AUDIT exam2
Bill Johnson, a senior in the San Diego office, has a material investment in the capital stock of Cameron. He does not participate in the engagement.
independence of the CPA is impaired he is not a covered member, firm independence is not impaired unless that investment is more than five percent of the client's outstanding equity securities or other ownership interests
Mary McGraw, a partner in the San Diego office, fell wildly in love with Bill Smith, the treasurer for Cameron Corporation. They were married in Las Vegas. During the week, McGraw still lives in San Diego and works in that office, while Bill Smith lives in Phoenix, working for Cameron. On weekends they commute to their home in Yuma. Mary does not participate in the engagement.
independence of the CPA is impaired the independence rule requires that an employee is not an officer in an attest client and because immediate family members ordinarily have the same requirements as the CPA
which of the following would more likely be detected by an auditor's review of the client's sales cutoff
inflated sales for the year
tests of controls
inquire, inspect, observe, reperform
in testing controls over cash disbursements, the auditors most likely would determine that the person who signs check also:
is responsible for mailing the checks
control risk
likelihood a misstatement will not be prevented or detected
corrective control
maintaining backups of data
attracting, developing, and retaining competent employees
management is committed to hiring employees with appropriate levels of education, experience and evidence of integrity and ethical behavior
a deficiency in internal control such that there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis
material weakness in internal control
one or more ___________ in internal control result in an adverse opinion on internal control
material weaknesses
significant deficiency
merits attention, less than material weakness
Daleiden and his associates audit a number of municipalities. He proposes to contact other CPAs and inform them of his interest in obtaining more of these types of audits. He offers a $500 "finder's fee" to CPAs who forward business to him.
no violation
Daleiden wishes to advertise that if he is hired to perform the audit, he will discount his fees on tax services (he does intend to grant a discount).
no violation
Daleiden wishes to form a professional corporation and use the name "AAAAAAAA the CPAs" to obtain the first ad in the yellow pages of the telephone book.
no violation
Daleiden wishes to prepare a one-page flyer that he will have his son stuff on the windshields of each car at the Pleasant Valley shopping mall. The flyer will outline the services provided by Daleiden's firm and will include a $50-off coupon for services provided on the first visit.
no violation
provide actuarial services related to certain liabilities, as well as perform the audit. the subjectivity determined liabilities relate to a material portion of the financial statements - nonpublic
not allowable
provide actuarial services related to certain liabilities, as well as perform the audit. the subjectivity determined liabilities relate to material portion of the financial statements - public
not allowable
which of the following procedures would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?
observe the consistency of the employees' use of cash registers and tapes
monitoring
ongoing and separate evaluations
AICPA Code of Professional Conduct principles definition
outline the profession's responsibilities to the public, clients, and fellow practitioners
which of the following is least likely to be considered an inherent risk relating to receivables and revenues
over-recorded sales dues to a lack of control over the sales entry function
service organization
perform data processing/computer/IT services, like payroll processing, for various clients
which of the following non attest services may be performed by the auditors of a public company?
preparation of the company's tax return
segregation of duties is a control aimed at _________ misstatement
preventing
supervisory approval of time cards (detective, preventive, corrective)
preventive it would serve to prevent errors and fraud with respect to payroll transactions.
segregation of duties over purchasing (detective, preventive, corrective)
preventive serve to prevent errors and fraud relating to purchase transactions. prevents individuals from perpetuating errors and fraud and covering them up in the course of performing their assigned duties
dual signatures for checks (detective, preventive, corrective)
preventive would serve to prevent errors and fraud with respect to cash disbursements
reconciliation of the bank account should not be performed by an individual who also:
processes cash disbursements
prepare a four-column proof of cash
reconcile cash receipt and disbursement totals between company records and bank records the middle two columns of a four-column proof of cash is used to reconcile cash receipt and disbursement totals between company records and bank records
preparing bank ___________ can help detect misstatements that have been made
reconciliations
which of the following is most likely to be an example of fraudulent financial reporting relating to sales
recording sales when the customer is likely to return the goods
reasonable assurance
relationship of costs and benefits
in order to guard against the misappropriation of company-owned marketable securities, which of the following is the best course of action that can be taken by a company with a large portfolio of marketable securities
require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent provides strong internal control because they are not available to employees responsible for maintaining the accounting records of the securities
risk assessment
risk responses
preventive control
segregation of duties
cooper, cpa, is auditing the financial statements of a small rural municipality. the receivable balances represent residents' delinquent real estate taxes. internal control at the municipality is weak. to determine the existence of the accounts receivable balances at the balance sheet date, cooper would most likely:
send positive confirmation requests
to determine that all sales have been recorded, the auditors would select a sample of transactions from the:
shipping documents file
auditors are required by professional standards to communicate ___________ and material weaknesses to the audit committee
significant deficiencies
less severe than a material weakness
significant deficiency
to provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is:
stamped "paid" by the check signer to avoid a situation in which supporting documents are used a second time to elicit a second payment
the compliance with standards rule requires CPAs to adhere to all of the following applicable standards, except:
statements on responsibilities for assurance services
Bill Adams, CPA, accepted the audit engagement of Kelly Company. During the audit, Adams became aware of his lack of competence required for the engagement. What should Adams do?
suggest that Kelly Company engage another CPA to perform the audit the general standards rule prohibits a public accounting firm from accepting an engagement that the firm is not competent to perform. If technical competence problems develop during the engagement, the CPAs should advise the client and withdraw from the engagement
effective board of directors
the extent of independence of this group is critical
individual accountability
the organization must hold individuals accountable for their internal control responsibilities
which of the following is implied when a CPA signs the preparer's declaration on a federal income tax return
the return is not misleading based on all information of which the CPA has knowledge the declaration requires the preparer to acknowledge that the return is "true, correct, and complete......based on all information of which the preparer has any knowledge"
which of the following is an example of misappropriation of assets relating to sales
theft of cash register sales
in providing non attest services to an attest client, a CPA is allowed to perform which of the following functions
training client employees
the sequence of procedures applied by the client in processing a particular type of recurring transaction
transaction cycle
there are ________ types of reports that auditors of service organizations (service auditors) can provide
two
which of the following provisions is not included in the institute of internal auditors code of ethics?
use of appropriate sampling methods to select areas for audit the IIA Code of Ethics does not directly address the use of sampling methods
the auditors of a service organization, known as service auditors, may review the controls at the organization and issue a report that may be relied upon by ___________ auditors
user
the best way to verify the amounts of dividend revenue received during the year is:
verification by reference to dividend record books
obtain bank cutoff statements
verify reconciling items on the year-end bank reconciliation a bank cutoff statement includes information on bank transactions for the first 7-10 days after year-end, and accordingly is used to verify reconciling items on the year-end bank reconciliation
use a standard confirmation form to confirm account balance information
verify year-end cash and liability balance information the standard bank confirmation includes questions that help the auditor to verify both year-end cash and liability balance information
Daleiden has a thorough knowledge of the tax law. He has a number of acquaintances who prepare their own tax returns. He proposes to offer to review these returns before they are filed with the Internal Revenue Service. For this review, he will charge no fee unless he is able to identify legal tax savings opportunities. He proposes to charge each individual one-third of the tax savings he is able to identify.
violation
identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable:
write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence
other relative and friends
- cousin - golf partner - niece - nephew - college friend - roommate
immediate family
- dependent child -spouse - spouse equivalent - dependent parent
close relative
- father - sister - brother - mother - independent child - grandfather
AICPA Code of Professional Conduct rules
- govern performance of professional services - several of these correspond to GAAS
AICPA code of professional conduct rules
- independence - general standards - accounting principles - contingent fees - advertising and other forms of solicitation - form of organization and name - integrity and objectivity - compliance with standards - confidential client standards - acts discreditable - commissions and referral fees
AICPA Code of Professional Conduct principles
- overall framework for professional services - each of these is called an article (article I, article II, article III, etc.)
AICPA Code of Professional Conduct interpretations
- provide guidelines as to scope and implementation
AICPA code of professional conduct principles
- responsibilities - the public interest - integrity - objectivity and independence - due care - scope and nature services
AICPA Code of Professional Conduct ethics rulings
- summarize applications in particular instances
a type _________ report assesses the controls and their suitability
1
a type _______ report assesses the controls, their suitability, and effectiveness
2
customers' checks are properly credited to customer accounts and are properly deposited, but errors are mad in recording receipts in the cash receipts journal
An employee, other than the bookkeeper, periodically prepares a bank reconciliation.
compared total bad debts this year with the totals for the previous two years
Analytical procedure Substantive procedures
goods are removed from inventory for unauthorized orders
Approved sales orders are required for goods to be released from the warehouse.
the auditor suspects that a lapping scheme exists because an accounting department employee who has access to cash receipts also maintains the accounts receivable ledger and refuses to take any vacation or sick days
Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date
the entity's cash receipts of the first few days of the subsequent year were probably deposited in its general operating account after the year-end. however, the auditor suspects that entity recorded the cash receipts in its books during the last week of the year under audit
Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips.
using the company's securities during the year and replacing them prior to year-end
Comparing securities' serial numbers to in the prior year's audit working papers.
omitting an important financial statement disclosure item related to a loan agreement obtained from a nonfinancial institution
Confirm terms using a debt confirmation form.
the entity borrowed funds from financial institutions funds from a financial institution. although the transaction was properly recorded, the auditor suspects that the loan created a lien on the entity's real estate that is not disclosed in its financial statements
Confirm the terms of borrowing arrangements with the lender
receiving a loan from the company's primary banking institution and not recording the entry, but placing the cash in overseas account not recorded in the company's accounting records
Confirm using the standard form for use with financial institutions.
requested responses directly from customers as to amounts due
Confirmation Substantive procedures
invoices are sent for shipped goods and are recorded in the sales journal, but are not posted to any customer account
Control amounts posted to the accounts receivable ledger are compared with control totals of invoices.
credit sales are made to individuals with unsatisfactory credit ratings
Customer orders are compared with an approved customer list.
invoices are sent for shipped goods, but are not recorded in the sales journal
Daily sales summaries are compared with control totals of invoices.
the auditor suspects that vouchers were prepared and processed by an accounting department employee for merchandise that was neither ordered nor received by the entity
Examine the supporting purchase orders and receiving reports for selected paid vouchers
invalid transactions granting credit for sales returns are recorded
Goods returned for credit are approved by the supervisor of the sales department.
Gizmo, a partner in the Green Bay office, owns 600 shares of the stock of Gillington. He has no responsibilities with respect to the Gillington audit
Independence is not impaired as a partner in an office other than that of the lead auditor, Gizmo's investment does not impair independence
questioned management about likely total uncollectible accounts
Inquiry Substantive procedures
examined invoice to obtain evidence in support of the ending recorded balance of a customer
Inspection of records or documents Substantive procedures
examined a sample of sales invoices to see if they were initialized by the credit management indicating credit approval
Inspection of records or documents Test of controls
which of the following is most likely to be a violation of the AICPA rules of conduct by Bill Jones, a sole practitioner with no other employees
Jones names his firm Jones and Smith, CPAs
customers' checks are credited into incorrect customer accounts
Monthly statements are mailed to all customers with outstanding balances.
customers' checks are misappropriated before being forwarded to the cashier for deposit
Monthly statements are mailed to all customers with outstanding balances.
invoices for goods sold are posted to incorrect customer accounts
Monthly statements are mailed to all customers with outstanding balances.
a control that reduces the risk of misstatement by remediating control deficiencies through automated means
NA
watched the accounting clerk record the daily deposit of cash receipts
Observation Test of controls
the auditor suspects that fictitious employees have been placed on the payroll by the entity's payroll supervisor. who has access to payroll records and to the paychecks
Observe payroll check distribution on a surprise basis.
an auditor suspects that the controlled wrote several checks and recorded the cash disbursements just before year-end but did not mail checks until after the first week of the subsequent year
Obtain the cutoff bank statement and compare the cleared checks to the year-end bank reconciliation.
the auditor suspects that a kiting scheme exists because an accounting department employee who can issue and record checks seems to be leading an unusually luxurious lifestyle
Prepare a bank transfer schedule
the auditor suspects that the entity is inappropriately increasing the cash reported on its balance sheet by drawing a check on one account and not recording it as an outstanding check on that account and simultaneously recording it as a deposit in a second account
Prepare a bank transfer schedule
compare a sample of sales invoices to credit files to determine whether the customer were on the approved customer list
Reperformance Test of controls
omitting several outstanding checks from the year-end bank reconciliation
Review of the bank cutoff statement.
invoices are sent to allies in a fraudulent scheme and sales are recorded for fictious transactions
Sales invoices are compared with shipping documents and approved customer orders before invoices are mailed.
the details of invoices for equipment repairs were not clearly identified or explained to the accounting department employees. the auditor suspects that the bookkeeper incorrectly recorded the repairs as fixed assets
Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization.
the auditor discovered an unusually large receivable from one of the entity's new customers. the auditor suspects that the receivable may be fictitious because the auditor bas never heard of the customer and because the auditor's initial attempt to confirm the receivable has been ignored by the customer
Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer.
the auditor suspects that the entity's controller has overstated sales and accounts receivable by recording fictitious sales to regular customers in the entity's books
Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer
goods are shipped to customers do not agree with goods ordered by customers
Shipping clerks compare goods received from the warehouse with approved sales orders.
goods ordered by customers are shipped, but are not billed to anyone
Shipping documents are compared with sales invoices when goods are shipped.
customers' checks are misappropriated after being forwarded to the cashier for deposited, but errors are made in recording receipts in the cash receipts journal
Total amounts posted to the accounts receivable ledger from remittance advices are compared with the validated bank deposit slip.
customers' checks are received for less than the customer's full account balances, but the customer's full account balances are credited
Total amounts posted to the accounts receivable ledger from remittance advices are compared with the validated bank deposit slip.
different customer accounts are each credited for the same cash receipt
Total amounts posted to the accounts receivable ledger from remittance advices are compared with the validated bank deposit slip.
lapping of accounts receivable
Tracing remittance advices to postings in the accounts receivable records.
the auditor suspects that selected employees of the entity received unauthorized raises from the entity's payroll supervisor, who has access to payroll records
Vouch data in the payroll register to documented authorized pay rates in the human resources department's files.
the AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client. this rule may preclude a CPA from responding to an inquiry made by:
a CPA-shareholder of the client corporation
which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees?
a bank lockbox system
commitment to integrity and ethical values
a clearly articulated statement of ethical values
in which of the following situations would a public accounting firm have violated the AICPA Code of Professional Conduct in determining its fee
a fee is based on whether or not the public accounting firm's audit report leads to the approval of the client's application for bank financing
which of the following is not a covered member for an attest engagement under the independence rule of the AICPA code of professional conduct
a partner in the national office of the firm that performs marketing services
a public accounting firm would least likely be considered in violation of the AICPA Independence Rule in which of the following instances?
a partner's checking account, which is fully insured by the federal deposit insurance corporation, is held at a financial institution for which the public accounting firms perform attest services an auditor's independence would not be considered to be impaired with respect to a financial institution in which the auditor maintains a checking account which is fully insured
type 1 report
a report that documents a service organization's controls and documents their suitability
type 2 report
a report that documents a service organization's controls and documents their suitability and effectiveness
detective control
a requirement to prepare bank reconciliation
effective organizational structure
a well designed structure provides a basis for planning, directing, and controlling operations
the enhance the control environment, management develops job __________
a. descriptions job descriptions help define objectives
annual physical inventory (detective, preventive, corrective)
a. detective it would serve to detect misstatements of inventory after they have occurred
the audit committee should be composed of directors who are not ______ of the organization
a. employees to be independent, the audit committee needs to not be comprised of employees
organizational structure provides a basis for planning, directing, and controlling _____
a. operations a strong organizational structure helps to best control operations
________ should develop a statement of ethical values
a. senior management a statement of values by senior management helps establish the control environment
if employees lack _________, they may be ineffective in performing their duties
a. skills employees must have appropriate skills to properly perform their duties
to test the existence assertion for recorded receivables, the auditors would select a sample from the:
accounts receivable subsidiary ledger
the auditors who physically examine securities should insist that a client representative be present in order to:
acknowledge the receipt of securities returned
which of the following is not prohibited by the AICPA Code of Professional Conduct
advertising in newspapers is an acceptable practice
implement an off-the-shelf accounting package, as well as perform the audit - nonpublic
allowable
provide financial information systems design an implementation assistance. WW provides no attest services for that company - public
allowable
serve on the board of directors of the company. WW provides no attest services for the company - public
allowable
hall company had large amounts of funds to invest on a temporary basis. the board of directors decided to purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. the best person or persons to make periodic reviews of the investment activity would be:
an investment committee of the board of directors
the auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low:
and accounts receivable are immaterial, or the use of the confirmations would be ineffective
the requirement to ________ journal entries is an example of a preventive control
approve
which of the following would provide the most assurance concerning the valuation of accounts receivable
assess the allowance for uncollectible accounts for reasonableness
service aduitors
auditors selected by a service organization to assess systems
the foreign corrupt practices act of 1977 prohibits ________ to foreign officials to obtain business and requires companies to maintain an effective system of internal
bribes
performance review
comparison of actual performance to expectations
a control that functions together with another control to achieve the same control objective
complementary control
which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices
completeness
the accounting department uses a manual of accounting policies and procedures (control and sub-control)
control: accounting information and communication system non-control:
management compares actual performance with budgets and forecasts (control and sub-control)
control: control activities non-control: performance reviews
entry into the warehouse is strictly controlled by security personnel (control and sub-control)
control: control activities non-control: physical controls
invoices are reviewed for accuracy before they are mailed to customers (control and sub-control)
control: control activities non-control: transaction processing (or application) control
the human resources department investigates the educational background of prospective employees (control and sub-control)
control: control environment non-control: commitment to attract, develop and retain competent employees
management has prepared and distributed an organizational chart (control and sub-control)
control: control environment non-control: effective structure, reporting lines, and authority and responsibility
management has developed and distributed a code of conduct (control and sub-control)
control: control environment non-control: integrity and ethical values
management surveys customers about their satisfaction with the company's service (control and sub-control)
control: monitoring non-control: ongoing
the internal auditors periodically evaluate the controls in various departments of the company (control and sub-control)
control: monitoring non-control: separate evaluations
management periodically evaluates the threats to preparing reliable financial statements (control and sub-control)
control: risk assessment non-control:
you have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures relating to cash. you decide that it would be preferable to:
coordinate the count of cash with the count of marketable securities and other negotiable assets
auditors may ignore individually immaterial accounts when confirming accounts receivable
correct
confirmations address existence more than they address completeness
correct
_________ controls come into play when a misstatement is found
corrective
adjustment of perpetual inventory records to physical counts (detective, preventive, corrective)
corrective would serve to correct inventory records
a control established to remedy misstatements that are discovered
corrective control
material weakness
creates a reasonable possibility a material misstatement will not be detected
a situation in which 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
deficiency in internal control
under SEC rules, which of the following is not among the criteria that ordinarily exist for revenue to be recognized
delivery has occurred or is scheduled to occur in the near future
a correct statement concerning risk of misappropriation of cash
deposit of cash into a lockbox system decreased the risk of misappropriation
the auditors suspect 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 auditors most likely would compare the:
details of bank deposit slips with details of credits to customer accounts
prepare a bank transfer schedule
detect kiting a bank transfer schedule, which is appropriately used when a client has two or more bank accounts, is prepared to detect kiting, manipulations that cause cash to be included simultaneously in the balance of two or more bank accounts
the goal to find a misstatement that has already been made is a type of __________ control
detective
internal audits of payroll (detective, preventive, corrective)
detective detect errors and payroll after they have occurred
management review of budget/actual information (detective, preventive, corrective)
detective highlight potential errors and fraud after they have occurred.
monthly reconciliation of bank accounts (detective, preventive, corrective)
detective it would serve to detect misstatements of cash after they have occurred
type 2 reports address operating __________, type 1 do not
effectiveness
AICPA Code of Professional Conduct rules definition
enforceable applications of the principles
walk-through
follow a transaction through the system
the two broad categories of information processing controls are ____________ and application controls
general controls
to gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except:
general ledger
search for large checks to directors, officers, and employees
identify related party transactions auditors search for related party transactions to determine whether they are properly authorized, recorded, and disclosed
Auditors should always confirm the total balances of accounts rather than individual portions (if the balance is made up of three sales, all three should be confirmed)
incorrect
accounts receivable are ordinarily confirmed on a standard form developed by the American Institute of Certified Public Accountants and the Financial Executives Institute
incorrect
the best way to evaluate the results of the confirmation process is to compare the total misstatements identified to the account's tolerable misstatements amounts
incorrect
Johnson, a partner in the Chicago office, owns 100 shares of the stock of Gillington. He has no responsibilities with respect to the Gillington audit
independence is impaired as a partner in the office of the lead auditor, Johnson is a covered member, and is prohibited from having, among other things, a direct investment in Gillington
Masterson is a staff assistant in the Green Bay office and owns 10 percent of Gillington's outstanding common stock. Masterson provides no services to Gillington and is not able to influence the engagement
independence is impaired the restriction on the financial interest of more than 5 percent of an attest client's equity securities apply to all firm personnel and therefore, Matterson's investment would impair independence
Gorman is a staff assistant on the audit. Gorman's mother owns shares of Gillington that are material to her net worth and of which Gorman has knowledge
independence is impared Gorman participates in the Gillington audit and has knowledge of a close relative's material investment
Schilling, the partner in charge of the entire firm, works in the Green Bay office. He owns 100 shares of Gillington stock but provides no services on the engagement
independence is not impaired as a partner in charge of the entire firm is a covered member and is prohibited from having among other things, a direct or material indirect financial interest in Gillington
Sandra Steversen, a staff assistant in the Phoenix office, works on the Cameron audit. Her uncle works as the chief accounting officer for Cameron.
independence is not impaired since uncles are other relatives independence is not impaired but one should consider reassigning from that audit
Jim West is the father of Will West, a Phoenix partner. Jim West has a material investment in Cameron. Will West is unaware of his father's investment but does participate in the engagement.
independence is not impaired west is unaware of the investment
Bill Adams, a senior in the Phoenix office, does not work on the Cameron audit but owns 9 percent of Cameron's outstanding equity (common stock).
independence of both the CPA and the firm is impaired the independence rule requires that no more than 5% of the client's outstanding equity can be owned by all members of the CPA firm
