an accounting estimate? (1)Review and test management's process for developing the estimate. (2)Review subsequent transactions. (3)Confirm the amounts. (4)Develop an independent estimate.
3
A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably: (1)Remain silent on the matter since it is an internal matter of the auditing firm. (2)Note that the assistant auditor is completely dissociated from responsibility for the auditors' opinion. (3)Document the additional work required, since all disagreements of this type will require expanded substantive procedures. (4)Document the assistant auditor's position and how the difference of opinion was resolved.
4
A primary purpose of the audit working papers is to: (1)Aid the auditors by providing a list of required procedures. (2)Provide a point of reference for future audit engagements. (3)Support the underlying concepts included in the preparation of the basic financial statements. (4)Support the auditors' opinion.
4
Which is not a financial statement assertion made by management. (1)Existence of recorded assets and liabilities. (2)Completeness of recorded assets and liabilities. (3)Valuation of assets and liabilities. (4)Effectiveness of internal control.
4
Which of the following business characteristics is not indicative of high inherent risk? (1)Operating results that are highly sensitive to economic factors. (2)Large likely misstatements detected in prior audits. (3)Substantial turnover of management. (4)A large amount of assets.
4
State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. Absent any other changes, an increase in the risk of material misstatement results in an increase in audit risk.
Correct
State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. Both inherent risk and control risk exist independently of the audit of financial statements.
Correct
State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. Detection risk does not exist when no audit is performed.
Correct
State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. Inherent risk is the possibility of material misstatement before considering the client's internal control.
Correct
State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. Inherent risk is the possibility of material misstatement before considering the client's internal control.
Incorrect
State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. Rather than restrict detection risk through the performance of more substantive procedures, auditors assess it.
Incorrect
State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. The risk of material misstatement is composed of the three components of audit risk.
Incorrect
A good fraud prevention program should address employees' motivation to steal from the company. The best method for doing this is to: a. Establish employee assistance programs. b. Require reconciliations of all accounts to be reviewed by a supervisor. c. Ensure that all accounts with high inherent risk of fraud are audited. d. Require a fidelity bond on all employees.
a
Allison Everhart, an employee in accounts payable, believes she can run a fictitious invoice through the accounts payable system and collect the money. She knows payments are subject to an audit. Which account would be the best place to hide the fraud? a. Consulting service expense. b. Property tax expense. c. Wage expense. d. Inventory.
a
Before accepting an engagement to audit a new client, an auditor is required to a. make inquiries of the predecessor auditors after obtaining the consent of the prospective client b. obtain the prospective client's signature to the engagement letter c. prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan d. discuss the management representation letter with the prospective client's audit committee
a
Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor? a. Understating the sales journal. b. Overstating the sales journal. c. Overstating the accounts receivable subsidiary ledger. d. Overstating the accounts receivable control account.
a
Fraud risk factors are events or conditions that indicate I. An incentive or pressure to perpetrate fraud. II. An opportunity to carry out the fraud. III. An attitude or rationalization that justifies the fraudulent action. Which of the following statements is true? a. I, II, and III are fraud risk factors. b. None of these is a fraud risk factor. c. I is a fraud risk factor. d. I and II are fraud risk factors. e. II and III are fraud risk factors.
a
In most audits of large entities, control risk assessment contributes to audit efficiency, which means that: a. Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs. b. Auditors will be able to reduce the cost of substantive procedures by an amount less than the cost of tests of controls. c. The cost of control evaluation work will exceed the cost of substantive procedures. d. The cost of substantive procedures will exceed the cost of control evaluation work.
a
In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would a. review the entity's descriptions of inventory policies and procedures b. perform test controls of inventory during the entity's physical count c. analyze inventory turnover statistics to identify slow-moving and obsolete items d. analyze monthly production reports to identify variances and unusual tranactions
a
In obtaining an understanding of controls that are relevant to audit planning, an auditor is required to obtain knowledge about the a. design of the controls included in the internal control components b. effectiveness of the controls that have been iplemented c. consistency with which the controls are currently being applied d. controls related to teach principal transaction class and account balance
a
In preparing for the audit of cash, the auditors perform analytical procedures concerning cash balances. Which of the following would be the best source of information for use in the estimate of cash? a. Cash budgets. b. Prior-years' balances. c. Aged accounts receivable reports. d. Management inquiry.
a
Q The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may A Allow the internal auditor to perform tests of internal controls. B Allow the internal auditor to audit a major subsidiary of the company. C Allow the internal auditor to perform analytical procedures but not be involved with any tests of details. D Not assign any task to the internal auditor because of the internal auditor's lack of independence.
a
Q When auditing the existence assertion for an asset, auditors proceed from the A General ledger back to the supporting original transaction documents. B Potentially unrecorded items forward to the financial statement amounts. C Financial statement amounts back to the potentially unrecorded items. D Supporting original transaction documents to the general ledger.
a
Q When evaluating whether accounting estimates made by management are reasonable, the audit team would be most interested in which of the following? A Evidence of a conservative systematic bias. B Key factors that are consistent with prior periods. C Measurements that are objective and not susceptible to bias. D Assumptions that are similar to industry guidelines.
a
Q When planning an audit, which of the following is not a factor that affects auditors' decisions about the quantity, type, and content of audit documentation? A The auditors' judgment about their independence with regard to the client. B The auditors' need to document compliance with generally accepted auditing standards. C The auditors' judgments about materiality. D The auditors' need to verify the existence of new sales contracts important for the client's business.
a
Q Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement? A There will be a client-imposed scope limitation. B Staff will need to be rescheduled to cover this new client. C The client's financial reporting system has been in place for 10 years. D The firm will have to hire a specialist in one audit area.
a
Q Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-sheet date? A Scanning the minutes for significant transactions with members of the board of directors. B Interviewing internal auditors about their reporting responsibilities. C Inspecting communications with the client's legal counsel regarding recorded contingent liabilities. D Reviewing accounting records for recurring transactions occurring near year-end.
a
Q Which of the following is an advantage of computer-assisted audit techniques (CAATs)? A The software can be used for audits of clients that use differing computer equipment and file formats. B The CAATs programs are all written in one computer language. C The use of CAATs can be substituted for a relatively large part of the required testing. D The use of CAATs has reduced the need for the auditor to study input controls for computer-related procedures.
a
Q Which of the following procedures would most likely be performed during planning? A Identifying related parties. B Surprise counts of the client's petty cash fund. C Reporting internal control deficiencies to the audit committee. D Performing a search for unrecorded liabilities.
a
Tests of controls in a GAAS audit are required for: a. Obtaining evidence about the operating effectiveness of client control activities. b. Obtaining evidence about the financial statement assertions. c. Accomplishing control over the occurrence of recorded transactions. d. Applying analytical procedures to financial statement balances.
a
The auditors vouched a sample of recorded cash receipts to the deposits in the bank statement. a. existence b. completeness c. authorization d. accuracy e. classification f. accounting and posting g. proper period
a
The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with a. knowledge necessary for audit planning b. evidence to use in assessing inherent risk. c. a basis for modifying tests of controls d. an evaluation of the consistency of application of management's policies
a
Upon receipt of customers' checks in the mail room, a responsible employee should prepare a remittance list that is forwarded to the cashier. A copy of the list should be sent to the a. Accounts receivable bookkeeper to update the subsidiary accounts receivable records. b. Treasurer to compare the list with the monthly bank statement. c. Entity's bank to compare the list with the cashier's deposit slip. d. Internal auditor to investigate the list for unusual transactions.
a
When planning the audit of internal controls for an issuer, the audit team should: a. Identify significant accounts, locations, and assertions. b. Conduct a walkthrough of the internal control process. c. Make inquiries of employees regarding the existence of control activities. d. Reperform control activities performed by client employees to determine their effectiveness.
a
Which of the following characteristics distinguishes computer processing from manual processing? a. computer processing virtually eliminates the occurrence of computational error normally associated with manual processing b. error or fraud in computer processing will be detected soon after their occurance c. the potential for systematic error is ordinarily greater in manual processing than in computerized processing d. most computer systems are designed so that transaction trails useful for audit purposes do not exist
a
Which of the following control activities would best protect against the preparation of improper or inaccurate cash disbursements? a. All signed checks must be reviewed and compared with supporting documentation by the treasurer before mailing. b. All checks must be signed by an officer designated by the board of directors. c. All checks must be perforated or otherwise effectively canceled when they are returned with the bank statement. d. All checks must be sequentially numbered and accounted for by internal auditors.
a
Which of the following is least indicative of fraudulent activity? a. Bank reconciliation has no outstanding checks or deposits older than 15 days. b. Internal auditors cannot locate several credit memos to support reductions of customers' balances. c. Three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later. d. Numerous cash refunds have been made to different people at the same post office box address.
a
Which of the following is not a component of internal control a. control risk b. monitoring of controls c. information system d. the control environment
a
Which of the following is the most serious password security problem? a. users are assigned passwords when accounts are created but do not change them b. users have accounts on several systems with different passwords c. users copy their passwords on note paper, which is kept in their wallets d. users select secret passwords that are not listed in any online dictionary
a
Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control? a. incompatible duties b. management override c. faculty judgement d. collusion among employees
a
Which of the following should be performed by the persons opening the mail and recording payments? a. restrictive endorsement on all checks b. entering of payment information into customer accounts c. the preparation of the deposit slip and the delivery of the checks to the bank d. the segregation of all payments made on accounts listed as past due
a
Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriation of assets? a. a large number of bearer bonds on hand b. a large number of inventory items with low sales prices c. a large number of transactions processed in a short period of time d. a large number of fixed assets with easily identifiable serial numbers
a
A material weakness is a situation in which: a. It is reasonably possible that an immaterial misstatement would not be detected on a timely basis. b. It is reasonably possible that a material misstatement would not be detected on a timely basis. c. It is probable that an immaterial financial statement misstatement would not be detected on a timely basis. d. There is a remote likelihood that a material misstatement would be detected on a timely basis.
b
A transaction-level internal control activity is best described as: a. An action taken by auditors to obtain evidence. b. An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company. c. A method for recording, summarizing, and reporting financial information. d. The functioning of the board of directors in support of its audit committee.
b
According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to a. Determine whether the company' controls are processing company data effectively b. Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed c. Determine that the company's employees are processing the controls according to the policy and procedures manuals at the company d. None of the above
b
An advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaires is that systems flowcharts a. identify internal control deficiencies more prominently b. provide a visual depiction of clients' activities c. indicate whether controls are operating effectively d. reduce the need to observe clients' employees performing routine tasks
b
An auditor should obtain an understanding of an entity's information system, including a. safeguards used to limit access to computer facilities b. process used to prepare significant accounting estimates c. procedures used to unsure the proper supervision of staff d. programs and controls intended to address the risks of fraud
b
During an audit of cash, the auditor is most concerned with the management assertion of: a. Occurrence. b. Existence. c. Rights and obligations. d. Valuation or allocation.
b
Embezzlement is a type of fraud that involves: a. A manager's falsification of financial statements for the purpose of misleading investors and creditors. b. An employee misappropriating an employer's money or property entrusted to the employee's control in the employee's normal job. c. An employee's mistaken representation of opinion that causes incorrect accounting entries. d. An employee's misappropriating an employer's money or property not entrusted to him or her.
b
In an audit of financial statements, an auditor's primary consideration regarding an internal control is whether the control a. reflects management's philosophy and operating style b. affects management's financial statement assertions c. provides adequate safeguards over access to assets d. relates to operational objectives
b
Once the auditor detects a control deficiency, which of the following steps must he or she take first? a. Test the deficient control, assuming a maximum level of risk. b. Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion. c. Modify the planned substantive procedures as a result of the deficiency. d. Perform tests of other controls related to the same assertion as the control deemed ineffective.
b
Proper segregation of functional responsibilities to achieve effective internal control calls for separation of the functions of a. authorization, execution and payment b. authorization, recording, and custody c. custody, execution and reporting d. authorization, payment and recording
b
Q Generally accepted auditing standards require that auditors always prepare and use A A written client consent to discuss audit matters with prospective auditors. B A written audit plan. C The written time budgets and schedules for performing each audit. D A written planning memorandum explaining the auditors' understanding of the client's business.
b
Q When auditing Vandalay Jewelry, Costanza, CPA, was not familiar with the quality and cut of the company's precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes's work in the audit report? A The use of an audit specialist need not be mentioned if the auditors decide not to take responsibility for the audit specialist's findings. B The auditors' report should mention the use of the audit specialist only when the audit specialist's findings affect the auditors' conclusions. C The auditors' report should mention the audit specialist only if Vandalay agrees with the audit specialist's findings. D Yes, the auditors' report should mention the fact that an audit specialist was used.
b
Q Which of the following procedures would a CPA most likely perform in planning a financial statement audit? A Perform cutoff tests of cash receipts and disbursements. B Compare financial information with nonfinancial operating data. C Recalculate the prior-years' accruals and deferrals. D Make inquiries of the client's lawyer concerning pending litigation.
b
The auditors traced a sample of daily cash reports to the cash receipts journal. a. existence b. completeness c. authorization d. accuracy e. classification f. accounting and posting g. proper period
b
The primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to a. Provide the rational for the inherent risk assessment at the financial statement assertion level. b. Determine the nature, timing, and extent of tests to be performed in the audit. c. Provide information for a communication of internal control-related matters to management. d. Provide a basis for making constructive suggestions in a management letter
b
To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except for: a. Inquiry of client personnel. b. Confirmation of balances. c. Observation of company operations. d. Inspection of documentation
b
When applying analytical procedures during an audit, which of the following is the best approach for developing expectations? a. considering unaudited account balances and ratios to calculate what adjusted balances should be b. identifying reasonable explanations for unexpected differences before talking to client management c. considering the pattern of several unusual changes without trying to explain what caused them d. comparing client data with client-determined expected results to reduce detailed tests of account balances
b
When auditing with "fraud awareness," auditors should especially notice and follow up employee activities under which of these conditions? a. Management has published a company code of ethics and sends frequent communication newsletters about it. b. The company always estimates the inventory but never takes a complete physical count. c. The petty cash box is always locked in the desk of the custodian. d. The board of directors reviews and approves all investment transactions.
b
When obtaining an understanding of an entity's internal control, an auditor should concentrate on their substance rather than their form because a. the controls may be operating effectively but may not be documented b. management may establish appropriate controls but not enforce compliance with them c. the controls may be so inappropriate that no reliance is expected by the auditor d. management may implement controls whose costs exceed their benefits
b
Which of the following auditor concerns most likely could be so serious that the auditor would conclude that a conclude that a financial statement audit cannot be conducted? a. the entity has no formal written code of conduct b. the integrity of the entity's management is suspect c. procedures requiring separation of duties are subject to management override d. management fails to modify prescribed controls for changes in conditions
b
Which of the following controls most likely could prevent computer personnel from modifying programs to bypass programmed controls? a. periodic management review of computer utilization reports and systems documentation b. separation of duties for computer programming and computer operations c. participation of user department personnel in designing and approving new systems d. physical security of computer facilities in limiting access to computer equipment
b
Which of the following statements is most accurate regarding sufficient and appropriate documentation? a. accounting estimates are not considered sufficient and appropriate documentation b. sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed c. if additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and is therefore deleted from the working papers d. audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditors for at least five years
b
Which of the following steps should an auditors perform first to determine the existence of related parties? a. examine invoices, contracts and purchasing orders b. request a list of related parties from management c. review the company's business structure d. review proxy and other materials filed with the SEC
b
Which of the following would probably not be considered an indication of a material weakness? a. Immaterial fraud committed by senior management. b. Overproduction by the manufacturing plant. c. Ineffective oversight by the audit committee. d. Evidence of a material misstatement.
b
If the auditor believes that a misstatement is or might be intentional and the effect on the financial statements could be material or cannot be readily determined, the auditor should do which of the following? a. Inquire of management as to the possibility of fraud. b. Discuss with the audit committee what should be done to prevent possible future misstatements. c. Perform procedures to obtain additional audit evidence to determine whether fraud has occurred or is likely to have occurred. d. Discuss with the audit committee what should be done to prevent possible future misstatements and perform procedures to obtain additional audit evidence to determine whether fraud has occurred or is likely to have occurred. e. None of these is correct.
c
Immediately upon receipt of cash, a responsible employee should: a. Prepare a deposit slip in triplicate. b. Record the amount in the cash receipts journal. c. Prepare a remittance listing. d. Update the subsidiary accounts receivable records.
c
Most fraud investigators utilize the fraud triangle theory. A new theory called the fraud diamond has been proposed. Which of the following is an element of the fraud diamond and is not an element of the fraud triangle? a. motive b. opportunity. c. capability d. liquidityc
c
Q A primary advantage of using CAATs in the audit of an advanced computerized system is that it enables the auditor to A Substantiate the accuracy of data through self-checking digits and hash totals. B Gather and store large amounts of supportive audit evidence in machine-readable form. C Utilize the speed and accuracy of the computer. D Verify the performance of machine operations that leave visible evidence of occurrence.
c
Q An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client? A Client representations about availability of all minutes of meetings of the board of directors. B Methods of statistical sampling the auditor will use. C Schedules and analyses to be prepared by the client's employees. D Specification of litigation in progress against the client.
c
Q An audit plan contains A Documentation of the assertions under audit, the evidence obtained, and the conclusions reached. B Reconciliation of the account balances in the financial statements with the account balances in the client's general ledger. C Specifications of procedures the auditors believe appropriate for the financial statements under audit. D Specifications of audit standards relevant to the financial statements being audited.
c
Q Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the A Planning memorandum in the current file. B Administrative audit documentation in the current file. C Current file audit documentation. D Permanent file audit documentation.
c
Q Confirmations of accounts receivable provide evidence primarily about which two assertions? A Valuation and rights and obligations. B Completeness and valuation. C Existence and rights and obligations. D Existence and completeness.
c
Q The revenue cycle of a company generally includes which accounts? A Inventory, general expenses, and payroll. B Cash, notes payable, and capital stock. C Cash, accounts receivable, and sales. D Inventory, accounts payable, and general expenses.
c
Q Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit? A Avoiding the problem of doing more work than necessary (overauditing). B Avoiding the problem of doing too little work (underauditing). C Being able to decide early what type of audit opinion to issue. D Being able to fine-tune the audit work for effectiveness and efficiency.
c
Q Which of the following would be considered an analytical procedure? A Reconciling physical counts to perpetual records and general ledger balances. B Projecting the deviation rate of a statistical sample to the population. C Comparing inventory balances to recent sales activities. D Testing purchasing, shipping, and receiving cutoff activities.
c
The best way to enact a broad fraud prevention program is to: a. Place dedicated hotline telephones on walls around the workplace with direct communication to the company ethics officer. b. Install airtight control systems of checks and supervision. c. Practice management "of the people and for the people" to help them share personal and professional problems. d. Name an "ethics officer" who is responsible for receiving and acting on fraud tips.
c
The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the: a. Operational responsibility from the record-keeping responsibility. b. Administrative controls from the internal accounting controls. c. Authorization of transactions from the custody of related assets. d. Human resources function from the controllership function.
c
When completing the audit of internal controls for a public company, AS 5 requires auditors to report on Management's Report on Internal Control / An Audit of Internal Control a. Yes Yes b. No No c. No Yes d. Yes No
c
When completing the audit of internal controls for a public company, AS 5 requires auditors to test: a. Operating effectiveness only. b. Design effectiveness only. c. Both operating and design effectiveness. d. Neither operating nor design effectiveness
c
When completing the audit of internal controls for a public company, the PCAOB requires auditors to audit internal controls over a. Operations b. Compliance with Regulations c. Financial reporting d. All of the above
c
Which of the following are considered control environment elements? Detection Risk/Commitment to Competence a. yes/yes b. yes/no c. no/yes d. no/no
c
Which of the following does not accurately summarize auditors' requirements regarding internal control? Public Entity / Nonpublic Entity a. Evaluating control risk: Yes Yes b. Understanding: Yes Yes c. Test controls: Yes Yes d. Documenting: Yes Yes
c
Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular audit objective? a. the audit is being performed soon after the balance sheet date b. audit staff are experienced in performing the planned procedures c. analytical procedures have revealed no unusual or unexpected results d. there were too many transactions posted to the account during the period
c
Which of the following information would be included in the introductory paragraph of the auditors' report on internal control over financial reporting if the report is presented separately from the auditors' report on the entity's financial statements? a. A reference to the auditors' report and opinion on the entity's financial statements. b. The fact that the auditors conducted an audit of the entity's financial statements. c. Statements identifying the responsibility of the auditors and management for internal control over financial reporting. d. The definition of a material weakness in internal control over financial reporting.
c
Which of the following is a computer program that appears to be legitimate but performs some illicit activity when it is run? a. hoax virus b. web crawler c. trojan horse d. killer application
c
Which of the following is a management control method that most likely could improve management's ability to supervise company activities effectively? a. monitoring compliance with internal control requirements imposed by regulatory bodies. b. limiting direct access to assets by physical segregation an protective devices c. establishing budgets and forecasts to identify variances from expectations d. supporting employees with the resources necessary to discharge their responsibilities
c
Which of the following is an effective audit procedure that an auditor might use to detect kiting between intercompany banks? a. Review subsequent bank statements. b. Prepare a year-end bank reconciliation. c. Prepare a schedule of the bank transfers. d. Review the composition of authenticated deposit slips.
c
Which of the following statements is not true with respect to the auditors' report on internal control over financial reporting? a. The auditor will issue an adverse opinion if one or more material weaknesses exist. b. The report may be presented with the report on the entity's financial statements as a combined report. c. The report will be dated as of the date of the financial statements. d. The report will express an opinion on the effectiveness of internal control over financial reporting.
c
Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances? 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 cards. d. The cashier endorses the checks.
c
Which of these arrangements of duties could most likely lead to an embezzlement or theft? a. The financial vice president received checks made out to suppliers and the supporting invoices, signed the checks, and mailed the checks. b. The cashier prepared the bank deposit, endorsed the checks with a company stamp, and delivered the cash and checks to the bank for deposit (no other bookkeeping duties). c. The inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records. d. The accounts receivable clerk received a list of payments received by the cashier so he could make entries in the customers' accounts receivable subsidiary accounts.
c
Which report would not be appropriate for a public accounting firm to provide on financial reporting controls? a. Unqualified—no material weaknesses found. b. Disclaimer of opinion—unable to perform all necessary procedures. c. Disclaimer of opinion—significant deficiencies exist. d. Adverse—material weaknesses exist.
c
A client is concerned that a power outage or disaster could impair the computer hardware's ability to function as designed. The client desires off-site backup hardware facilities that are fully configured and ready to operate within several hours. The client most likely should consider a a. cold site b. cool site c. warm site d. hot site
d
A client who recently installed a new accounts payable system assigned employees a user Id code (UIC) and a separate password. Each UIC is a person's name, and the individual's password is the same as the UIC. Users are not required to change their passwords as initial login nor do passwords expire. Which of the following statements does not reflect a limitation of the client's computer access system? a. employees can easily guess fellow employee's passwords b. employees are not required to change passwords c. employees can circumvent procedures to segregate duties d. employees are not required to take regular vacations
d
A code of ethics is an important element of a fraud prevention program. Which of the following would diminish the effectiveness of a company's code of conduct? a. The establishment of a chief ethics officer. b. The posting of the code of ethics in the company workplace. c. The establishment of a hotline for reporting unethical behavior. d. The violation of the code of ethics by senior management.
d
An auditor uses the knowledge provided by the understanding of internal control and the assessed risks of material misstatement primarily to a. determine whether procedures and records concerning the safeguarding of assets are reliable b. determine whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized c. modify the initial assessments of inherent risk and judgement about materiality levels for planning purposes d. determine the nature, timing and extent of substantive procedures for financial statement assertions
d
An auditor would most likely be concerned with controls that provide reasonable assurance about the a. efficiency of management's decision-making process b. appropriate prices the entity should charge for its produts c. decision to make expenditures for certain advertising activities d. entity's ability to initiate , authorize, record, process and report financial date
d
An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the auditor's a. assessment of the risks of material misstatement b. identification of weaknesses in the system c. assessment of the control environment's effectiveness d. understanding of the system
d
As part of understanding internal control relevant to the audit of a non issuer, an auditors does not need to a. consider factors that affect the risks of material misstatement b. determine whether controls have been implemented c. identify the risks of material misstatement d. obtain knowledge about the operating effectiveness of internal control
d
Each morning the controller gets the prior day's list of remittances, a copy of the payment report, and a copy of the deposit slip returned from the bank. When comparing these items, the controller would be able to determine that: a. The assistant controller does not also reconcile the subsidiary accounts payable. b. The accounts receivable system has controls over unauthorized access. c. No checks were returned for insufficient funds. d. The cash received and remittance advice received were maintained in a single batch.
d
Effectiveness of audit procedures would be reduced by a. Deciding to obtain external evidence instead of internal evidence. b. Performing procedures during the interim period as opposed to at the fiscal year-end date. c. Selecting larger sample sizes for audit. d. Performing audit procedures at the fiscal year-end date as opposed to the interim period
d
Fraud risk factors are events or conditions that indicate which of the following: a. An attitude or rationalization that justifies a fraudulent action. b. An opportunity to carry out a fraud. c. An incentive or pressure to perpetrate fraud. d. All of these are correct.
d
If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must a. Assess control risk at less than the maximum for all relevant assertions. b. Provide additional examples of responses to assessed fraud risks relating to fraudulent financial reporting. c. Perform only substantive procedures. d. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance.
d
If the auditors encounter a significant scope limitation in evaluating a public company's internal control over financial reporting, which of the following types of opinions on the effectiveness of the company's internal control over financial reporting would be appropriate? a. Unqualified opinion or adverse opinion. b. Qualified opinion or adverse opinion. c. Unqualified opinion or disclaimer of opinion. d. Disclaimer of opinion.
d
In an audit of financial statements in accordance with generally accepted auditing standards, an auditor should a. identify specific controls relevant to management's financial statement assertions b. perform test of controls to evaluate the effectiveness of the entity's accounting system c. determine whether procedures are suitably designed to prevent, or detect and correct, material misstatement d. document the auditor's understanding of the entity's internal control
d
In obtaining and understanding of internal control in a financial statement audit, an auditor is not obligated to a. determine whether the controls have been implemented b. perform procedures to understand the design of internal control c. document the understanding of the entity's internal control components d. search for significant deficiencies in the operation of internal control
d
In what way can audit procedures be modified to address assessed fraud risks? a. Obtain more reliable information. b. Perform procedures close to year-end. c. Apply computer-assisted techniques to all items. d. All of these are valid modifications.
d
In which of the following circumstances would an auditor expect to find that an entity implemented automated controls to reduce risks of misstatement? a. when errors are difficult to predict b. when misstatements are difficult to define c. when large, unusual, or nonrecurring transactions require judgement d. when transactions are high-volume and recurring
d
Matters that could affect the necessary extent of testing for a control activity as it related to the degree of auditor reliance on a control activity would not include the following: a. The frequency of the performance of the control by the company during the period being audited. b. The length of time that the auditor is planning to rely on the operating efficiency of the control activity. c. The expected rate of deviation for a control activity. d. The relevance and reliability of the audit evidence to be obtained to test the operating effectiveness of a control activity
d
Proper segregation of duties reduces the opportunities to allow persons to be in positions both to a. journalize entries and prepare financial statements b. record cash receipts and cash disbursements c. establish internal control and authorize transactionos d. perpetrate and conceal fraud and error
d
Q An auditor's permanent file audit documentation most likely will contain A Memoranda of conference with management. B Internal control analysis for the current year. C The most recent engagement letter. D Excerpts of the corporate charter and bylaws.
d
Q Prior to accepting a new audit engagement, a public accounting firm should A Attempt to contact the predecessor auditors. B Evaluate the integrity of management. C Assess the firm's resources to ensure that they are sufficient to permit the firm to accept the engagement. D All of the above.
d
Q Spreadsheet software would be most useful for which of the following audit activities? A Preparing an audit plan. B Drafting a planning memorandum. C Testing internal controls over computerized accounting applications. D Preparing a comparison of current-year expenses with those from the previous year.
d
Q When initiating communications with predecessor auditors, prospective auditors should expect A To take responsibility for obtaining the client's consent for the predecessor to give information about prior audits. B To conduct interviews with the partner and manager in charge of the predecessor public accounting firm's engagement. C To obtain copies of some or all of the predecessor auditors' audit documentation. D All of the above.
d
Q Which of the following communications is most likely to be written before the balance-sheet date? A Confirmation letters to vendors confirming the amounts they owe to the client. B A report to the audit committee on the results of testing of internal control over cash receipts. C An attorney's letter regarding contingent liabilities. D An engagement letter.
d
Q Which of the following statements is correct concerning analytical procedures used in planning an audit engagement? A They often replace the tests of controls that are performed to assess control risk. B They are often used to develop an auditor's preliminary judgment about materiality. C They usually involve the comparison of assertions developed by management to ratios calculated by an auditor. D They typically use financial and nonfinancial data aggregated at a high level.
d
Q With respect to the concept of materiality, which of the following statements is correct? A Materiality depends only on the dollar amount of an item relative to other items in the financial statements. B Materiality is determined by reference to AICPA guidelines. C Materiality depends on the nature of a transaction rather than the dollar amount of the transaction. D Materiality is a matter of professional judgment.
d
The auditor should assess control risk for each relevant assertion by evaluating the evidence obtained from all sources, including: a. The auditor's testing of controls for the audit of internal control on a public company. b. Misstatements detected during the financial statement audit. c. Any control deficiencies identified during the audit. d. All of the above.
d
The auditors recalculate the cash listed on the daily deposit for a sample of recorded cash receipts a. existence b. completeness c. authorization d. accuracy e. classification f. accounting and posting g. proper period
d
The most important fundamental component of an entity's internal control is a. Reliability of financial reporting. b. Effectiveness and efficiency of operations. c. Compliance with applicable laws and regulations. d. People who operate the control system
d
When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on: a. Whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure. b. Whether the account has a history of errors. c. The magnitude of the potential misstatement resulting from the deficiency or the deficiencies. d. Both a & c e. All of these are correct.
d
When testing a control activity's operating effectiveness, procedures the auditor performs to test operating effectiveness would likely include a. Inquiry of appropriate personnel b. Reading over the company's code of conduct c. Reperformance of the control activity d. Both A and C are correct
d
Which of the following combinations is a good way to conceal employee fraud but an ineffective means of perpetrating management (financial reporting) fraud? a. Omitting the disclosure information about related-party sales to the president's relatives at below-market prices. b. Overstating sales revenue and overstating customer accounts receivable balances. c. Understating interest expense and understating accrued interest payable. d. Overstating sales revenue and overstating bad debt expense.
d
Which of the following control activities could prevent a paid disbursement voucher from being presented for payment a second time? a. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment. b. Vouchers should be prepared by individuals who are responsible for signing disbursement checks. c. Disbursement vouchers should be approved by at least two responsible management officials. d. The official signing the check should compare it with the voucher and should stamp "paid" on the voucher documents.
d
Which of the following factors are included in an entity's control environment? Audit committee Participation/Integrity and Ethical Values/Organizational Structure a. yes/yes/no b. yes/no/yes c. no/yes/yes d. yes/yes/yes
d
Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client? a. A narrative memorandum describing the control system. b. An internal control questionnaire. c. A flowchart of the documents and procedures used by the company. d. All of the above.
d
Which of the following is a preventive control? a. Detailed fluctuation analysis completed by the CFO for revenue. b. Reconciliation of a bank account. c. Recalculation of a sample of payroll entries by internal auditors. d. Separation of duties between the payroll and personnel departments.
d
Incorporating elements of unpredictability in the selection of audit procedures to be performed by auditors include all of the following except: a. Varying the timing of the audit procedures. b. Performing audit procedures on an unannounced basis. c. Selecting items for testing that have lower amounts or areotherwise outside customary selection parameters. d. None of these are correct. e. Sending attorney letters to every attorney listed under the legal expense account.
e
When Auditing financial statements and finding indications of a possible misappropriation of assets, independent auditors should a. investigate fully to determine the total amount of the misappropriation. b. determine which accounts are affected and the amount by which they are overstated or understated. c. determine the methods by which the misappropriation was carried out. d. identify a person(s) who are likely responsible for the misappropriation and obtain evidence about some other fraud indications in their work e. all of these
e
The auditors traced a sample of recorded cash receipts to postings in the correct customers' accounts. a. existence b. completeness c. authorization d. accuracy e. classification f. accounting and posting g. proper period
f
For a sample of recorded cash receipts, the auditors compared the date of the receipt to the recording date. a. existence b. completeness c. authorization d. accuracy e. classification f. accounting and posting g. proper period
g
State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. Audit risk refers to the possibility that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially or immaterially misstated.
incorrect
