Audit Test 2

For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the: A. Receiving report and the purchase order. B. Receiving report and the voucher. C. Vendor's packing slip and the purchase order. D. Vendor's packing slip and the voucher.

A. Receiving report and the purchase order.

To determine that all sales have been recorded, the auditors would select a sample of transactions from the: A. Shipping documents file. B. Sales journal. C. Accounts receivable subsidiary ledger. D. Remittance advices.

A. Shipping documents file.

An auditor may compensate for a weakness in internal control by increasing the extent of: A. Tests of controls. B. Detection risk. C. Substantive tests of details. D. Inherent risk.

C. Substantive tests of details.

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? A. A bank lockbox system. B. Pre-numbered remittance advices. C. Monthly bank reconciliations. D. Daily deposit of cash receipts.

A. A bank lockbox system.

An auditor may obtain information on the December 31 month-end balance per bank in which of the following? Standard Confirmation Form and/or January 1-10 Cutoff Statement A) Yes Yes B) Yes No C) No Yes D) No No

A) Yes Yes

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: A. An investment committee of the board of directors. B. The chief operating officer. C. The corporate controller. D. The treasurer.

A. 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: A. And accounts receivable are immaterial, or the use of confirmations would be ineffective. B. And accounts receivable are composed of large accounts. C. And the effectiveness of confirmations is absolutely determined. D. Or accounts receivable are from extremely reputable customers.

A. And accounts receivable are immaterial, or the use of confirmations would be ineffective.under

Ordinarily, the most significant assertion relating to accounts payable is: A. Completeness. B. Existence. C. Presentation. D. Valuation.

A. Completeness.

A company's decision to use their fair value option for valuation of marketable securities is most likely to affect which of the following assertions the most? A. Completness. B. Existence. C. Fairness. D. Presentation and Disclosure.

A. Completness.

In an audit, the valuation of year-end accounts payable is most likely addressed by: A. Confirmation. B. Examination of cash disbursements immediately prior to year-end. C. Examination of cash disbursements immediately subsequent to year-end. D. Analytical procedures applied to vouchers payable at year-end.

A. Confirmation.

When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPA's procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should: A. Consider the organizational level to which the internal auditors report the results of their work. B. Review the internal auditors' work. C. Consider the qualifications of the internal audit staff. D. Review the training program in effect for the internal audit staff.

A. Consider the organizational level to which the internal auditors report the results of their work.

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: A. Details of bank deposit slips with details of credits to customer accounts. 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. Details of bank deposit slips with details of credits to customer accounts.

An audit of the balance in the accounts payable account is ordinarily not designed to: A. Detect accounts payable that are substantially past due. B. Verify that accounts payable were properly authorized. C. Ascertain the reasonableness of recorded liabilities. D. Determine that all existing liabilities at the balance sheet date have been recorded.

A. Detect accounts payable that are substantially past due.

In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the: A. Efficiency of the audit. B. Effectiveness of the audit. C. Selection of the sample. D. Audit quality controls.

A. Efficiency of the audit.

To have an adequate basis to issue a management report on internal control under Section 404(a) of the Sarbanes-Oxley Act, management must do all of the following, except: A. Establish internal control with no material weakness. B. Accept responsibility for the effectiveness of internal control. C. Evaluate the effectiveness of internal control using suitable control criteria. D. Support the evaluation with sufficient evidence.

A. Establish internal control with no material weakness.

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts? A. Examine cash receipts received after year-end. B. Confirm Receivables. C. Examine dates of purchase orders. D. Foot the receivables lead schedule.

A. Examine cash receipts received after year-end.

A primary objective of procedures preformed to obtain an understanding of internal control is to provide the auditors with: A. Knowledge necessary to determine the nature, timing, and extent of further audit procedures. B. Audit evidence to use in reducing detection risk. C. A basis for modifying tests of controls. D. An evaluation of the consistency of application of management policies.

A. Knowledge necessary to determine the nature, timing, and extent of further audit procedures.

The auditors are using unstratified mean-per-unit sampling to audit accounts receivable as they did in the prior year. Which of the following changes in characteristics or specifications would result in a larger required sample size this year than that required in the prior year? A. Larger variance in the dollar value of accounts. B. Smaller population size. C. Larger tolerable misstatement. D. Higher risk of incorrect acceptance

A. Larger variance in the dollar value of accounts.

An auditor needs to estimate the average highway weight of tractor-trailer trucks using a state's highway system. Which estimation method is most appropriate? A. Mean per unit. B. Difference. C. Ratio. D. Probability proportional to size.

A. Mean per unit.

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? A. Observe the consistency of the employees' use of cash registers and tapes. B. Inquire about employees' access to recorded but undeposited cash. C. Trace deposits in the cash receipts journal to the cash balance in the general ledger. D. Compare the cash balance in the general ledger with the bank confirmation request.

A. Observe the consistency of the employees' use of cash registers and tapes.

Reconciliation of the bank account should not be performed by an individual who also: A. Processes cash disbursements. B. Has custody of securities. C. Prepares the cash budget. D. Reviews inventory reports.

A. Processes cash disbursements.

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: A. Send positive confirmation requests. B. Send negative confirmation requests. C. Examine evidence of subsequent cash receipts. D. Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

A. Send positive confirmation requests.

Which of the following is not a universal rule for achieving internal control over cash? A. Separate record keeping from accounting for cash to the extent possible. B. Deposit each day's cash receipts intact. C. Separate cash handling from record keeping. D. Having monthly bank reconciliations prepared by employees not responsible fro the issuance of checks.

A. Separate record keeping from accounting for cash to the extent possible.

A CPA examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitive data. This is an example of: A. Test of a control. B. Substantive test. C. Cutoff test. D. Statistical test.

A. Test of a control.

In which of the following circumstances is it least likely that tests of controls will be performed? A. The expected deviation rate exceeds the tolerable deviation rate. B. The planned assessed level of control risk is at a level slightly below the maximum. C. The risk of assessing control risk too low is less than the expected deviation rate. D. The tolerable deviation rate exceeds the risk of assessing control risk too low.

A. The expected deviation rate exceeds the tolerable deviation rate.

Which of the following is accurate regarding tolerable misstatement? A. Tolerable misstatement is directly related to materiality. B. Tolerable misstatement cannot be determined until the sample results are evaluated. C. Tolerable misstatement does not affect sample size. D. Tolerable misstatement is a measure of reliability of the sample.

A. Tolerable misstatement is directly related to materiality.

Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements? A. Understatement of outstanding checks. B. Overstatement of outstanding checks. C. Understatement of deposits in transit. D. Overstatement of bank services charges.

A. Understatement of outstanding checks.

Identify the control that is most likely to prevent the concealment of a cash shortage result- ing from the improper write-off of a trade account receivable: A. Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. B. Write-offs must be approved by the accounts receivable department. C. Write-offs must be authorized by the shipping department. D. Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.

A. Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence.

The auditors who physically examine securities should insist that a client representative be present in order to: A. Detect fraudulent securities. B. Lend authority to the auditors' directives. C. Acknowledge the receipt of securities returned. D. Coordinate the return of securities to the proper locations.

C. Acknowledge the receipt of securities returned.

Under SEC rules, which of the following is not among the criteria that ordinarily exist for revenue to be recognized? A. Collectibility is reasonably assured. B. Delivery has occurred or is scheduled to occur in the near future. C. Persuasive evidence of an arrangement exists. D. The seller's price to the buyer is fixed or determinable.

B. Delivery has occurred or is scheduled to occur in the near future.

Which of the following would be least likely to be considered an objective of internal control? A. Checking the accuracy and reliability of accounting data. B. Detecting management fraud. C. Encouraging adherence to managerial policies. D. Safeguarding assets.

B. Detecting management fraud.

Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts. A. Accounts receivable divided by Cost of goods sold. B. Aging of accounts receivable. C. Cash sales divided by accounts receivable. D. Year 2 accounts receivable compared to year one accounts receivable.

B. Aging of accounts receivable.

Which of the following statistical sampling techniques is least desirable for use by the auditors? A. Random number table selection. B. Block selection. C. Systematic selection. D. Random number generator selection.

B. Block selection.

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? A. Existence or occurrence. B. Completeness. C. Rights and obligations. D. Presentation and disclosure.

B. Completeness.

Which of the following is an element of sampling risk? A. Choosing an audit procedure that is inconsistent with the audit objective. B. Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement. C. Failing to detect an error on a document that has been inspected by an auditor. D. Failing to perform audit procedures that are required by the sampling plan.

B. Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement.

Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by: A. Employment of temporary personnel to aid in the separation of duties. B. Direct participation by the owner in key record-keeping and control activities of the business. C. Engaging in CPA to preform monthly write-up work. D. Delegation of full, clear-cut responsibility for the separate major transaction cycle to each employee.

B. Direct participation by the owner in key record-keeping and control activities of the business.

In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to the supporting documents. Which assertion would this test of controls most likely test? A Completeness. B. Existence. C. Valuation. D. Rights.

B. Existence

Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This is an example of: A. Lapping. B. Kiting. C. Effective cash management. D. Related party transactions.

B. Kiting

A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner? A. Footing the purchases journal. B. Reconciling vendors' monthly statements with subsidiary payable ledger accounts. C. Tracing totals from the purchases journal to the ledger accounts. D. Sending written quarterly confirmation to all vendors.

B. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

Which of the following procedures is least likely to be completed before the balance sheet date? A. Confirmation of receivables. B. Search for unrecorded liabilities. C. Observation of inventory. D. Review of internal accounting control over cash disbursements.

B. Search for unrecorded liabilities.

When confirming accounts payable, the approach is most likely to be one of: A. Selecting the accounts with the largest balances at year-end, plus a sample of other accounts. B. Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts. C. Selecting a random sample of accounts payable at year-end. D. Confirming all accounts.

B. Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts.

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: A. Supported by a vendor's invoice. B. Stamped "paid" by the check signer. C. Prenumbered and accounted for. D. Approved for authorized purchases.

B. Stamped "paid" by the check signer.

Discovery sampling is particularly effective when: A. There are a large number of errors in the population. B. The auditors are looking for critical deviations that are not expected to be frequent in number. C. The auditors know where deviations are likely to occur. D. The population is large in size.

B. The auditors are looking for critical deviations that are not expected to be frequent in number.

The best way to verify the amounts of dividend revenue received during the year is: A. Recomputation. B. Verification by reference to dividend record books. C. Confirmation with dividend-paying companies. D. Examination of cash disbursements records.

B. Verification by reference to dividend record books.

To test the existence assertion for recorded receivables, the auditors would select a sample from the: A. Sales orders file. B. Customer purchase orders. C. Accounts receivable subsidiary ledger. D. Shipping documents (bills of lading) file.

C. Accounts receivable subsidiary ledger.

Using the same facts as in (k) above, what is the estimated total audited value of the population using the difference method? A. $198,000. B. $200,000. C. $201,000. D. $203,000.

C. $201,000. ( ([$203-$200] * 1000 accounts) + $198,000)

The auditors' primary objective in selecting a sample of items from an audit population is to obtain: A. A random sample. B. A stratified sample. C. A representative sample. D. A large sample.

C. A representative sample.

To test the existence assertion for recorded receivables, an auditor would select a sample from the: A. Sales orders file. B. Customer purchase orders. C. Accounts receivable subsidiary ledger. D. Shipping documents (billing of lading) file.

C. Accounts receivable subsidiary ledger.

The provisions of the Foreign Corruption Practices Act apply to: A. All U.S. corporations B. All U.S. corporations that engage in foreign operations. C. All corporations under the jurisdiction of the SEC. D. All U.S. partnerships and corporations.

C. All corporations under the jurisdiction of the SEC.

After the CPAs have selected particular accounts receivable for confirmation: A. As a control measure, the CPAs should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail. B. It is important that every account selected that has material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow up any follow-up through alternative procedures. C. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm. D. All differences between confirmation replies and book values should be reconciled by the CPA's, rather than the client.

C. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm.

Which of the following sampling techniques is typically used for tests of controls? A. Mean-per-unit sampling. B. Difference sampling. C. Attribute sampling. D. Probability-proportional-to-size sampling.

C. Attribute sampling.

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except: A. Cutoff bankstatement. B. Year-end bank statement. C. Bank confirmation. D. General ledger.

C. Bank confirmation.

Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This is an example of: A. Bank confirmation. B. Bank transfer schedule prepared used only the cash receipts and cash disbursements journals. C. Comparison of bank cutoff statement to the cash receipts and disbursements records. D. Receivable confirmation.

C. Comparison of bank cutoff statement to the cash receipts and disbursements records.

Which of the following generally provides the lease evidence regarding the valuation of the allowance for doubtful accounts? A. Reviewing an aging of accounts receivable. B. Examination of cash receipts subsequent to the balance sheet date. C. Confirming current (0-30 day) year-end accounts receivable. D. Reviewing credit files for selected account.

C. Confirming current (0-30 day) year-end accounts receivable.

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: A. Board of Directors. B. Treasurer. C. Controller. D. Executive Committee.

C. Controller.

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: A. Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. B. Coordinate the count of cash with the cutoff of accounts payable. C. Coordinate the count of cash with the count of marketable securities and other negotiable assets. D. Count the cash immediately upon the return of the confirmation letters from the financial institution.

C. Coordinate the count of cash with the count of marketable securities and other negotiablewhich of the f

Which of the following is not an advantage of establishing an enterprise risk management system within an organization? A. Reduces operational surprises. B. Provides integrated responses to multiple risks. C. Eliminates all risks. D. Identifies opportunities.

C. Eliminates all risks.

To determine that each voucher is submitted and paid only once, when a payment is approved, supporting documents should be canceled by the: A. Authorized members of the audit committee. B. Accounting department. C. Individual who signs the checks. D. Chief executive officer.

C. Individual who signs the checks

Tracing recorded sales transactions to the bills of lading provides evidence about the: A. Completeness of sales transactions. B. Collectibility of sales transactions. C. Occurrence of sales transactions. D. Billing of all sales transactions.

C. Occurrence of sales transactions.

Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control? A. Segregation of duties over cash disbursements. B. Requiring approval of purchase transactions. C. Preparing bank reconciliations. D. Maintaining backup copies of key transactions.

C. Preparing bank reconciliations.

When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they should: A. Modify their report for any significant deficiencies identified. B. Use a "bottom-up" approach to identify controls to test. C. Test controls for all significant accounts. D. Perform a separate assessment of controls over operations.

C. Test controls for all significant accounts.

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because: A. This is a duplication of cutoff tests. B. Accounts payable balances at the balance sheet date may not be paid before the audit is completed. C. Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment. D. There is likely to be other reliable external evidence available to support the balances.

D. There is likely to be other reliable external evidence available to support the balances.

(k) The auditors have sampled 50 accounts from a population of 1,000 accounts receivable. The sample items have a mean book value of $200 and a mean audited value of $203. The book value in the population is $198,000. What is the estimated audited value of the population using the mean-per-unit method? A. $198,000. B. $200,000. C. $201,000. D. $203,000.

D. $203,000. ($203*1000 accounts)

Which of the following would provide the most assurance concerning the valuation of accounts receivable? A. Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. B. Compare receivable turnover ratios to industry statistics for reasonableness. C. Inquire about receivables pledged under loan agreements. D. Assess the allowance for uncollectible accounts for reasonableness.

D. Assess the allowance for uncollectible accounts for reasonableness.

In a financial statement audit preformed following AICPA Professional Standards, how frequently must and auditor test operating effectiveness of controls that appear to function as they have in past years and on which auditor wishes to rely upon in the current year? A. Monthly. B. Each Audit. C. At least every second audit. D. At least every third audit.

D. At least every third audit.

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities? A. Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable. B. Examine unusual relationships between monthly accounts payable balances and recorded purchases. C. Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded. D. Examine selected cash disbursements in the period subsequent to year-end.

D. Examine selected cash disbursements in the period subsequent to year-end.

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: A. Cutoff bank statement. B. Year-end bank statement. C. Bank confirmation. D. General ledger.

D. General ledger.

Which of the following would most likely be detected by an auditor's review of the client's sales cutoff? A. Excessive goods returned for credit. B. Unrecorded sales discounts. C. Lapping of year-end accounts receivable. D. Inflated sales for the year.

D. Inflated sales for the year.

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: A. Reviews the monthly bank reconciliation. B. Returns the checks to accounts payable. C. Is denied access to the supporting documents. D. Is responsible for mailing the checks.

D. Is responsible for mailing the checks.

An entity's ongoing monitoring activities often include: A. Periodic audits by internal auditors. B. The audit of the annual financial statements. C. Approval of cash disbursements. D. Management review of weekly performance reports.

D. Management review of weekly performance reports.

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? A. Restrictions placed on sales by laws and regulations. B. Decline in sales due to economic declines. C. Decline in sales due to product obsolescence. D. Over-recorded sales due to a lack of control over the sales entry function.

D. Over-recorded sales due to a lack of control over the sales entry function.

Which of the following is not ordinarily a procedure for documenting an auditors understanding of internal control for planning purposes? A. Checklist. B. Confirmation. C. Flowchart. D. Questionnaire.

D. Questionnaire.

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? A. Inaccurate billing due to a lack of controls. B. Lapping of accounts receivable. C. Misbilling a client due to a data input error. D. Recording sales when the customer is likely to return the goods.

D. Recording sales when the customer is likely to return the goods.

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? A. Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. B. Require that employees who enter and leave the safe keeping area sign and record in a log the exact reason for their access. C. Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. D. Require that the safekeeping function for securities be assigned to a bank or stock- broker that will act as a custodial agent.

D. Require that the safekeeping function for securities be assigned to a bank or stock- broker that will act as a custodial agent.

The least likely approach in auditing management's estimate relating to an accrued liability is to: A. Independently develop an estimate of the amount to compare to management's estimate. B. Review and test management's process of developing the estimate. C. Review subsequent events or transactions bearing on the estimate. D. Send confirmations relating to the estimate.

D. Send confirmations relating to the estimate.

Which of the following is an example of misappropriation of assets relating to sales? A. Accidentally recording cash that represents a liability as revenue. B. Holding the sales journal open to record next year's sales as having occurred in the current year. C. Intentionally recording cash received from a new debt agreement as revenue. D. Theft of cash register sales.

D. Theft of cash register sales.

If the auditors do not perform tests of controls for certain assertions: A. They have preformed a substandard audit. B. They are not required to communicate significant deficiencies relating to those accounts to management and the board of directors. C. They must issue a qualified opinion. D. They must assess control risk at the maximum level for those assertions.

D. They must assess control risk at the maximum level for those assertions.

Auditors should make inquiries about whether there is knowledge of fraud in the company. Such inquires should be made of: A. management. B. the audit committee. C. internal auditors. D. all of of the above.

D. all of of the above.