Exam #3 Assessments

Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern? "The balance does not reflect our sales discount for paying by January 5th." "We received this shipment on January 2nd." "This amount was paid on December 30th." "These goods were returned for credit on November 15th."

"These goods were returned for credit on November 15th."

Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriation of assets? A large number of inventory items with low sales prices. A large number of fixed assets with easily identifiable serial numbers. A large number of bearer bonds on hand. A large number of transactions processed in a short period of time.

A large number of bearer bonds on hand.

Which of the following statements is correct with respect to the elements of the "fraud triangle"? All of these statements are correct. A lack of integrity describes a person who does not stick to the social or organizational ethical code. Opportunity refers to a situation that allows someone with motive to carry out fraud. Fraud is most common when these three factors exist together.

All of these statements are correct.

Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization? Requiring accountants to pass a yearly background check. Allowing for greater management oversight of incompatible activities. Replacing personnel every three or four years. Disclosing lack of segregation of duties to the external auditors during the annual review.

Allowing for greater management oversight of incompatible activities.

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? Capability. Opportunity. Motive. Liquidity.

Capability.

Which of the following sets of information does an auditor usually confirm on one form? Accounts payable and purchase commitments. Cash in bank and collateral for loans. Inventory on consignment and contingent liabilities. Accounts receivable and accrued interest receivable.

Cash in bank and collateral for loans.

A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows: Clerk 1: Review vendor invoices for proper signature approval. Clerk 2: Enters vendor invoice into the accounting system and verifies payment terms. Clerk 3: Posts entered vendor invoices to accounts payable ledger for payment and mails checks. Treasurer: Review the vendor invoices and signs each check. Which of the following would indicate a weakness in the company's internal controls? Clerk 3 mails the checks and remittances after they have been signed. Clerk 1 opens all of the incoming mail. Clerk 2 reconciles the accounts payable ledger with the general ledger monthly. The treasurer uses a stamp for signing checks.

Clerk 3 mails the checks and remittances after they have been signed.

In the revenue and collection cycle, the auditor checks the numerical sequence of shipping documents. This procedure is related to which of the following assertions? Existence. Valuation or allocation. Rights and obligations. Completeness.

Completeness.

Alpha Brewery Corporation recorded sales through January 4, 2021, dating them December 31, 2020. This situation is an example of a violation of which of the following assertions? Existence or occurrence. Accuracy. Classification. Completeness.

Existence or occurrence.

Which of the following is a step in an auditor's decision to assess control risk at below the maximum? Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing. Identify specific internal control policies and activities that are likely to detect or prevent material misstatements. Perform tests of details of transactions and account balances to identify potential errors and fraud. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls.

Identify specific internal control policies and activities that are likely to detect or prevent material misstatements.

As payments are received, one mailroom employee is assigned the responsibility of prelisting receipts and preparing the deposit slip prior to forwarding the receipts, deposit slip, and remittance advices to accounts receivable for posting. Accounts receivable personnel re-foot the deposit slip, stamp a restrictive endorsement on the back of each check, and then forward the receipts and deposit slip to the treasury department. Evaluate the internal control of the described process. Which of the following is a reasonable assessment of internal control in this process? Adequate internal control. Inadequate internal control because mailroom employees should not have access to cash. Inadequate internal control because treasury employees should prepare the deposit slip. Inadequate internal control because of a lack of separation of duties.

Inadequate internal control because of a lack of separation of duties.

Which of the following would most likely be classified as a material weakness? Absence of appropriate separation of duties. Ineffective oversight of the financial reporting process by the company's audit committee. Absence of appropriate reviews and approvals of transactions. Evidence of failure of control activities.

Ineffective oversight of the financial reporting process by the company's audit committee.

Which of the following is ordinarily considered an "extended procedure" during the independent audit of financial statements? Conduct interviews with the client's sales billing personnel to learn about sales recording control activities. Perform physical observation and test count during the client's inventory taking. Send positive confirmations on recorded customer accounts receivable balances. Measure the time lag between the date of recording cash receipts in the books to the date of deposit credit in the bank.

Measure the time lag between the date of recording cash receipts in the books to the date of deposit credit in the bank.

Which of the following management policies would increase the probability of fraud in a company? Measuring performance and awarding bonuses based on short-term operating results. Giving employees performance feedback that considers positive and constructive praise along with critical and negative observations on their work. Establishing work teams that share responsibilities, performance, and bonuses based on collective efforts. Diversifying authority throughout divisions and subsidiaries in the organization.

Measuring performance and awarding bonuses based on short-term operating results.

In order for auditors to be able to recognize potential fraud, they must be aware of the basic characteristics of fraud. Which of the following is not a characteristic of fraud? Negligence on the part of executive management. Intentional deception. Perpetration for the benefit or detriment of the organization. Taking unfair or dishonest advantage of other people.

Negligence on the part of executive management.

The auditor selects a sample of recorded sales invoices and vouches them to shipping documents. This procedure is related to which of the following assertions? Accuracy. Occurrence. Completeness. Cutoff.

Occurrence.

At the end of each business day, Safe Company sends its bank a listing of all checks written during the day including the check number, payee, and amount. When a check is sent to the bank for payment the bank compares the payee and the amount with the listing provided by Safe Company. This system is called: PayChex. Pay-As-You-Go. Positive Pay. Pay Master.

Positive Pay.

Which of the following controls is designed to meet the completeness assertion? Sales orders are approved by the credit department prior to shipping goods. Sales are dated by the computer to ensure it is included in the proper period. Prenumbering invoices, shipping documents, and sales orders. The sale is to a customer on the approved customer list.

Prenumbering invoices, shipping documents, and sales orders.

When auditing financial statements of a private company, the minimum work an auditor must perform in connection with a company's internal control is best described by which of the following statements? Design procedures to search for significant deficiencies in the actual operation of the company's internal control. Determine whether the company's control policies are designed well enough to prevent material misstatements. Perform exhaustive tests of accounting controls and evaluate the company's control system effectiveness. Prepare auditing working papers that document the auditor's understanding of the company's internal control.

Prepare auditing working papers that document the auditor's understanding of the company's internal control.

Which of the following should be performed by the persons opening the mail and recording payments? Restrictive endorsement on all checks. The segregation of all payments made on accounts listed as past due. The preparation of the deposit slip and the delivery of the checks to the bank. Entering of payment information into customer accounts.

Restrictive endorsement on all checks.

To conceal defalcations involving receivables, a dishonest bookkeeper might charge which of the following accounts? Petty cash. Miscellaneous expense. Miscellaneous income. Sales returns.

Sales returns.

A client has a separate sales group for its largest "preferred" customers. This is a select group of customers that normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform? Send out positive confirmations on a large sample of these customers. Prepare a schedule of purchases and payments for these customers. Inquire of the sales manager regarding the accounts receivable terms. Send out negative confirmations on a large sample of these customers.

Send out positive confirmations on a large sample of these customers.

Which of the following internal control activities most likely would deter lapping of collections from customers? Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries. Separation of duties between receiving cash and posting the accounts receivable ledger.

Separation of duties between receiving cash and posting the accounts receivable ledger.

Which of the following audit procedures most likely would provide an auditor with the most assurance about the effectiveness of the operation of an entity's internal control? Successful re-performance of the control activity. Observation of client personnel. Inquiry of client personnel. Confirmation with outside parties.

Successful re-performance of the control activity.

Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls? The relationship between management, the board of directors, and external stakeholders. The degree to which the auditor intends to use internal audit personnel to perform substantive tests. The industry and the business and regulatory environments in which the client operates. The degree to which information technology is used in the accounting function.

The degree to which information technology is used in the accounting function.

An auditor is evaluating a client's internal controls. Which of the following situations would be the most difficult internal control issue for an auditor to detect? The technology department writes a program that does not properly implement the control, due to a lack of understanding. The accounting staff neglects the control, due to increased transactions to be processed. Two employees, who work in different departments, are circumventing an internal control. Someone erroneously disables edit checks in a software program designed to identify control exceptions.

Two employees, who work in different departments, are circumventing an internal control.

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate? Increase the dollar threshold of vouching customer invoices. Move detailed analytical procedures from year end to interim. Use more experienced audit team members to perform year-end testing. Send negative accounts receivable confirmations instead of positive accounts receivable confirmations.

Use more experienced audit team members to perform year-end testing.

An auditor is concerned about a policy of management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor's concern? Verifying that approved spending limits are not exceeded. Reviewing minutes of board meeting. Matching purchase orders to accounts payable. Tracing sales orders to the revenue account.

Verifying that approved spending limits are not exceeded.

An auditor noted that client sales had increased 10 percent for the year. At the same time, cost of goods sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. The auditor interviewed the sales manager who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor best test the sales manager's representation? Perform additional inquiries with sales personnel. Vouch vender invoices to payments made after year-end. Send confirmations asking customers about unit prices paid for product. Obtain copies of all price lists in use during the year and vouch the prices to sales invoices.

Vouch vender invoices to payments made after year-end.

An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using: employee fidelity bonds. daily check summaries. independently prepared mailroom prelists. a bank lockbox system.

a bank lockbox system.

Management's report on internal controls must include each of the following except: a statement providing management's evaluation of the company's control environment. a statement providing management's assessment of the effectiveness of the company's internal control. a statement that management is responsible for establishing and maintaining adequate internal control over financial reporting. a statement identifying the framework management uses to evaluate the effectiveness of the company's internal control.

a statement providing management's evaluation of the company's control environment.

After obtaining an understanding of the entity's internal control and assessing control risk, an auditor of a non-public company decided not to perform additional tests of controls. The auditor most likely concluded that the: additional evidence to support a further reduction in control risk was not cost beneficial. internal control structure was properly designed and justifiably may be relied on. assessed level of inherent risk exceeded the assessed level of control risk. evidence obtainable through tests of controls would not support an increased level of control risk.

additional evidence to support a further reduction in control risk was not cost beneficial.

In an audit of financial statements, an auditor's primary consideration regarding an internal control policy or activity is whether the policy or activity: provides adequate safeguards over access to assets. reflects management's philosophy and operating style. affects management's financial statement assertions. enhances management's decision making processes.

affects management's financial statement assertions.

The SEC requires all of the following for revenue to be recognized except: the seller's price to the buyer is fixed or determinable. cash is collected. persuasive evidence of an arrangement exists. delivery has occurred or services have been rendered.

cash is collected.

A sales clerk enters a customer's six-number customer account. The computer program uses the first five numbers to calculate a sixth number. This resulting number is then compared to the sixth number entered by the sales clerk. This is an example of a: reasonableness test. missing data test. check digit. valid character test.

check digit.

Control activities intended to ensure that transactions are recorded in the right period are designed to achieve the ASB assertion of: cutoff. valuation or allocation. accuracy. occurrence.

cutoff.

The appropriate separation of duties does not include: custody of assets involved in transactions. data preparation. authorization to execute transactions. recording of transactions.

data preparation.

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except: do nothing for immaterial balances. send a second request. examine client correspondence files. examine shipping documents.

do nothing for immaterial balances.

After obtaining an understanding of a client's financial reporting control activities, the auditor would next: test the client's control activities. document the understanding obtained. plan the remainder of the audit work. assess the final control risk.

document the understanding obtained.

To gather evidence regarding the bank's balance in a bank reconciliation, an auditor would examine all of the following except the: bank confirmation. year-end bank statement. cutoff bank statement. general ledger.

general ledger.

Sound internal control can be described as separating all of the following duties and responsibilities except for: custody of, or direct access to, assets. hiring of employees. recordkeeping. transaction authorization.

hiring of employees.

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose: small account balances. individual invoices. customers with credit balances. individual overdue balances.

individual invoices.

After obtaining an understanding of internal controls and assessing control risk on the audit of a non-public company, an auditor decided to perform tests of controls. The auditor most likely decided that: it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests. an increase in the assessed level of control risk is justified for certain financial statement assertions. additional evidence to support a further reduction in control risk is not available. there were many internal control weaknesses that could allow errors to enter the accounting system.

it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.

The mail which includes payments should be opened by two people. This control is called: separation of duties. anti-collusion. joint custody. lapping.

joint custody.

As part of understanding the internal control, an auditor is not required to: ascertain whether internal control policies and activities have been placed in operation. identify the types of potential misstatements that can occur. consider factors that affect the risk of material misstatement. obtain knowledge about the operating effectiveness of the client's internal control activities.

obtain knowledge about the operating effectiveness of the client's internal control activities.

The internal control in small business is highly dependent on the: bonding of employees. complexity of the client's internal controls. owner-manager's competence, as well as his/her ethics and integrity. separation of functional responsibilities.

owner-manager's competence, as well as his/her ethics and integrity.

Your client is in the process of acquiring another company. You have been requested to verify that cash for the company being acquired is properly stated. The audit technique that will yield the most persuasive evidence is: examination of the company's escrow account. interview with the company's treasurer and cash manager. analytical computations comparing current cash in the bank with previous accounting periods. preparation and review of standard bank confirmation inquiries.

preparation and review of standard bank confirmation inquiries.

The auditor maintains control of the mailing and receipt of confirmations by typically performing all of the following except: preparing the confirmation letters. mailing the confirmation letters. receiving the confirmation letters. None of these choices are correct.

preparing the confirmation letters.

In the revenue and collection cycle, the order of the activities in the cycle is best illustrated by: delivering goods, billing customer, granting credit, and performing collection activities. granting credit, billing customers, delivering goods, and processing cash receipts. customer ordering, delivering goods, granting credit, and billing customers. processing customer orders, granting credit, delivering goods, and billing customers.

processing customer orders, granting credit, delivering goods, and billing customers.

In testing control activities, an auditor ordinarily selects from a variety of techniques, including: inquiry and analytical procedures. comparison and confirmation. inspection and verification. reperformance and observation.

reperformance and observation.

When counting cash on hand the auditor must exercise simultaneous control over all cash and other negotiable assets to prevent: replacement or substitution of stolen assets. deposits in transit. theft. irregular endorsement.

replacement or substitution of stolen assets.

An audit plan of substantive procedures for cash would not include: request client to prepare bank reconciliations. prepare a schedule of interbank transfers for a period of ten business days before and after year-end date. request a cutoff bank statement be mailed to the client. obtain a written client representation concerning compensating balance agreements.

request a cutoff bank statement be mailed to the client.

Smith Manufacturing Company's accounts receivable clerk has a friend who is also Smith's customer. The accounts receivable clerk, on occasion, has issued fictitious credit memorandums to his friend for goods supposedly returned (these returns did not exist). The most effective control for preventing this activity is to: mail monthly statements to the customer. have the sales department independent of the accounts-receivable department. prenumber and account for all credit memorandums. require receiving reports to support all credit memorandums before they are approved.

require receiving reports to support all credit memorandums before they are approved.

The most effective audit procedure for determining the collectability of an account receivable is the: review of the subsequent cash collections. review of authorization of credit sales to the customer and the previous history of collections. examination of the related sales invoice(s). confirmation of the account.

review of the subsequent cash collections.

When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to: sales invoices with shipping documents. records of accounts receivable write-offs. credit files and reports. cash remittance lists and bank deposit slips.

sales invoices with shipping documents.

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is: prenumbered and accounted for. approved for authorized purchases. supported by a vendor's invoice. stamped "paid" by the check signer.

stamped "paid" by the check signer.

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because: the auditor cannot infer that all nonrespondents have verified their account information. negative confirmations do not produce evidential matter that is statistically quantifiable. some recipients may report incorrect balances that require extensive follow up. a majority of recipients usually lacks the willingness to respond objectively.

the auditor cannot infer that all nonrespondents have verified their account information.

An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if: the illegal act was committed during a prior year that was not audited. the client does not take the remedial action that the auditor considers necessary. the auditor has already assessed control risk at the maximum level. the illegal act is a violation of generally accepted accounting principles.

the client does not take the remedial action that the auditor considers necessary.

Revenues are normally considered to have been earned when: the company has substantially accomplished what it must to be entitled to the benefits. all possibility of return has expired. goods have been shipped. the cash is collected.

the company has substantially accomplished what it must to be entitled to the benefits.

An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion. The auditor need not perform this omitted procedure if: the omission is documented in a communication with the audit committee. no individual investment is material to the financial statements taken as a whole. the auditor's assessed level of detection risk is low. the results of alternative procedures that were performed compensate for the omission.

the results of alternative procedures that were performed compensate for the omission.