ACCT 561 Final Becker Questions
Which of the following statements ordinarily is not included among the written client representations made by the chief executive office and the chief financial officer?
"Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."
Selected data pertaining to Lore Co. for calendar Year 4 is as follows: Net cash sales $3,000 COGS 18,000 Inventory at beginning of year 6,000 Purchases 24,000 A/R at beginning of year 20,000 A/R at end of year 22,000 The A/R turnover for Year 4 was 5.0 times. What were Lore's Year 4 sales (net)?
$105,000
Selected data pertaining to Lore Co. for calendar Year 4 is as follows: Net cash sales $3,000 COGS 18,000 Inventory at beginning of year 6,000 Purchases 24,000 A/R at beginning of year 20,000 A/R at end of year 22,000 What was the inventory turnover for Year 4?
2.0 times.
Check no, From, To 101, National, Federal 202, County, State 303, Federal, American 404, State Republic Check Number, Disbursement (book/bank), Receipt (book/bank) 101: 12/30, 1/4; 12/30, 1/3 202: 1/3, 1/2; 12/30, 12/31 303: 12/31, 1/3; 1/2, 1/2 404: 1/2, 1/2; 1/2, 12/31 Which of the following checks might indicate kiting?
202 and 404 An auditor would most likely detect kiting by reviewing the bank transfer schedule and following-up on all transfers for which the receipt date per bank is recorded in the accounting period before the disbursement date.
The following data pertain to Cowl Inc., for the year ended December 31, Year 4: Net sales $600,000 Net Income 150,000 Total assets, Jan 1, Year 4 2,000,000 Total assets, Dec 31, Year 4 3,000,000 What was Cowl's return on assets for Year 4?
6%
At Dec 31, Year 2, Curry Co. had the following balances in selected asset accounts: " "-Year 2-Increase over Year 1 Cash-$300-$100 A/R net-1,200-400 Inventory-500-200 Prepaid expenses-100-40 Other assets-400-150 Total assets-$2,500-$890 Curry also had current liabilities of $1,000 at Dec 31, Year 2, and sales (net) of $7,200 for the year then ended. What was Curry's days sales in accounts receivable during Year 2?
60.8
Which of the following matters most likely would be included in a management representation letter?
A statement that the affects of all known or possible litigation and claims have been accounted for and disclosed.
To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would A. Request the senders to mail the original forms to the auditor B. Examine subsequent cash receipts for the accounts in question. C. Consider the e-mail responses to the confirmations to be exceptions. D. Mail second requests to the e-mail respondents.
A. Request the senders to mail the original forms to the auditor
Which of the following results of analytical procedures would most likely indicate possible unrecorded liabilities?
Accounts payable as a percentage of total liabilities of 25%, compared to 35% for the prior period.
Which of the following should be included in a management representation letter?
Acknowledgment of management's responsibility for the design, implementation, and maintenance of internal control.
Which of the following factors most likely would cause an auditor to question integrity of management?
Audit tests detect material fraud that was known to management, but not disclosed to the auditor.
The date of the management representation letter should coincide with the:
Auditor's report.
In analyzing a company's financial statements, which financial statement would a potential investor primarily use to assess the company's liquidity and financial flexibility?
Balance sheet.
Which of the following ratios would an engagement partner most likely consider in the overall review stage of an audit?
COGS/average inventory.
Smith CPAs was not able to obtain a written representation letter from management acknowledging management's responsibility for establishing effective internal control. Because the scope of the audit was restricted, Smith CPAs should: a. Withdraw from the engagement b. Issue a disclaimer of opinion because of the scope limitation c. withdraw from the engagement or issue a disclaimer of opinion d. continue with the engagement and include an additional paragraph in the report describing the situation
Choice "2" is correct. An auditor may visit the service organization facility, but that is not required when an entity uses a service organization as part of internal control. Choice "3" is correct. The auditor should withdraw from an engagement or issue a disclaimer of opinion if the scope of an audit is restricted.
Which of the following statements might be included among additional written client representations obtained by the auditor?
Compensating balances and other arrangements involving restrictions on cash balances have been disclosed.
To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into:
Cost of goods sold.
At Dec 30, Year 3, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of .5:1. On Dec 31, Year 3, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?
Current ratio - INCREASED Quick ratio - DECREASED
What effect would the sale of a company's trading securities at their carrying amounts for cash have on each of the following ratios?
Current ratio - NO EFFECT Quick ratio - NO EFFECT
Which of the following is least likely to explain an increase in inventory turnover from Year 1 to Year 2?
Direct labor charges were inadvertently applied twice to some inventory items during Year 2.
An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:
Fictitious credit sales have been recorded during the year.
To which of the following matters would materiality limits not apply when obtaining written client representations? Losses from sales commitments Unasserted claims and assessments Fraud involving management Noncompliance with contractual agreements
Fraud involving management
In a comparison of 20X2 to 20X2, Neir Co.'s inventory turnover ratio increased substantially although sales and inventory amounts were essentially unchanged. Which of the following statements explains the increased inventory turnover ratio?
Gross profit percentage decreased.
To which of the following matters would materiality limits not apply when obtaining written client representations? Violations of state labor regulations Disclosure of line-of-credit arrangements Information about related party transactions Instances of fraud involving management
Instances of fraud involving management.
"We disclosed to you all know instances of non-compliance or suspected non-compliance with laws and regulations whose affects should be considered when preparing financial statements." The foregoing passage is most likely a:
Management representation letter.
Management representations should be obtained about all the following, except: Uncorrected misstatements identified by the auditor The absence of unrecorded transactions Management's consultation with other accountants Instances of immaterial fraud involving employees who have significant roles in internal control
Management's consultation with other accountants.
Which of the following ratios would most likely be used to evaluate an entity's profitablility?
Net income / net sales
Which of the following expressions most likely would be included in a management representation letter?
No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements.
Selected data pertaining to Lore Co. for calendar Year 4 is as follows: Net cash sales $3,000 COGS 18,000 Inventory at beginning of year 6,000 Purchases 24,000 A/R at beginning of year 20,000 A/R at end of year 22,000 Lore would use which of the following to determine the days in inventory?
Numerator - Ending inventory Denominator - COGS divided by 365
A limitation of the scope of an auditor's examination sufficient to preclude an unmodified opinion will always result when management:
Refused to furnish a management representation letter to the auditor.
To which of the following matters would materiality limits not apply in obtaining written management representations?
The availability of minutes of stockholder's and director's meetings.
Which of the following should be included as a written representation from management?
The belief that misstatements identified by the auditor and not corrected are immaterial.
Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?
The current year's payroll expense with the prior year's payroll expese.
A purpose of a management representation letter is to reduce:
The possibility of misunderstanding concerning management's responsibility for the financial statements.
Which of the following matters would an auditor most likely include in a management representation letter?
The reasonable of significant assumptions used in making accounting estimates.
An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:
There was an improper cutoff of sales at the end of the year.
Identify the types of testing methods that are appropriate when testing the design effectiveness of controls in an integrated audit. Inquiry/Observation/Inspection/Recalculation/Reperformance
Yes/Yes/Yes/No/No (Yes to inquiry, observation, and inspection)
If specific information comes to an auditor's attention that implies noncompliance with laws that could result in a material, but indirect effect of the financial statements, the auditor should next a) apply audit procedures specifically directed to ascertaining whether noncompliance has occurred b) seek the advice of an informed expert qualified to practice law as to possible contingent liabilities c) report the matter to an appropriate level of management at least one level above those involved d) discuss the evidence with the client's audit committee, or others with equivalent authority and responsibility
a) apply audit procedures specifically directed to ascertaining whether noncompliance has occurred
Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees? a. A bank lockbox system b. Prenumbered remittance advices c. Monthly bank reconciliations d. Daily deposits of cash receipts
a. A bank lockbox system
An auditor of a manufacturer would most likely question whether that client has committed illegal acts if the client has: a. Been forced to discontinue operations in a foreign country. b. Been an annual donor to a local political candidate. c. Failed to correct material weaknesses in internal accounting control that were reported after the prior year's audit. d. Disclosed several subsequent events involving foreign operations in the notes to the financial statements.
a. Been forced to discontinue operations in a foreign country.
An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the a. Dates checks are deposited per bank statements with the dates remittance credits are recorded. b. Daily cash summaries with the sums of the cash receipts journal entries. c. Individual bank deposit slips with the details of the monthly bank statements. d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded.
a. Dates checks are deposited per bank statements with the dates remittance credits are recorded.
When auditing a client's related party transactions (relationships), certain audit objectives should be met. Which of the following does not represent a primary audit objective pertaining to related party transactions? a. Determine which of the client's related party transactions were not completed on an arm's length transactions basis b. Determine whether the client's financial statements achieve fair presentation of all related party transactions and relationships c. Obtain sufficient audit evidence that the client's related party transactions have been identified and disclosed d. recognize fraud risk factors arising from the client's related party transactions
a. Determine which of the client's related party transactions were not completed on an arm's length transactions basis
The management of Cain Company, a non issuer, engaged Bell , CPA, to express an opinion on Cain's internal control. Bell's report described several material weaknesses and potential errors and irregularities that could occur. Subsequently, management included Bell's report in its annual report to the Board of Directors with a statement that the cost of correcting the weaknesses would exceed the benefits. Bell should: a. Disclaim an opinion as to management's cost-benefit statement. b. Advise the Board that Bell either agrees or disagrees with management's statement. c. Advise management that Bell's report was restricted for use only by management. d. Advise both management and the Board that Bell was withdrawing the opinion.
a. Disclaim an opinion as to management's cost-benefit statement. Choice "1" is correct. The auditor should disclaim an opinion as to management's cost-benefit statement (i.e., "We do not express an opinion or any other form of assurance on management's cost-benefit statement.").
On receiving a client's bank cutoff statement, an auditor most likely would trace: a. Prior-year checks listed in the cutoff statement to the year-end outstanding checklist b. Deposits in transit listed in the cutoff statement to the year-end bank reconciliation c. Checks dated after year-end listed in the cutoff statement to the year-end outstanding checklist d. Deposits recorded in the cash receipts journal after year-end to the cutoff statement
a. Prior-year checks listed in the cutoff statement to the year-end outstanding checklist
Which of the following is the relevant authoritative literature for an audit of internal control of a nonissuer? a. Statements on Auditing Standards b. Statements on Standards for Attestation Engagements c. PCAOB Auditing Standards d. Statements on Standards for Accounting and Review Services
a. Statements on Auditing Standards
Which of the following does not demonstrate an inappropriate segregation of duties? a. a billing clerk prepares invoices and records the resulting increase in accounts receivable b. an accounting clerk receives customer payments and records the resulting reduction in accounts receivable c. the cashier performs the monthly bank reconciliation d. the purchasing manager approves vendor invoices for payment
a. a billing clerk prepares invoices and records the resulting increase in accounts receivable
Which of the following journal entries would the auditor least likely examine in an effort to address the risk of management override of controls? a. a journal entry made to record recurring periodic accounting estimates b. a journal entry made by an individual who does not typically make journal entries c. a journal entry recorded as a post-closing entry that has no explanation or description d. a journal entry made to a seldom-used account
a. a journal entry made to record recurring periodic accounting estimates
Which of the following statements best describes an auditor's responsibility to detect errors and fraud? a. an auditor should design an audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements b. an auditor has a responsibility to detect material errors, but has no responsibility to detect fraud that is concealed through employee collusion or management override of internal control c. an auditor has no responsibility to detect errors and fraud unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated d. an auditor has no responsibility to detect errors and fraud because an auditor is not an issuer and an audit does not constitute a guarantee
a. an auditor should design an audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements
What is the definition of fraud in an audit of financial statements? a. an intentional act that results in a material misstatement in financial statements that are the subject of an audit b. the unintentional misapplication of accounting principles related to amounts, classification, manner of presentations, or disclosure c. an intentional act that results in a material weakness in financial statements that are the subject of an audit d. management's inability to design and implement programs and controls to prevent, deter, and detect material misstatements
a. an intentional act that results in a material misstatement in financial statements that are the subject of an audit
Which of the following is least likely to aid the auditor in evaluating the risk of improper revenue recognition due to fraud? a. analysis of sales commissions over the most recent five-year period b. comparison of sales volume, as determined from recorded revenue amounts, with production capacity c. trend analysis of revenues and sales returns by month d. comparison of revenue reported by month and by product line for the current and prior years
a. analysis of sales commissions over the most recent five-year period
Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement due to fraud? a. audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion b. an audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material misstatement due to fraud c. the factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements d. the auditor didn't consider factors influencing audit risk for account balances that have effects pervasive to financial statements taken as a whole
a. audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion
While performing tests of details on a client's investment transactions, the auditor's tests starts with source documents and then traces transaction information to the client's journal entries. The auditor's directional testing is most likely testing which of the following assertions? a. completeness b. cutoff c. valuation d. existence
a. completeness
Clara, a CPA, has been engaged by a nonissuer Baxter Manufacturing Co. to perform a financial statement audit. During the audit, Clara identified a control deficiency that was a significant deficiency but not a material weakness. Management corrected the deficiency during the audit. How should the significant deficiency be communicated? a. control deficiency in design b. control deficiency in operation c. material weakness d. significant deficiency
a. control deficiency in design
When an auditor becomes aware of a possible noncompliance with laws and regulations by a client, the auditor should obtain and understanding of the nature of the noncompliance to: a. evaluate the effect on the financial statements b. determine the reliability of management's representations c. consider whether other similar acts may have occurred d. recommend remedial actions to those charged with governance
a. evaluate the effect on the financial statements
Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? a. inability to generate cash flows from operations while reporting substantial earnings growth b. management's lack of interest in increasing the entity's stock trend c. large amounts of liquid assets that are easily convertible into cash d. inability to borrow necessary capital without granting debt covenants
a. inability to generate cash flows from operations while reporting substantial earnings growth
A public accounting firm was performing an integrated audit for Lenon Co, a nonissuer. The audit team noted the following control deficiencies during the audit. Which of these control deficiencies would not be considered a material weakness? a. inadequate design of an IT control b. fraud committed by senior management c. ineffective oversight by those charged with governance d. audit team identification of a material misstatement that Lenon Co's controls would not have detected
a. inadequate design of an IT control Choice "1" is correct. Inadequate design of an IT control in and of itself would be an example of a deficiency in the design of control but does not necessarily indicate a material weakness.
Which of the following procedures concerning accounts receivable would an auditor most likely perform to obtain audit evidence supporting the effective operation of controls? a. observing an entity's employee prepare the schedule of past due accounts receivable b. sending confirmation requests to an entity's principal customers to verify the existence of accounts receivable c. inspecting an entity's analysis of accounts receivable for unusual balances d. comparing an entity's uncollectible accounts expense to actual uncollectible accounts receivable
a. observing an entity's employee prepare the schedule of past due accounts receivable
When engaged to audit a nonissuer's internal control, an auditor should: a. obtain management's written assessment regarding whether the company has maintained effective internal control b. qualify any opinion concerning management's assessment that the cost of correcting any weaknesses exceeds the benefits c. keep informed of events subsequent to the date of the report that might have affected the accountant's opinion d. disclaim an opinion on whether the system taken as a whole is sufficient to prevent or detect material errors or irregularities
a. obtain management's written assessment regarding whether the company has maintained effective internal control Choice "1" is correct. An auditor should obtain management's written assessment about the effectiveness of the entity's internal control.
Regarding a nonissuer's compliance with laws and regulations, an auditor performing an audit of the entity's financial statements is responsible for: a. obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework b. preventing noncompliance with existing applicable laws and regulations that determine reported amounts and disclosures in the entity's financial statements c. determining whether an act performed by the entity being audited constitutes noncompliance with existing applicable laws and regulations d. ensuring that the entity's operations are conducted in accordance with the provisions of laws and regulations relevant to the entity's financial statements
a. obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework
An auditor may achieve audit objectives related to particular assertions by: a. performing analytical procedures b. adhering to a system of quality control c. preparing audit documentation d. increasing the level of detection risk
a. performing analytical procedure
Which of the following statements is correct concerning the use of negative confirmation requests? a. unreturned negative confirmation requests rarely provide significant explicit evidence b. negative confirmation requests are effective when detection risk is low c. unreturned negative confirmation requests indicate that alternative procedures are necessary d. negative confirmation requests are effective when understatements of account balances are suspected
a. unreturned negative confirmation requests rarely provide significant explicit evidence Although returned negative confirmations may provide evidence about the financial statement assertions, unreturned negative confirmation requests do not provide explicit evidence that the intended third parties received the confirmation requests and verified that the information contained in them is correct.
An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion is most likely related to presentation and disclosure and: a. valuation and allocation b. completeness c. existence d. rights and obligations
a. valuation and allocation
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about: a. valuation and allocation b. understandability and classification c. existence d. rights and obligations
a. valuation and allocation
As part of audit procedures performed on a client's transactions, the auditor reconciles supporting schedules to the corresponding general ledger entries. The auditor would most likely be testing which of the following assertions? a. valuation, allocation, and accuracy b. cutoff c. existence and occurrence d. understandability and classification
a. valuation, allocation, and accuracy
An audit client has a valid reason for requesting that a certain account receivable that the auditor has selected for confirmation not be confirmed. Under these circumstances, the auditor should: a. verify the account balance by inspecting the client's bank statements and cash receipt records b. select at random a different account for confirmation that is approximately the same size c. request the client's management to document the matter in the management representation letter d. explain to the client that the request will most likely cause the auditor to disclaim an opinion
a. verify the account balance by inspecting the client's bank statements and cash receipt records
The primary evidence regarding year-end cash balances in the financial statements is documented in the: a. Standard bank confirmations b. Bank reconciliations c. Interbank transfer schedule d. Bank deposit lead schedule
b. Bank reconciliations
The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to: a. Detect kiting activities that may otherwise not be discovered b. Corroborate information regarding deposit and loan balances c. Provide the data necessary to prepare a proof of cash d. Request information about contingent liabilities and secured transactions
b. Corroborate information regarding deposit and loan balances
For the most effective internal control, monthly bank statements should be received directly from the banks and reviewed by the a. Controller b. Internal auditor c. Accounts receivable accountant d. Accounts payable accountant
b. Internal auditor
Which of the following is not required of an auditor during the integrated audit of an entity that uses a service organization? a. Obtain the service auditor's report b. Visit the service organization facility c. Perform additional procedures if the date specified in management's assessment is significantly beyond the time period covered by the service auditor's report d. obtain evidence that controls are operating effectively
b. Visit the service organization facility Choice "2" is correct. An auditor may visit the service organization facility, but that is not required when an entity uses a service organization as part of internal control.
Which of the following is true? a. an integrated audit may be performed for an issuer, but it is not required b. an integrated audit may be performed for a nonissuer, but it is not required c. an integrated audit is required for both issuers and nonissuers d. an integrated audit is not required but is recommended for both issuers and nonissuers
b. an integrated audit may be performed for a nonissuer, but it is not required
An auditor most likely would limit substantive tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting: a. opening and closing inventory balances b. cash receipts and A/R c. Shipping and receiving activities d. cutoffs of sales and purchases
b. cash receipts and A/R
If an auditor performs an inspection of documentation supporting a client's account balances, he or she would most likely be testing any of the following financial statement assertions, with the exception of: a. rights and obligations b. completeness c. valuation, allocation, and accuracy d. understandability and classification
b. completeness
Which of the following is not an appropriate testing method when testing the operating effectiveness of controls during an integrated audit? a. inspection b. confirmation c. reperformance d. recalculation
b. confirmation Choice "2" is correct. Confirmation is an audit procedure that is performed during substantive procedures. Operating effectiveness of controls can be tested through inspection, reperformance, or recalculation.
All of the following may be an indication of a RPT with the exception of: a. a loan guarantee b. consignment sale c. compensating balance arrangement d. nonrecurring transaction near year-end
b. consignment sale
Tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion regarding: a. classification b. cutoff c. accuracy d. existence
b. cutoff
Which of the following circumstances most likely would cause an auditor to suspect that material misstatements exist in a client's financial statements? a. The assumptions used in developing the prior year's accounting estimates have changed b. differences between reconciliations of control accounts and subsidiary records are not investigated c. negative confirmation requests yield fewer responses than in the prior year's audit d. management consults with another CPA firm about complex accounting matters
b. differences between reconciliations of control accounts and subsidiary records are not investigated
An auditor may decide not to test controls related to certain assertions because the auditor believes: a. sufficient appropriate evidence to support the assertions is likely to be available b. evaluating the effectiveness of controls is inefficient c. more emphasis on tests of controls rather than substantive tests is warranted d. considering the relationship of assertions to specific account balances is more efficient
b. evaluating the effectiveness of controls is inefficient
Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed? a. scan the sales journal for sequential and unusual entries b. examine shipping documents for matching sales invoices c. compare the accounts receivable ledger to daily sales summaries d. inspect unused invoices for consecutive prenumbering
b. examine shipping documents for matching sales invoices
Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions? a. verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed b. inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal c. compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list d. inquire about the entity's credit granting policies and the consistent application of credit checks
b. inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal
Which of the following conditions is necessary for an auditor to accept an engagement to audit and report on a nonissuer's internal control over financial reporting? a. the auditor anticipates relying on the entity's internal control in a financial statement audit b. management presents its written assessment about the effectiveness of internal control c. the auditor is a continuing auditor who previously has audited the entity's financial statements d. management agrees not to present the auditor's report in a general-use document to stockholders
b. management presents its written assessment about the effectiveness of internal control Choice "2" is correct. In order for an auditor to audit and report on a nonissuer's internal control, management must present its written assessment about the effectiveness of internal control.
When performing an integrated audit, auditors are not responsible for: a. obtaining more evidence for controls that are subject to a greater risk of failure b. obtaining sufficient evidence to support an opinion about the effectiveness of each individual control c. incorporating an element of unpredictability into the testing d. determining the effect of any identified control deviations on the assessment of risk associated with the control
b. obtaining sufficient evidence to support an opinion about the effectiveness of each individual control Choice "2" is correct. Auditors are responsible for obtaining sufficient evidence to support an opinion about the effectiveness of the entity's internal control overall. It is not necessary to obtain evidence regarding each individual control.
Which of the following would not be considered an entity-level control? a. risk assessment process controls b. periodic comparison of actual assets with amounts shown in the accounting records c. biannual distribution of the code of conduct via intranet d. period-end financial reporting controls
b. periodic comparison of actual assets with amounts shown in the accounting records Choice "2" is correct. Periodic comparison of actual assets with amounts shown in the accounting records is a control activity related to the existence of specific assets. It is not an entity-level control. Risk assessment process controls, biannual distribution of the code of conduct, and period-end financial reporting controls are considered entity-level controls, as they have a pervasive effect on a company's internal control.
An auditor has identified a risk of material misstatement due to fraud related to the inventory function. Which is least likely to be an appropriate response? a. observing inventory counts on an unannounced basis b. requesting that management more closely monitor the inventory function c. assigning more experienced personnel to the engagement d. requesting that inventory be counted on a date close to the end of the reporting period
b. requesting that management more closely monitor the inventory function
Which of the following procedures is performed first for unreturned positive confirmations of accounts receivable? a. comparing current sales with budgeted sales b. sending second requests for confirmation of accounts receivable c. performing subsequent procedures d. asking the client to obtain additional correspondence from the customers
b. sending second requests for confirmation of accounts receivable
Tracing shipping documents to prenumbered sales invoices provides evidence that a. no duplicate shipments or billings occurred b. shipments to customers were properly invoiced c. all goods ordered by customers were shipped d. all prenumbered sales invoices were accounted for
b. shipments to customers were properly invoiced
Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements? a. the entity's management places no emphasis on meeting publicized earnings projections b. significant differences between the physical inventory count and the accounting records are not investigated c. monthly bank reconciliations ordinarily include several large outstanding checks d. cash transactions are electronically processed and recorded, leaving no paper audit trail
b. significant differences between the physical inventory count and the accounting records are not investigated
Which of the following circumstances would most likely cause an auditor to suspect that material misstatements arising from fraud exist in a client's financial statements? a. property and equipment are usually sold at a loss before being fully depreciated b. significantly fewer responses to confirmation requests are received than expected c. monthly bank reconciliations usually include several in-transit items d. clerical errors are listed on an EDP-general exception report
b. significantly fewer responses to confirmation requests are received than expected
When a service organization is part of an entity's internal control, an auditor performing an integrated audit should: a. obtain an understanding of all controls related to the service organization b. test the entity's relevant controls over the activities of the service organization c. perform substantive procedures at the service organization d. reference the service auditor's report in the auditor's report on internal control
b. test the entity's relevant controls over the activities of the service organization Choice "2" is correct. When a service organization is part of an entity's internal control, an auditor should test the entity's relevant controls over the activities of the service organization to obtain evidence that controls are operating effectively.
During an audit, an auditor discovers a fraudulent expense reimbursement for a low-level manager. The auditor determines that this transaction is inconsequential and several similar transactions would not be material to the financial statements in the aggregate. Which of the following statements best describes the auditor's required response to the discovery? a. the auditor should fully investigate other transactions related to this manager to determine if fraud exists b. the auditor should bring the transaction to the attention of an appropriate level of management c. the auditor should report this finding to those charged with governance d. the auditor's responsibility is satisfied by documenting that the single transaction is inconsequential
b. the auditor should bring the transaction to the attention of an appropriate level of management
Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of noncompliance with laws and regulations? a. The exchange of property for similar property in a monetary transaction b. the discover of unexplained payments made to government employees c. the presence of several difficult-to-audit transactions affecting expense accounts d. the failure to develop adequate procedures that detect unauthorized purchases
b. the discover of unexplained payments made to government employees
Which statement is true regarding the three fraud risk factors (incentives/pressures, opportunity, and rationalization/attitude)? a. the auditor should determine whether and to what extent fraud risk factors are present as part of the final overall review stage of the audit b. the fraud risk factors should be discussed by engagement personnel during planning c. the existence of all three fraud risk factors indicates that fraud has occurred d. lack of observation of all three fraud risk factors indicates that fraud has not occurred
b. the fraud risk factors should be discussed by engagement personnel during planning
Financial statement assertions include: a. completeness; existence; occurrence; and risk assessment b. valuation, allocation, and accuracy; completeness; and understandability and classification c. information and communication; rights and obligations; existence; and occurrence d. understandability and classification; independence, integrity, and objectivity; and rights and obligations
b. valuation, allocation, and accuracy; completeness; and understandability and classification
Which of the following is not an inquiry the auditor should make to identify the risks of material misstatement due to fraud? a. how management communicates to employees its views on acceptable business practices b. whether operating personnel have communicated to management regarding internal control and how it functions to prevent, deter, or detect material misstatement due to fraud c. whether there are any particular business segments for which a risk of fraud may be more likely to exist d. whether management is aware of any allegations of fraud
b. whether operating personnel have communicated to management regarding internal control and how it functions to prevent, deter, or detect material misstatement due to fraud
Which of the following situations most likely could lead to an embezzlement scheme? a. The accounts receivable bookkeeper receives a list of payments prepared by the cashier and personally makes entries in the customers' accounts receivable subsidiary ledger b. Each vendor invoice is matched with the related purchase order and receiving report by the vouchers payable bookkeeper who personally approves the voucher for payment c. Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement d. Vouchers and supporting documentation are examined and then canceled by the treasurer who personally mails the checks to vendors
c. Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement
Which of he following statements correctly describes the "top-down approach" used during an audit of internal control over financial reporting? a. Begin reviewing balance sheet accounts and then review income statement accounts b. Begin reviewing income statement accounts and then review balance sheet accounts c. Begin by understanding the overall risks to internal control over financial reporting at the financial statement level d. Begin by understanding the overall risks to internal control over financial reporting at the general ledger level
c. Begin by understanding the overall risks to internal control over financial reporting at the financial statement level Choice "3" is correct. The "top-down approach" used during an audit of internal control over financial reporting begins by understanding the overall risks to internal control over financial reporting at the financial statement level.
Identify the correct order of steps for an auditor when applying a top-down approach to select controls to test in an integrated audit. I. Evaluation of overall risks at the financial statement level II. Evaluation of accounts, disclosures, and assertions for which there is a reasonable possibility of material misstatement III. Consideration of controls at the entity level a. I, II, III b. III, I, II c. I, III, II d. III, II, I
c. I, III, II
Which of the following is not considered evidence of failure in the operation of internal controls? a. Management override of controls b. Undue bias or lack of objectivity c. Insufficient control of consciousness d. Misrepresentation by client personnel to the auditor
c. Insufficient control of consciousness
Jackson is auditing the financial statements of Saffer Company, an issuer. Which of the following is true? a. Jackson is not required to audit internal control, but should report any significant deficiencies or material weaknesses noted b. Saffer is required to obtain an audit of its internal control, but a professional other than Jackson may be hired for this purpose c. Jackson is required to audit and report on Saffer's internal control d. If Jackson provides an adverse opinion on the financial statements, an audit of Saffer's internal control is not permitted
c. Jackson is required to audit and report on Saffer's internal control Choice "3" is correct. PCAOB Standards require Jackson to perform an integrated audit, which includes audits of both the financial statements and the effectiveness of internal control.
Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions? a. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities b. Vouching accounting records for recurring transactions recorded just after the balance sheet date c. Reviewing confirmations of loans receivable and payable for indications of guarantees d. Performing analytical procedures for indications of possible financial difficulties
c. Reviewing confirmations of loans receivable and payable for indications of guarantees
Which of the following internal control procedures most likely would deter lapping of collections from customers? a. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries b. Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval c. Segregation of duties between receiving cash and posting the accounts receivable ledger d. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries
c. Segregation of duties between receiving cash and posting the accounts receivable ledger
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. internal auditor to investigate the listing for unusual transactions b. treasurer to compare the listing with the monthly bank statement c. accounts receivable bookkeeper to update the subsidiary accounts receivable records d. entity's bank to compare the listing with the cashier's deposit slip
c. accounts receivable bookkeeper to update the subsidiary accounts receivable records
When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would: a. inspect the allowance account to verify whether the accounts were subsequently written off b. increase the assessed level of detection risk for the valuation and completeness assertions c. ask the client to contact the customers to request that the confirmations be returned d. increase the assessed level of inherent risk for the revenue cycle
c. ask the client to contact the customers to request that the confirmations be returned
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? a. fictitious transactions may be recorded that cause an understatement of revenues and overstatement of receivables b. claims received from customers for goods returned may be intentionally recorded in other customers' accounts c. authorization of credit memos by personnel who receive cash may permit the misappropriation of cash d. the failure to prepare shipping documents may cause an overstatement of inventory balances
c. authorization of credit memos by personnel who receive cash may permit the misappropriation of cash
An engagement to audit the internal control of a nonissuer will generally: a. require procedures that duplicate those already applied in assessing control risk during a financial statement audit b. increase the reliability of the financial statements that are being audited c. be more extensive in scope than the assessment of control risk made during a financial statement audit d. be more limited in scope than the assessment of control risk made during a financial statement audit
c. be more extensive in scope than the assessment of control risk made during a financial statement audit Choice "3" is correct. An engagement to audit internal control will generally be more extensive in scope than the assessment of control risk made during a financial statement audit of a nonissuer. This occurs because assessing control risk is the primary purpose of an engagement to express an opinion on internal control, whereas it is an incidental result of an audit of a nonissuer.
The audit team of issuer Kape Krafts Inc evaluated both qualitative and quantitative risk factors as part of audit planning. The audit team should evaluate risk factors for: a. an audit of financial statements b. an audit of internal controls c. both an audit of financial statements and an audit of internal control d. risk factors should be evaluated prior to accepting the engagement
c. both an audit of financial statements and an audit of internal control
When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations: a. copies of the client's shipping documents that support the account balances b. lists of the customers' recent payments that the client has already recorded c. client-prepared statements of account that show the details of the account balances d. copies of the customers' purchase orders that support the account balances
c. client-prepared statements of account that show the details of the account balances
During the course of an audit, an auditor finds evidence that an officer has entered fraudulent transactions in the financial statements. The fraudulent transactions can be adjusted so the statements are not materially misstated. What should the auditor do? a. report the matter to regulatory authorities b. consider the fraud a scope limitation and disclaim an opinion c. communicate the matter to those charged with governance d. immediately withdraw from the engagement
c. communicate the matter to those charged with governance
In the integrative audit of an issuer, an auditor has identified entity-level controls that are important to the conclusion as to whether the company has effective internal control over financial reporting. Each of the following is an example of an entity-level control, except: a. controls over the period-end financial reporting process b. the company's risk assessment process c. controls over the completeness of deposited cash d. controls over management override
c. controls over the completeness of deposited cash Choice "3" is correct. Controls over the completeness of deposited cash relates to controls at the account level.
The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because: a. many customers merely sign and return the confirmation without verifying its details b. recipients usually respond only if they disagree with the information on the request c. customers may not be inclined to report understatement errors in their accounts d. auditors typically select many accounts with low recorded balances to be confirmed
c. customers may not be inclined to report understatement errors in their accounts
In an entity under audit, employees have the opportunity to change their time worked after their time cards have been approved. This is an example of which of the following types of deficiency? a. accounting b. operating c. design d. procedural
c. design
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: a. client receives financial assistance from a federal government agency b. audit evidence that is necessary to prove that the acts of noncompliance with laws and regulations were committed does not exist c. employee's actions affect the auditor's ability to rely on management's representations d. notes to the financial statements fail to disclose the employee's actions
c. employee's actions affect the auditor's ability to rely on management's representations
Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables: a. valuation b. classification c. existence d. completeness
c. existence
An internal auditor's work would most likely affect the nature, timing, and extent of an independent CPA's auditing procedures when the internal auditor's work relates to assertions about that: a. existence of contingencies b. valuation of intangible assets c. existence of fixed asset additions d. valuation of related party transactions
c. existence of fixed asset additions
Which of the following statements is correct regarding the auditor's consideration of the possibility of noncompliance with laws and regulations by clients? a. the auditor is responsible for preventing noncompliance with laws and regulations and is expected to detect noncompliance with all laws and regulations b. the auditor's training, experience, and understanding of the client should be used to provide a basis for the determination as to whether acts of noncompliance with laws and regulations have occurred c. if specific information concerning an act of noncompliance comes to the auditor's attention, the auditor should apply audit procedures specifically directed to ascertaining whether such an act has occurred d. if an act of noncompliance with laws and regulations has occurred, the auditor should express a qualified opinion or an adverse opinion on the financial statements taken as a whole
c. if specific information concerning an act of noncompliance comes to the auditor's attention, the auditor should apply audit procedures specifically directed to ascertaining whether such an act has occurred
Which of the following audit procedures, if used, should be combined with other audit procedures when testing the operating effectiveness of controls? a. observation b. inspection c. inquiry d. reperformance
c. inquiry Choice "3" is correct. Inquiry should be corroborated with other audit procedures when testing the operating effectiveness of controls. Inquiry alone is not sufficient to support a conclusion on the operating effectiveness of controls.
Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatement arising from fraudulent financial reporting? a. there is a lack of interest by management in maintaining an earnings trend b. computer hardware is usually sold at a loss before being fully depreciated c. management had frequent disputes with the auditor on accounting matters d. monthly bank reconciliations usually include several large checks outstanding
c. management had frequent disputes with the auditor on accounting matters
Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements? a. turnover of senior accounting personnel is low b. insiders recently purchased additional shares in the entity's stock c. management places substantial emphasis on meeting earnings projections d. the rate of change in the entity's industry is slow
c. management places substantial emphasis on meeting earnings projections
An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertion(s) of understandability and classification / existence a. yes, yes b. yes, no c. no, yes d. no, no
c. no, yes
After determining that a related party transaction has, in fact, occurred, an auditor should: a. Add a separate paragraph to the auditor's standard report to explain the transaction b. Perform analytical procedures to verify whether similar transactions occurred but were not recorded c. obtain an understanding of the business purpose of the transaction d. substantiate that the transaction was consummated on terms equivalent to an arm's-length transaction
c. obtain an understanding of the business purpose of the transaction
When performing an audit, a CPA notes that bad debt expense is unusually high relative to similar firms in the industry. The CPA should recommend which of the following controls? a. use approved price lists of customer billing b. send monthly statements of account to customers with outstanding balances c. require credit checks on all new customers d. reconcile accounts receivable in the general ledger with the subsidiary ledger
c. require credit checks on all new customers
Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions? a. Retesting ineffective internal controls previously reported to those charged with governance b. Sending second requests for unanswered positive confirmations of accounts receivable c. reviewing accounting records for nonrecurring transactions recognized near the balance sheet date d. Inspecting communications with law firms for evidence of unreported contingent liabilities
c. reviewing accounting records for nonrecurring transactions recognized near the balance sheet date
Which of the following procedures most likely could assist an auditor in identifying related party transactions? a. Performing tests of controls concerning the segregation of duties b. evaluating the reasonableness of management's accounting estiamtes c. reviewing confirmations of compensating balance arrangements d. Scanning the accounting records for recurring transactions
c. reviewing confirmations of compensating balance arrangements
Two assertions for which confirmation of accounts receivable balances provides primary evidence are: a. completeness and valuation b. valuation and rights and obligations c. rights and obligations and existence d. existence and completeness
c. rights and obligations and existence
An auditor determines that there is a high level of control risk surrounding the revenue cycle. Which situation is most likely to have given rise to this assessment? a. a related party sale is identified which has not been properly disclosed in the financial statements b. the auditor discovers a sale that was recorded in the current year although title did not pass until the subsequent year c. the sales manager does not enforce the client's stated policies regarding authorization and approval of sales transactions d. the sales clerk is a newly hired, recent college graduate, with no previous experience in sales
c. the sales manager does not enforce the client's stated policies regarding authorization and approval of sales transactions
Which of the following could indicate source document fraud? a. the same customer purchase order number appears on different customer invoices b. the same item code appears on different invoices c. the same invoice number appears on different invoices d. the same invoice date appears on different invoices
c. the same invoice number appears on different invoices
Which of the following most likely would be detected by an auditor's review of a client's sales cut-off? a. shipments lacking sales invoices and shipping documents b. excessive write-offs of accounts receivable c. unrecorded sales at year-end d. lapping of year-end accounts receivable
c. unrecorded sales at year-end
After performing all phases of the current audit, the auditor determines that the client is in noncompliance with several required securities regulations. The auditor then prepares a modified audit report to reflect this noncompliance but the client refuses to accept the auditor's report claiming the level of materiality does not warrant such an opinion. Under this scenario, what is the auditor's proper course of action? a. withdraw from the engagement and contact the applicable regulatory authorities in writing b. issue the modified report c. withdraw from the engagement and notify those charged with governance in writing d. issue an unmodified opinion with an emphasis-of-matter paragraph explaining the materiality issue
c. withdraw from the engagement and notify those charged with governance in writing
In the bank transfer schedule, which of the following cash transfers results in a misstatement of cash at 12/31/X1? Disbursement (books/bank); Receipt (books/bank) a. 12/31/X1, 1/5X2; 12/31/X1, 1/4/X2 b. 1/4/X2, 1/11/X2; 1/4/X2, 1/4/X2 c. 12/31/X1, 1/4/X2; 12/31/X1, 12/31/X1 d. 1/4/X1, 1/5/X2; 12/31/X1, 1/4/X2
d. 1/4/X1, 1/5/X2; 12/31/X1, 1/4/X2 Choice "4" is correct. Since the disbursement was not recorded until January 20X2 while the receipt was recorded in December 20X1, cash will be overstated at December 31, 20X1.
During an audit of a nonissuer, if the terms of a related party transaction are found to be materially inconsistent with the explanations provided by management, an auditor should: a. Communicate to those charged with governance that the auditor will be unable to express an opinion on the financial statements b. Include an emphasis-of-matter paragraph in the auditor's report that describes the auditor's inability to obtain assurance over related party transactions and balances c. Include an other-matter paragraph in the auditor's report describing the inconcsistent explanations provided by management d. Consider the reliability of management's explanations and representations on other significant matters
d. Consider the reliability of management's explanations and representations on other significant matters
When auditing related party transactions, an auditor places primary emphasis on a. ascertaining the rights and obligations of related parties b. Confirming the existence of related parties c. Verifying the valuation of the related party transactions d. Evaluating the disclosure of the related party transactions
d. Evaluating the disclosure of the related party transactions
An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to: a. Provide the data necessary to prepare a proof of cash b. request a cutoff bank statement and related checks to be sent to the auditor c. Detect kiting activities that may otherwise not be discovered d. Seek information about contingent liabilities and security agreements
d. Seek information about contingent liabilities and security agreements
Which of the following is least likely to be used as a substantive test relating to cash balances? a. Send cash confirmations to all banks with whom the client has done business b. Count all cash on hand c. Obtain cutoff bank statements and perform bank reconcilliatons d. Verify that cash disbursements have been properly approved
d. Verify that cash disbursements have been properly approved
Which of the following events would least likely indicate the existence of related party transactions? a. Making a loan with no scheduled date for the funds to be repaid b. Maintaining compensating balance arrangements for the benefit of principal stockholders c. Borrowing funds at an interest rate significantly below prevailing market rates d. Writing off obsolete inventory to net realizable value just before year end
d. Writing off obsolete inventory to net realizable value just before year end
Which of the following statements reflects an auditor's responsibility for detecting errors and fraud? a. an auditor is responsible for detecting employee errors and fraud, but not for discovering fraud involving employee collusion or management override b. an auditor should plan the audit to detect errors and fraud that are caused by departures from GAAP c. an auditor is not responsible for detecting errors and fraud unless the application of GAAS would result in such detection d. an auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements
d. an auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements
Which of the following is not an example of a deficiency in the design of internal controls that may be a significant deficiency or material weakness? a. inadequate documentation of the components of internal control b. lack of appropriate qualifications or training of client personnel c. insufficient control consciousness d. an observed deviation rate that exceeds the auditor's expected rate
d. an observed deviation rate that exceeds the auditor's expected rate Choice "4" is correct. An observed deviation rate that exceeds the auditor's expected rate is an example of a deficiency in the operation of controls, not in the design of controls.
Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? a. large amounts of liquid assets that are easily convertible into cash b. low growth and profitability as compared to other entities in the same industry c. financial management's participation in the initial selection of accounting principles d. an overly complex organizational structure involving unusual lines of authority
d. an overly complex organizational structure involving unusual lines of authority
Which statement is true with respect to discussion among engagement personnel regarding the risk of material misstatement due to fraud? a. discussion among engagement personnel regarding the risk of material misstatement due to fraud is recommended but not required b. all key members of the audit team should be brought to a single location to facilitate communication c. the discussion should occur only during the planning stage of the audit d. audit documentation must include a description of the discussion
d. audit documentation must include a description of the discussion
Information gathered in the course of an independent audit is the property of the auditor. This information is not generally disclosed to outside parties. However, after discussion with legal counsel, the auditor may wish to disclose information about irregularities or noncompliance with laws and regulations to outside parties in which of the following circumstances? a. change of auditor, predecessor/successor communications, and accounting changes b. predecessor/successor communications, court order, and accounting changes c. change of auditor, court order, and accounting changes d. change of auditor, predecessor/successor communications, and court order
d. change of auditor, predecessor/successor communications, and court order
Which of the following procedures would an auditor most likely perform during an audit engagement's overall review stage in formulating an opinion on the entity's financial statements? a. obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements b. verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement c. determine whether inadequate provisions for the safeguarding of assets have been corrected d. consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud
d. consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud
As part of the substantive tests performed on the client's purchase transactions, the auditor selects a sample of payment vouchers. If the auditor compares the dates on the vouchers to the dates the transactions were recorded in the purchase journal, which of the following assertions would the auditor be testing? a. existence and occurrence b. understandability and classification c. valuation, allocation, and accuracy d. cutoff
d. cutoff
Which of the following is not true about the auditor's use of relevant assertions? a. there may be more than one relevant assertion related to the same overall category b. a single auditing procedure can provide evidence relating to more than one relevant assertion c. supporting a relevant assertion can require more than one auditing procedure d. each relevant assertion should have one (and only one) audit procedure associated with it
d. each relevant assertion should have one (and only one) audit procedure associated with it
Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? a. review the cash receipts journal for the month prior to year-end b. intensify the study of the internal control structure concerning the revenue cycle c. increase the assessed level of detection risk for the existence assertion d. inspect the shipping records documenting the merchandise sold to the debtors
d. inspect the shipping records documenting the merchandise sold to the debtors
An auditor is engaged to report on the fairness of the financial statements of ABC Corp, a nonissuer. The auditor identifies several material misstatements in sales, which were caused by a control deficiency in the sales orders' preparation process. This was the only control deficiency and the only material misstatement identified in testing. The auditor presented a journal entry to the client to correct these misstatements, which the client agreed to record. Which of the following actions is the auditor LEAST likely to perform? a. consider compensating controls around the sales orders' preparation process b. determine whether the deficiency represents a significant deficiency or material weakness c. reassess control risk d. issue a qualified opinion on the financial statements
d. issue a qualified opinion on the financial statements
Which of the following procedures would least likely result in the discovery of possible noncompliance with laws and regulations? a. reading the minutes of the board of directors' meetings b. making inquiries of management or legal counsel c. performing tests of details of transactions d. reviewing an internal control questionnaire
d. reviewing an internal control questionnaire
In auditing related party transactions, an auditor ordinarily places primary emphasis on: a. the probability that related party transactions will recur b. confirming the existence of related parties c. verifying the valuation of the related party transactions d. the adequacy of the disclosure of the related party transactions
d. the adequacy of the disclosure of the related party transactions
When determining the auditor's and management's responsibility for compliance with laws and regulations during an audit, which of the following statements below would be incorrect? a. the auditor is not responsible for preventing noncompliance with laws and regulations b. management and those charged with governance are responsible for ensuring that the company's operations are conducted in accordance with all applicable laws and regulations c. the auditor provides reasonable assurance that the financial statements are free of material misstatement due to noncompliance with laws and regulations d. the auditor is expected to detect the client's noncompliance with all laws and regulations affecting the transaction cycles under review during the audit itself
d. the auditor is expected to detect the client's noncompliance with all laws and regulations affecting the transaction cycles under review during the audit itself
Generally accepted auditing procedures have not been followed in which of the following situations? a. the accounts receivable balance is immaterial, so the auditor decides not to send any receivables confirmations b. an unusually large number of receivables confirmations are not returned, and the auditor decides to verify the related cash receipts rather than sending second requests c. the auditor receives very few responses to negative confirmations sent. The auditor does not perform any additional procedures related to the non-responses d. the auditor receives several faxed and emailed confirmation responses indicating that the amount stated is correct. The auditor does not perform any additional procedures related to these electronic responses
d. the auditor receives several faxed and emailed confirmation responses indicating that the amount stated is correct. The auditor does not perform any additional procedures related to these electronic responses
In auditing accounts receivable, the negative form of confirmation request most likely would be used when: a. the total recorded amount of accounts receivable is immaterial to the financial statements taken as a whole b. response rates in prior years to properly designed positive confirmation requests were inadequate c. recipients are likely to return positive confirmation requests without verifying the accuracy of the information d. the combined assessed level of inherent risk and control risk relative to accounts receivable is low
d. the combined assessed level of inherent risk and control risk relative to accounts receivable is low
In the integrated audit of an issuer, which of the following would not be considered an entity-level control? a. management's established controls to monitor results of operations b. the executive committee's process for assessing business risk c. the board of director's controls to monitor the activities of the audit committee d. the outside auditor's assessment process of internal auditor competence
d. the outside auditor's assessment process of internal auditor competence Choice "4" is correct. An entity-level control exists independently of the audit. Therefore, the external auditor's assessment process of internal auditor competence and objectivity would not be considered an entity-level control.
Which of the following factors is most important concerning an auditor's responsibility to detect errors and fraud? a. the susceptibility of the accounting records to intentional manipulations, alterations, and the misapplication of accounting principles b. the probability that unreasonable accounting estimates result from unintentional bias or intentional attempts to misstate the financial statements c. the possibility that management fraud, defalcations, and the misappropriation of assets may indicate the existence of acts of noncompliance with laws and regulations d. the risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements
d. the risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements
To which of the following requests would the auditor be required to communicate information about noncompliance with laws and regulations discovered during the financial statement audit? a. to a bank or financial institution that has provided the majority of the company's financing b. to a request from a stockholder that is filing a claim against the company for financial statement fraud related to the issues found by the auditor c. to a successor auditor that has inquired of the predecessor auditor without first obtaining permission from the client d. to the audit committee, or those charged with governance of the client
d. to the audit committee, or those charged with governance of the client
Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements? a. management places little emphasis on meeting earnings projections b. the board of directors makes all major financing decisions c. significant deficiencies in internal control previously communicated to management are not corrected d. transactions selected for testing are not supported by proper documentation
d. transactions selected for testing are not supported by proper documentation
When performing tests on a client's balances for a particular transaction cycle, the auditor would consider performing audit procedures on all of the following relevant assertions, except for: a. existence and occurrence b. rights and obligations c. valuation, allocation, and accuracy d. understandability and classification
d. understandability and classification
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about a. existence b. rights and obligations c. understandability and classification d. valuation and allocation
d. valuation and allocation Choice "4" is correct. An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's assertions about valuation and allocation (i.e., if the inventory is becoming older, an obsolescence reserve might be required).
