Test 2

Vouching

Establishing the validity of a transaction by examining supporting documents

Inspection of Records

Examining a document or report

The client recorded receivables that were fictitious

Existence and occurrence

Tracing

Following a transaction from a source document to recorded entries

Inspection of tangible goods

Physically examining an asset

Data control group activities in an information systems department would appropriately include: -reviewing error listings and maintaining error logs and reports. -investigating deviations from standard procedures in data handling. -supervising distribution of output. -all of the above.

-all of the above.

Processing data through the use of simulated files provides an auditor with information about the operating effectiveness of controls. One of the techniques involved in this approach makes use of: -an integrated test facility. -input validation. -controlled reprocessing. -program code checking.

-an integrated test facility.

Monitoring is considered: -an element of the control environment. -a component of internal control. -the primary asset safeguarding technique. -a portion of the information and communication system.

-a component of internal control.

The permanent file of the auditors' working papers generally should include: -a copy of key customer confirmations. -names and addresses of all audit staff personnel on the engagement. -time and expense reports. -a copy of the corporate charter.

-a copy of the corporate charter.

When performing an audit of internal control, the period or date on which the opinion relates under PCAOB standards is the: -as of date. -entire period under audit. -last day of significant field work. -end of each quarter of the year.

-as of date.

Differences of opinion between members of the audit staff about auditing matters should: -be included in a note to the financial statements. -be documented along with the manner in which they were resolved. -be described in the auditors' report. -never be documented in the working papers because to do could lead to legal liability problems.

-be documented along with the manner in which they were resolved.

The auditors' working papers will generally be least likely to -include documentation showing how the: engagement had been planned. -unusual matters were resolved. -client's internal control structure had been considered. -client's schedules were prepared.

-client's schedules were prepared.

Tracing a sample of documents from the source documents to the ledgers is designed to test the financial statement assertion of: -valuation. -existence. -validity. -completeness.

-completeness.

Tracing of a transaction from source documents to the accounting records is generally an audit procedure that is designed to establish: -completeness. -valuation. -existence. -rights.

-completeness.

Which of the following topics is not normally included in an engagement letter? -The auditors' responsibilities with respect to the audit. -A request that the client sign a copy of the letter. -Client responsibilities regarding the audit. -A schedule of individual audit team member billing rates.

-A schedule of individual audit team member billing rates.

Which of the following is a basic tool used by the auditors to control the audit work and review the progress of the audit? -Time and expense summary. -Engagement letter. -Progress flowchart. -Audit plan.

-Audit plan.

Independent auditors obtain an understanding of a client's computer system and perform tests of controls. The latter phase might include which of the following? -Examination of the machine room logbook to determine whether control information is properly recorded. -Examination of the systems manuals to determine whether existing procedures are satisfactory. -Examination of organization charts to determine whether electronic data processing department responsibilities are properly separated to afford effective control. -Examination of systems flowcharts to determine whether they reflect the current status of the system.

-Examination of the machine room logbook to determine whether control information is properly recorded.

Which of the following is ordinarily considered a test of a control? -Send confirmation letters to financial institutions. -Count and list cash on hand. -Obtain or prepare reconciliations of bank accounts as of the balance sheet date. -Examine signatures on checks.

-Examine signatures on checks.

Which of the following procedures is not customarily used by the auditors in determining the existence of related parties? -Inquire of appropriate management personnel as to the names of all related parties and whether there were any transactions with these parties during the period. -Review prior years' work papers for the names of known related parties. -Inquire of customers, suppliers, and employees as to their knowledge of related-party transactions. -Evaluate the company's procedures for identifying and properly accounting for related-party transactions.

-Inquire of customers, suppliers, and employees as to their knowledge of related-party transactions.

Which of the following risk factors indicates an increased risk of misappropriation of assets? -High turnover of senior management. -Strained relationships between management and auditors. -Overly complex organizational structure. -Lack of mandatory vacations for employees performing key functions.

-Lack of mandatory vacations for employees performing key functions.

Which of the following eliminates voluminous details from the auditors' working trial balance by classifying and summarizing similar or related items? -Account analyses. -Lead schedules. -Supporting schedules. -Control accounts.

-Lead schedules.

Which of the following statements regarding auditor documentation of the client's internal control is correct? -No one particular form of documentation is required, and the extent of documentation may vary. -No documentation is necessary although it is desirable. -Documentation must include flowcharts. -Documentation must include procedural write-ups.

-No one particular form of documentation is required, and the extent of documentation may vary.

Which of the following is most likely to provide an auditor with the most assurance about the effectiveness of the operation of internal control? -Recomputation of account balance amounts. -Inquiry of client personnel. -Confirmation with outside parties. -Observation of client personnel applying the control.

-Observation of client personnel applying the control.

Which of the following is not a characteristic of a batch processed IT system? -Production of numerous printouts. -Data input, followed by machine processing. -The collection of like transactions which are sorted and processed sequentially against a master file. -Posting of a transaction, as it occurs, to several files, without intermediate printouts.

-Posting of a transaction, as it occurs, to several files, without intermediate printouts.

Which of the following is an example of application control activities in IT systems? -Documentation procedures. -Controls over access to equipment and data files. -Programmed control activities. -Hardware controls.

-Programmed control activities.

What is the IT process called when data processing is performed concurrently with a particular activity and the results are available soon enough to influence the particular course of action being taken or the decision being made? -Real-time processing. -Batch processing. -Random access processing. -Integrated data processing.

-Real-time processing.

Which of the following is least likely to be considered a risk assessment procedure in a financial statement audit? -Analytical procedures. -Inquiries of management. -Observation and inspection relating to client activities. -Tests of controls.

-Tests of controls.

Tests of controls are most likely in which of the following situations? -Few transactions have occurred, but for very material amounts. -When substantive procedures are being used as the only further audit procedures. -The cost of tests of controls is likely to exceed the savings brought about by a resulting decrease in the scope of substantive procedures. -The assessed level of the risk of misstatement includes a presumption that controls operate effectively.

-The assessed level of the risk of misstatement includes a presumption that controls operate effectively.

Which of the following is an example of a validity test? -The computer flags any transmission for which the control field value did not match that of an existing file record. -After data for a transaction are entered, the computer sends certain data back to the terminal for comparison with data originally sent. -As the computer corrects errors and data are successfully resubmitted to the system, the causes of the errors are printed out. -The computer ensures that a numerical amount in a record does not exceed some predetermined amount.

-The computer flags any transmission for which the control field value did not match that of an existing file record.

Which of the following statements is not correct regarding the auditor's determination of materiality? -It is the smallest amount of misstatement that would probably influence the judgment of a reasonable person relying upon the financial statements. -Auditing standards require auditors to consider materiality in planning the audit. -The planning level of materiality will normally be the larger of the amount considered for the balance sheet versus the income statement. -The appropriate financial statement base for computing materiality may vary based on the nature of the client's business.

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

Which of the following is not a management assertion? -Existence. -Verification. -Valuation. -Rights.

-Verification.

An audit committee's responsibilities normally would not include: -discussing the meaning and significance of audited financial statements. -discussing problems and experience with independent auditors in completing the audit of annual financial statements. -nominating the independent auditors. -discussing all details of the audit plans of the independent auditors.

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

Although there are sometimes exceptions, ordinarily the most reliable audit evidence is: -documentary in form rather than an oral representation. -generated internally through a system of effective controls rather than through a computerized system of controls. -from nonindependent sources within the client company rather than independent sources outside the client company. -a facsimile of original documents, rather than photocopy.

-documentary in form rather than an oral representation.

Clico uses an online sales order processing system to process its sales transactions. Clico's sales data are electronically sorted and subjected to edit checks. A direct output of the edit checks most likely would be a: -list of all voided shipping documents. -report of missing sales invoices. -file of all rejected sales transactions. -printout of all user code numbers and passwords.

-file of all rejected sales transactions.

Analytical procedures are: -analytical tests of financial information made by a computer. -diagnostic tests of financial information that may not be classified as audit evidence. -statistical tests of financial information designed to identify areas requiring intensive investigation. -tests that involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data.

-tests that involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data.

Auditors must communicate internal control significant deficiencies to: -the Public Company Accounting Oversight Board. -the SEC. -the audit committee. -the shareholders.

-the audit committee.

Evidence is generally considered sufficient when: -it is reliable. -it has the qualities of being relevant, objective, and free from bias. -there is enough of it to afford a reasonable basis for an opinion on the financial statements. -it has been obtained by random selection.

-there is enough of it to afford a reasonable basis for an opinion on the financial statements.

Under PCAOB standards, when a significant deficiency exists, the auditors' report on internal control is most likely to include an opinion that is: -adverse. -qualified. -unqualified. -disclaimer.

-unqualified.

Recalculation

Testing the mathematical accuracy of documents or records

Which of the following is an effective audit planning and control procedure that helps prevent misunderstandings and inefficient use of audit personnel? -Arrange to make copies, for inclusion in the working papers, of those client supporting documents examined by the auditors. -Arrange to provide the client with copies of the audit plans to be used during the audit. -Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information. -Arrange to have the auditors prepare and post any necessary adjusting or reclassification entries prior to final closing.

-Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information.

Which of the following situations is compatible with good internal control in an information systems department? -Computer programmers have access to input data. -Computer operators have detailed knowledge of computer programs. -Computer programmers have unsupervised access to computer terminals. -Computer librarians have physical control of program documentation.

-Computer librarians have physical control of program documentation.

Which of the following is the best example of a substantive procedure? -Examining a sample of cash disbursements to test whether expenses have been properly approved. -Confirming balances of accounts receivable. -Comparing signatures on checks to a list of authorized check signers. =Flowcharting a client's cash receipts system.

-Confirming balances of accounts receivable.

Which of the following is most likely to be an overall response to fraud risks identified in an audit? -Decrease the use of professional skepticism and increase the use of internally generated evidence. -Use predictable, well established audit procedures. -Consider further management's selection and application of significant accounting principles. -Supervise members of the audit team less closely and rely more upon judgment.

-Consider further management's selection and application of significant accounting principles.

Of the following statements about internal control, which one is not valid? -No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. -Transactions must be properly authorized before such transactions are processed. -Because of the cost benefit relationship, a client may apply controls on a test basis. -Control activities reasonably ensure that collusion among employees cannot occur.

-Control activities reasonably ensure that collusion among employees cannot occur.

Which of the following is not a basic principle relating to control activities? -Design controls that restrict board of director oversight. -Select and develop general control activities over technology to support organization objectives. -Select and develop control activities that mitigate risks of the achievement of organizational objectives to acceptable levels. -Deploy control activities that establish what is expected to effect the organization's policies.

-Design controls that restrict board of director oversight.

Which of the following is most likely to be included in an auditor's inquiry of management while obtaining information to identify the risk of material misstatement due to fraud? -Are financial reporting operations controlled by and limited to one location? -Does it have knowledge of fraud or suspect fraud? -Has the possibility of management override been assessed? -Does the company have insurance against all forms of fraud?

-Does it have knowledge of fraud or suspect fraud?

Effective internal control requires organizational independence of departments. Organizational independence would be impaired in which of the following situations? -The controller reports to the vice president of production. -The internal auditors report to the audit committee of the board of directors. -The cashier reports to the treasurer. -The payroll accounting department reports to the chief accountant.

-The controller reports to the vice president of production.

The auditors may decide not to perform tests of the controls within the computerized portion of the client's internal control. Which of the following would not be a valid reason for choosing to omit such tests? -The time and dollar costs of testing exceed the time and dollar savings in substantive testing if the tests show the controls operating effectively. -The controls appear adequate. -The controls duplicate operative controls existing elsewhere in the system. -There appear to be major weaknesses that would preclude reliance on the stated procedures.

-The controls appear adequate.

Which of the following is not a factor that affects the independent auditors' judgment as to the quantity, type, and content of working papers? -The nature of the audit report. -The nature of the financial statements, schedules, or other information upon which the auditors are reporting. -The need for supervision of the engagement. -The timing and the number of personnel to be assigned to the engagement.

-The timing and the number of personnel to be assigned to the engagement.

Which of the following is correct concerning audit plans? -Plans are required for public company audits, but not for non-public company audits. -They are often revised throughout the audit. -It is essential that the audit engagement team perform every audit step. -They are generally less detailed than are audit engagement letters.

-They are often revised throughout the audit.

Which of the following is the most likely first step the auditors would perform at the beginning of an initial audit engagement? -Prepare a rough draft of the financial statements and of the auditors' report. -Consider internal control. -Tour the client's facilities and review the general records. -Consult with and review the work of the predecessor auditors prior to discussing the engagement with the client management.

-Tour the client's facilities and review the general records.

Audit working papers should include: -a number of permanent files each year and a general file that summarizes the permanent files.. -content that is sufficient to provide support for the auditors' report, including the auditors' representation as to compliance with auditing standards. -details on client ownership of individual working papers. -all authorization details for overtime worked.

-content that is sufficient to provide support for the auditors' report, including the auditors' representation as to compliance with auditing standards.

A situation in which the design or operation of a control does not allow management or employees, in the normal course of performing their functions, to prevent or detect misstatements on a timely basis is referred to as a(n): -material weakness in internal control. -control deficiency. -significant deficiency. -inherent limitation of internal control.

-control deficiency.

The purpose of tests of controls is to provide reasonable assurance that the: -entity has complied with disclosure requirements of generally accepted accounting principles. -accounting treatment of transactions and balances is valid and proper. -controls are operating effectively. -entity has complied with requirements of quality control.

-controls are operating effectively.

The major reason auditors gather evidence is to: -evaluate management. -form an opinion on the financial statements. -assess control risk. -detect fraud.

-form an opinion on the financial statements.

Before assessing control risk at a level lower than the maximum, the auditor obtains reasonable assurance that controls are in use and operating effectively. This assurance is most likely obtained in part by: -performing substantive procedures. -analyzing tests of trends and ratios. -preparing flowcharts. -inspecting documents.

-inspecting documents.

Hawkins, CPA, requested permission to communicate with the predecessor auditors of a prospective client. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the: -adequacy of the preplanned audit plan. -ability to establish consistency in application of accounting principles between years. -apparent scope limitation. -integrity of management.

-integrity of management.

When auditing an IT-based system, the auditors may use the "integrated test facility" technique, sometimes referred to as the mini-company approach, as an audit tool. This technique: -involves introducing simulated transactions into a system simultaneously with actual transactions. -involves using test decks. -is more applicable to independent audits than internal audits. -is the most commonly used audit tool for "auditing through the computer."

-involves introducing simulated transactions into a system simultaneously with actual transactions.

The portions of the auditors' audit plans relating to internal control are generally organized around the: -major transaction cycles. -substantive procedures. -analytical procedures. -inherent risk assessment.

-major transaction cycles.

Taylor Sales Co. maintains a large full time internal audit staff which reports directly to the chief accountant. Audit reports prepared by the internal auditors indicate that internal control is functioning as it should and that the accounting records are reliable. The external auditor, after assessing competence and objectivity will probably: -make limited use of the work performed by the internal audit staff. -avoid duplicating the work performed by the internal audit staff. -increase the depth of the consideration of administrative controls. -eliminate tests of controls.

-make limited use of the work performed by the internal audit staff.

When an audit is made in accordance with generally accepted auditing standards, the independent auditors must: -perform tests of controls. -use statistical sampling. -perform analytical procedures. -observe the taking of physical inventory on the balance sheet date.

-perform analytical procedures.

A successor auditor should attempt communication with a predecessor auditor: -prior to accepting the engagement. -after the engagement has been accepted. -both prior to acceptance of the engagement and after the engagement has been accepted. -is not required to do so.

-prior to accepting the engagement.

A principal purpose of a representation letter from management is to: -confirm management's approval of the work performed by the auditors. -substitute for other evidence-gathering audit procedures. -remind management of its primary responsibility for the financial statements. -serve as an introduction to company personnel and authorize the auditors to examine the records.

-remind management of its primary responsibility for the financial statements.

A computer master file that is the output of the most recent updating operation is referred to as the: -grandfather file. -scratch file. -son file. -father file.

-son file.

Audit procedures performed to obtain an understanding of the client and its environment, including its internal control, and to assess the risk of material misstatement are referred to as: -tests of details of balances. -tests of controls. -substantive procedures. -analytical procedures.

-tests of controls.

An auditor's flowchart of a client's internal control is a diagrammatic representation which depicts the auditors': -planned tests of controls. -program for tests of controls. -documentation of control risk. -understanding of the system.

-understanding of the system.

Reperformance

An independent execution of procedures or controls that were originally performed by the client

The client failed to describe in the financial statements significant debt restrictions

Classification and understandability

The client failed to include in their financial statements inventory that was consigned to others

Completeness

Passwords

Error: Alteration of data by an unauthorized terminal user

Self-checking numbers

Error: An error when entering an account number

Private lines

Error: Interception of data when it is transmitted

Limit tests

Error: Processing a transaction that is unreasonable in amount

Locking operating switch

Error: Unauthorized entry of data after business hours

Item Counts

Error: loss of a transaction during processing of data

Parity Check

Error: loss of data as it is processed internally by the computer

Internal File label

Error: update the wrong master file of accounts

External confirmation

Obtaining a written response about a particular item from a third party

A customer inadvertently ordered part number 12368 rather than part number 12638. In processing this order, the error could be detected by the vendor with which of the following controls? -Batch totals. -Limit test. -Key verifying. -Self-checking digit.

Self-checking digit.

The client had a significant amount of damaged goods that were presented at cost

Valuation or allocation