TEST 1 Audit
What are the 4-5 basic "types" of opinions which auditors may issue?
1. Unmodified 2. Unmodified with explanatory paragraph 3. Qualified 4. Adverse 5. Disclaimer
"Cooking the books" is typically accomplished by all the following except A) inflating accounts payable. B) accelerating recognition of revenue. C) delaying recording of expenses. D) failing to write off impaired assets.
A
. When receiving cash, which of the following controls will best ensure that all receipts received are properly recorded? a. Mailing monthly statements to customers b. Requiring accounting personnel to receive checks from customers c. Independently verifying that all recorded receipts appear on the prelist d. Footing the prelist e. Operating an effective accounting system for the underlying sales
A
10) If there is collusion among management, the chance a normal audit would uncover such acts is A) very low. B) very high. C) zero. D) none of the above.
A
13) Indicate which changes would require an explanatory paragraph in the audit report. The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern. Change from FIFO to LIFO Yes Yes B) The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern. Change from FIFO to LIFO No No C) The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern. Change from FIFO to LIFO Yes No D) The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern. Change from FIFO to LIFO No Yes
A
14) Which of the following best describes lapping? A) Applying cash receipts to a different customer's account in an attempt to conceal previous thefts of cash receipts. B) Inflating bank balances by transferring money among different bank accounts. C) Increasing expenses to conceal that an asset was stolen. D) Stealing small amounts of cash, many times over a period of time
A
4) Which of the following sequence of steps in the accounting process is correct? a. Prepare records, record in journals, post to ledgers, and prepare unadjusted trial balance b. Prepare records, post to ledgers, record in journals, and prepare unadjusted trial balance c. Prepare records, prepare unadjusted trial balance, record in journals, and post to ledgers d. Prepare records, record in journals, prepare unadjusted trial balance, and post to ledgers e. Record in journals, post to ledgers, prepare records, and prepare unadjusted trial balance
A
7) The standard unmodified audit report A) is sometimes called a clean opinion. B) can be issued only with an explanatory paragraph. C) can be issued if only a balance sheet and income statement are included in the financial statements. D) is sometimes called a disclaimer report.
A
A control procedure designed so that the employee that records cash received from customers does not also have access to the cash itself is an example of a(n) A) preventive control. B) detective control. C) corrective control. D) authorization control.
A
If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can withdraw from the engagement or A) Issue an adverse opinion Issue a qualified opinion Yes Yes B) Issue an adverse opinion Issue a qualified opinion No No C) Issue an adverse opinion Issue a qualified opinion Yes No D) Issue an adverse opinion Issue a qualified opinion No Yes
A
The clerk who opens mail is assigned responsibility for preparing a document which identifies all cash collections received in the mail for a given day. This document is called: a. cash receipts prelist form d. voucher b. receiving report e. collection authorization form c. accounts receivable subsidiary record
A
The general journal is used to: a. post all accounting entries not posted in other individual journals. b. post all accounting entries. c. post all accounting entries not involving cash. d. post only month end adjusting journal entries. e. post only year end adjusting journal entries.
A
The most common case in which conditions beyond the client's and auditor's control cause a scope restriction in an engagement is when the A) auditor is not appointed until after the client's year-end. B) client won't allow the auditor to confirm receivables for fear of offending its customers. C) auditor doesn't have enough staff to satisfactorily audit all of the client's foreign subsidiaries. D) client is going through Chapter 11 bankruptcy.
A
To emphasize the fact that the auditor is independent, a typical addressee of the audit report could be A) Company Controller Shareholders Board of Directors No Yes Yes B) Company Controller Shareholders Board of Directors No No Yes C) Company Controller Shareholders Board of Directors Yes Yes No D) Company Controller Shareholders Board of Directors Yes No No
A
Using prenumbered source documents (sales invoices, purchase orders, time-cards, receiving reports, etc.) is an excellent internal control to help ensure that: a. all transactions are recorded. b. all recorded transactions are valid. c. all recorded transactions are accurate. d. both a and c.
A
When an auditor believes that an illegal act may have occurred, the auditor should first A) obtain an understanding of the nature and circumstances of the act. B) consult with legal counsel or others knowledgeable about the illegal act. C) discuss the matter with the audit committee. D) withdraw from the engagement
A
Which is the most important audit objective relating to cash receipts? a. All amounts received are properly recorded. b. All amounts received relate to actual sales. c. All amounts received are properly disclosed in the footnotes of the financial statements. d. All amounts received are recorded in the same period in which the sale occurred. e. All amounts received are from actual customers
A
Which of the following is an accurate statement about professional skepticism? A) Professional skepticism involves a critical assessment of the evidence. B) Professional skepticism is easy to implement in practice. C) It is easy for auditors to understand that their clients may try to deceive them throughout the audit process. D) Professional skepticism is only necessary for the audits of public companies.
A
Which of the following statements is true? a. Original entries are recorded in journals, and journal totals are posted to ledgers. b. Original entries are recorded in ledgers, and ledger totals are posted to journals. c. Subsidiary ledgers are required for all general ledger accounts so that details can be provided. d. Batch totals from each journal (e.g., sales, cash disbursements, etc.) are posted to the general journal on a monthly basis. e.Entries from the trial balance are used to update subsidiary ledgers on a monthly basis
A
Which of the following transactions would likely be recorded in the general journal? a. Estimation of uncollectible accounts receivable b. Recording of sales returns c. Adjustment of perpetual inventory records d. Recording of payroll expense for hourly employees e. Issuance of bonds payable
A
Why does the auditor divide the financial statements into smaller segments? A) Using the cycle approach makes the audit more manageable. B) Most accounts have few relationships with others and so it is more efficient to break the financial statements into smaller pieces. C) The cycle approach is used because auditing standards require it. D) All of the above are correct.
A
What is meant by the term "Management Override of Controls"?
Accountant correctly record transaction, but management undid these transaction. For example, change expense to asset
1) The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the A) board of directors. B) company management. C) financial statement auditor. D) company's internal audit department
B
12) Indicate which changes would require an explanatory paragraph in the audit report. A) Change in the estimated life of an asset Variation in the format of the financial statements Yes Yes B) Change in the estimated life of an asset Variation in the format of the financial statements No No C) Change in the estimated life of an asset Variation in the format of the financial statements Yes No D) Change in the estimated life of an asset Variation in the format of the financial statements No Yes
B
17) To test for recorded sales for which there were no actual shipments, the auditor vouches from the A) bill of lading to the sales journal. B) sales journal to the shipping documents. C) sales journal to the accounts receivable subsidiary ledger. D) bill of lading to the supporting customer order and sales order.
B
4. A document prepared at the time of shipment indicating the description of the merchandise, the quantity shipped and other relevant data. It is a written contract of the receipt and shipment of goods between the seller and the carrier. This document is a a. remittance advice d. receiving report b. bill of lading e. sales order c. purchase requisition
B
8. An auditor is interested in testing whether a sample of sales to customers in the current year have been recorded. In this case, the auditor would most likely select a sample from which source? a. customer orders b. shipping documents. c. entries in sales journal d. entries in the cash disbursements journal e. the accounts receivable subsidiary ledger
B
A document prepared in the sales department of most firms for recording the description, quantity and related information for goods purchased by their customers is called a: a. customer order d. purchase order b. sales order e. purchase requisition c. sales invoice
B
A document that indicates such things as the description and quantity of goods and services received, the price including freight, the cash discount terms and the date of billing. It is an essential document because it specifies the amount of money owed for an acquisition. This document is a: a. purchase requisition d. sales order b. invoice e. credit memo c. purchase order
B
If the scope restriction imposed by the client is so material that the overall fairness of the financial statements is in question, the auditor should issue a(n) A) standard unmodified opinion. B) disclaimer of opinion. C) adverse opinion. D) unmodified opinion with revised wording in the scope paragraph.
B
If you received a request from a customer who wanted to know how much they owed, you would go to the: a. accounts receivable - general ledger account b. accounts receivable - subsidiary ledger c. sales journal d. sales invoice file e. sales department manager
B
In each independent situation below, what kind of audit opinion would you issue? A. Standard, unmodified (clean) B. Standard unmodified (clean) with explanatory paragraph. C. Qualification of scope D. Qualification of opinion E. Adverse. F. Disclaimer ________ 5. Becker's financial statements are good, but you have substantial doubt about Becker's ability to continue as a going concern.
B
In each independent situation below, what kind of audit opinion would you issue? A. Standard, unmodified (clean) B. Standard unmodified (clean) with explanatory paragraph. C. Qualification of scope D. Qualification of opinion E. Adverse. F. Disclaimer ________ 6. Becker Corporation changed its method of computing depreciation in 2020 from accelerated to straight line. You concur with the change and the change is properly disclosed in the financial statement footnotes.
B
In testing for cutoff, the objective is to determine A) whether all of the current period's transactions are recorded. B) whether transactions are recorded in the correct accounting period. C) the proper cutoff between capitalizing and expensing expenditures. D) the proper cutoff between disclosing items in footnotes or in account balances.
B
In which of the following circumstances would an auditor most likely express an adverse opinion? A) The CEO refuses to let the auditor have access to the board of director meeting minutes. B) The financial statements are not in conformity with the FASB statement on loss contingencies. C) Information comes to the auditor's attention that raises substantial doubt about the ability for the client to continue as a going concern. D) Tests of controls show that the internal control structure is so poor that the auditor has to assess control risk at the maximum.
B
The management's responsibility section of the standard unmodified opinion audit report for a nonpublic company states that the financial statements are A) the responsibility of the auditor. B) the responsibility of management. C) the joint responsibility of management and the auditor. D) none of the above.
B
To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with A) the original invoices. B) an approved master price list. C) the amounts recorded in the sales journal for that transaction. D) the amounts posted to the customer's account in the accounts receivable master file.
B
When an auditor knows that an illegal act has occurred, she must A) report it to the proper governmental authorities. B) consider the effects on the financial statements, including the adequacy of disclosure. C) withdraw from the engagement. D) issue an adverse opinion.
B
When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger purposefully enters cash received into the wrong customer's account that employee may be suspected of A) kiting. B) lapping. C) floating. D) shorting.
B
When analyzing the various types of audit reports, A) the unmodified opinion with an emphasis-of-matter paragraph is the most common type of report. B) companies will generally make the appropriate changes to their accounting records to avoid a qualification by the auditor. C) management is more concerned about a qualified report than a disclaimer report. D) an adverse report is issued when the auditor is unable to form an opinion on the financial statements.
B
When processing the payment from a customer on an accounts receivable, the accountant needs at his disposal all of the following except: a. deposit slip d. cash receipts journal b. sales invoice e. all of the above are needed c. accounts receivable subsidiary ledger
B
When the auditor determines that the financial statements are fairly stated, but there is a nonindependent relationship between the auditor and the client, the auditor should issue A) an adverse opinion. B) a disclaimer of opinion. C) either a qualified opinion or an adverse opinion. D) either a qualified opinion or an unqualified opinion with modified wording
B
When there is uncertainty about a company's ability to continue as a going concern, the auditor's concern is the possibility that the client may not be able to continue its operations or meet its obligations for a "reasonable period of time." For this purpose, a reasonable period of time is considered not to exceed A) six months from the date of the financial statements. B) one year from the date of the financial statements. C) six months from the date of the audit report. D) one year from the date of the audit report.
B
Which internal control would most likely help assure that goods shipped are billed? a. Reviewing the sales journal for sequential and unusual entries. b. Examining shipping documents for matching copies of sales invoices. c. Comparing the accounts receivable ledger to daily sales summaries. d. Inspecting unused sales invoices for consecutive prenumbering. e. Examine customer orders for matching bills of lading.
B
Which of the following assertions is described as "this assertion addresses whether all transactions that should be included in the financial statements are in fact included"? A) occurrence B) completeness C) rights and obligations D) existence
B
Which of the following is not explicitly stated in the standard unmodified opinion audit report? A) The financial statements are the responsibility of management. B) The audit was conducted in accordance with generally accepted accounting principles. C) The auditors believe that the audit evidence provides a reasonable basis for their opinion. D) An audit includes assessing the accounting estimates used.
B
Which of the following statements best describes the auditor's responsibility regarding the detection of fraud? A) The auditor is responsible for the failure to detect fraud only when such failure clearly results from nonperformance of audit procedures specifically described in the engagement letter. B) The auditor is required to provide reasonable assurance that the financial statements are free of both material errors and fraud. C) The auditor is responsible for detecting material financial statement fraud, but not a material misappropriation of assets. D) The auditor is responsible for the failure to detect fraud only when an unqualified opinion is issued.
B
Which of the following statements is most correct with respect to separation of duties? A) A person who has temporary or permanent custody of an asset should account for that asset. B) Employees who authorize transactions should not have custody of related assets. C) Employees who open cash receipts should record the amounts in the subsidiary ledgers. D) Employees who authorize transactions should have recording responsibility for these transactions.
B
Which, if any, of the following is not a reason for preparing an accounts receivable aged trial balance? a. Reconcile the control and subsidiary accounts. b. Display activity (cash receipts and sales) for each individual account. c. Show in a convenient format a listing of accounts receivable for management review. d. Provide information about the adequacy of the allowance for uncollectible accounts. e. All of the above are reasons for preparing an accounts receivable aged trial balance.
B
18) Management makes the following assertions about account balances: A) existence, completeness, classification and cutoff. B) existence, accuracy, classification and rights and obligations. C) existence, completeness, valuation and allocation, and rights and obligations. D) existence, completeness, rights and obligations, and cutoff.
C
At a movie theater box office, all tickets are sequentially prenumbered. At the end of each day, the beginning ticket number is subtracted from the ending number to calculate the number of tickets sold. Then, cash is counted and compared with the number of tickets sold. Which of the following situations does this control detect? A) Some customers presented tickets purchased on a previous day when there wasn't a ticket taker at the theater entrance (so the tickets didn't get torn.) B) A group of kids snuck into the theater through a back door when customers left after a show. C) The box office cashier accidentally gives too much change to a customer. D) The ticket taker admits his friends without tickets
C
Auditing standards make ________ distinction(s) between the auditor's responsibilities for searching for errors and fraud. A) little B) a significant C) no D) various
C
Committing fraud often takes time and effort and is broken into several, discreet steps. Of the frauds listed below, which one would most likely take the most time and effort? A) stealing inventory from the warehouse. B) selling stolen inventory to get cash. C) lapping accounts receivable. D) creating false journal entries to overstate revenue.
C
Management has recorded prepaid insurance as an asset in the previous year. This year, to reduce record-keeping costs, it expenses insurance. If the amount is immaterial to the financial statements, A) a disclaimer opinion is issued. B) a a qualified opinion is issued. C) a standard unmodified opinion audit report is issued. D) no audit report can be issued.
C
The appropriate audit report date for a standard unmodified opinion audit report for a nonpublic entity should be A) the date the financial statements are given to the Board of Directors. B) the date of the financial statements. C) the date the auditor completed the auditing procedures in the field. D) 60 days after the date of the financial statements as required by the SEC.
C
The auditor is determining that the correct selling price was used for billing and that the quantity of goods shipped was the same as the quantity billed. She is gathering evidence about which transaction-related audit objective? A) existence B) completeness C) accuracy D) cut-off
C
When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility A) more on discovering errors than employee fraud. B) more on discovering employee fraud than errors. C) equally on discovering errors and employee fraud. D) on the senior auditor for detecting errors and on the manager for detecting employee fraud.
C
Whenever an auditor issues an audit report for a public company, the auditor can choose to issue a report in which of the following forms? I. A combined report on financial statements and internal control over financial reporting II. Separate reports on financial statements and internal control over financial reporting A) I only B) II only C) either I or II D) neither I nor II
C
Which balance sheet accounts are included in the payroll and personnel cycle? A) cash in bank, accrued payroll, trade accounts receivable B) accrued payroll, notes payable, and deferred tax C) accrued payroll, cash in bank, and accrued payroll taxes D) salaries and commissions, cash in bank, accrued payroll taxes
C
Which of the following is the auditor least likely to do when aware of an illegal act? A) discuss the matter with the client's legal counsel B) obtain evidence about the potential effect of the illegal act on the financial statements C) contact the local law enforcement officials regarding potential criminal wrongdoing D) consider the impact of the illegal act on the relationship with the company's management
C
Which of the following scenarios does not result in a qualified opinion? A) A scope limitation prevents the auditor from completing an important audit procedure. B) Circumstances exist that prevent the auditor from conducting a complete audit. C) The auditor lacks independence with respect to the audited entity. D) An accounting principle at variance with GAAP is used.
C
Which of the following statements is true of a public company's financial statements? A) Sarbanes-Oxley requires only the CEO to certify the financial statements. B) Sarbanes-Oxley requires only the CFO to certify the financial statements. C) Sarbanes-Oxley requires both the CEO and CFO to certify the financial statements. D) Sarbanes-Oxley requires neither the CEO nor the CFO to certify the financial statements.
C
Which of the following would most likely be deemed a direct effect illegal act? A) violation of federal employment laws B) violation of federal environmental regulations C) violation of federal income tax laws D) violation of civil rights laws
C
In each independent situation below, what kind of audit opinion would you issue? A. Standard, unmodified (clean) B. Standard unmodified (clean) with explanatory paragraph. C. Qualification of scope D. Qualification of opinion E. Adverse. F. Disclaimer ________ 2. Management of Becker Corporation refuses to allow you to observe, or make, any counts of inventory. The recorded book value of inventory is material.
C or F
What 3 functions or tasks must be separated to have adequate separation of duties?
Custody, Authorization, Recording
1) Auditors accumulate evidence to A) defend themselves in the event of a lawsuit. B) determine if the financial statements are mathematically correct. C) satisfy the requirements of the outside investors. D) reach a conclusion about the fairness of the financial statements.
D
An auditor needs to determine whether all customers of an electric utility company are being billed. The auditor should test from the A) sales register to the accounts receivable ledger. B) sales register to the meter department records. C) accounts receivable ledger to the sales register. D) meter department records to the sales register.
D
As a result of management's refusal to permit the auditor to physically examine inventory, the auditor must depart from the unmodified opinion audit report because A) the financial statements have not been prepared in accordance with GAAP. B) the scope of the audit has been restricted by circumstances beyond either the client's or auditor's control. C) the financial statements have not been audited in accordance with GAAP. D) the scope of the audit has been restricted
D
For departures from GAAP or scope restrictions, the auditor must decide if the potential effect on the financial statements is A) immaterial. B) material. C) highly material. D) any of the above.
D
If the auditor lacks independence, a disclaimer of opinion must be issued A) if the client requests it. B) only if it is highly material. C) only if it is material but not pervasive. D) in all cases.
D
If the auditor were responsible for making certain that all of management's assertions in the financial statements were absolutely correct, A) bankruptcies could no longer occur. B) bankruptcies would be reduced to a very small number. C) audits would be much easier to complete. D) audits would not be economically practical
D
If the phrase "except for" is present in the opinion paragraph of the audit report, the auditor has issued a(n) A) adverse opinion. B) disclaimer of opinion. C) unqualified opinion. D) qualified opinion.
D
In each independent situation below, what kind of audit opinion would you issue? A. Standard, unmodified (clean) B. Standard unmodified (clean) with explanatory paragraph. C. Qualification of scope D. Qualification of opinion E. Adverse. F. Disclaimer ________ 7. Ten days after the balance sheet date, one of Becker's buildings was destroyed by a fire. Becker refuses to disclose this information in a footnote to the financial statements, but you believe disclosure is required to conform with GAAP. The amount of the uninsured loss was material, but not highly material.
D
In the accounts receivable subsidiary ledger, the length of time the account has been due can be useful to the client and the auditor in preparing the A) trial balance. B) working trial balance. C) accounts receivable trial balance. D) aged accounts receivable trial balance.
D
The audit report date on a standard unmodified opinion audit report indicates A) the last day of the fiscal period. B) the date on which the financial statements were filed with the Securities and Exchange Commission. C) the last date on which users may institute a lawsuit against either the client or the auditor. D) the last day of the auditor's fieldwork.
D
The primary difference between prelists and remittance advices is that a. there is no difference. b. prelists generally contain preprinted information regarding sales to customers. c. remittance advices are less likely to contain errors because they are prepared by the individual who opens the cash receipts. d. prelists summarize the information contained on each remittance advice. e.remittance advices are less effective as a control procedure
D
The total of the individual account balances in the accounts receivable subsidiary ledger should equal the A) total sales for the period. B) balance of the sales account in the general ledger. C) total sales less the total cash received for the period. D) balance of the accounts receivable account in the general ledger.
D
What is the first step performed after checks are received in the mail room? a. an entry in the cash receipts journal b. a bank deposit slip is prepared c. an entry in accounts receivable subsidiary ledger d. a cash receipts prelist is prepared e. an entry in the sales journal
D
When a client fails to follow GAAP, the audit report can be unmodified, qualified, or adverse depending on the materiality. What factors affect materiality that an auditor should consider? A) the dollar amount in comparison to a base B) if the misstatement can be measured C) the nature of the item D) All the above are factors an auditor should consider regarding materiality.
D
When a company's financial statements contain a departure from GAAP with which the auditor concurs, the departure should be explained in A) the scope paragraph. B) an introductory paragraph. C) the opinion paragraph. D) a separate paragraph.
D
Which of the following statements is not true? A) Balance-related audit objectives are applied to ending account balances. B) Transaction-related audit objectives are applied to classes of transactions. C) Balance-related audit objectives are applied to the ending balance in balance sheet accounts. D) Balance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts.
D
A document that accompanies the bill mailed to the customer and can be returned to the seller with the cash payment is called a: a. statement d. cash receipts memo b. voucher e. remittance advice c. collection invoice
E
In each independent situation below, what kind of audit opinion would you issue? A. Standard, unmodified (clean) B. Standard unmodified (clean) with explanatory paragraph. C. Qualification of scope D. Qualification of opinion E. Adverse. F. Disclaimer ________ 1. Becker Corporation carries its property, plant, and equipment accounts at current market values. Current market values exceed historical cost by a highly material amount, and the effects are pervasive throughout the financial statements.
E
In each independent situation below, what kind of audit opinion would you issue? A. Standard, unmodified (clean) B. Standard unmodified (clean) with explanatory paragraph. C. Qualification of scope D. Qualification of opinion E. Adverse. F. Disclaimer ________ 4. One week before the end of fieldwork, you discover that the audit manager on the Becker engagement owns a small amount of Becker's common stock.
F
What's the basic idea behind internal controls?
Internal controls are in house procedures designed to present/detect fraud. Don't give a single person too much power over the accounting process.
Suppose a company has good internal controls. In this case, all things being equal, will the auditor test more or less transactions?
Less
In order to be effective, what kind of person(s) must perform independent checks on performance?
Management
Suppose a company has bad internal controls. In this case, all things being equal, will the auditor test more or less transactions?
More
Which companies are required by the SEC to have annual financial statement audits?
Public Companies
Why are internal controls important when it comes to preparing financial statements?
These internal controls prevent errors / frauds before they occur.
True or False: Accounting frauds vary from case the case, but a common theme to all of them is a breakdown in internal controls.
True
In each independent situation below, what kind of audit opinion would you issue? A. Standard, unmodified (clean) B. Standard unmodified (clean) with explanatory paragraph. C. Qualification of scope D. Qualification of opinion E. Adverse. F. Disclaimer
________ 3. You were unable to confirm accounts receivable with Becker's customers. However, because of detailed sales and cash receipts records, you were able to perform reliable alternative audit procedures. A
If separation of duties fails to prevent/detect a material missstatement, what's the 2nd line of defense
independent checks on performance by an independent or non-process owner
Are private companies required by the SEC to conduct SOX audits?
no
Are private companies required by the SEC to have annual financial statement audits?
no
What's the key difference between "preventative" vs. "detective" internal controls.
one prevent errors/frauds before they occur, one identify errors/fraud after they occur
What attitude must auditors maintain at all times when conducting an audit?
professional skepticism
For publicly traded companies - what "type" of opinion is the most common? Why is this so?
unqualified opinion
Are all public companies are required by the SEC to gave a SOX 404(b) audit performed by an outside auditor?
yes
Are all public companies are required by the SEC to sign a SOX 404(a) statement on the effectiveness of Internal Controls over Financial Reporting (IC/FR)?
yes
