Auditing Exam #2

18. An auditor may obtain information on the December 31 month-end balance per bank in which of the following? A. Standard Confirmation Form: Yes, January 1 to 10 Cutoff Statement: Yes. B. Standard Confirmation Form: Yes, January 1 to 10 Cutoff Statement: No. C. Standard Confirmation Form: No, January 1 to 10 Cutoff Statement: Yes. D. Standard Confirmation Form: No, January 1 to 10 Cutoff Statement:No.

A. Standard Confirmation Form: Yes, January 1 to 10 Cutoff Statement: Yes.

44. A certifies public accountant (CPA) examines a sample of credit memoranda to ensure they were signed by an officer of the company. This is an example of a: A. test of a control. B. Substantive test. C. Cutoff test. D. Statistical test.

A. Test of Controls

3. An auditor's purpose for performing test of controls is to provide reasonable assurance that: A. Controls are operating effectively. B. The risk that the auditors may unknowingly fail to modify the opinion on the financial statements is minimized. C. Transactions are executed in accordance with management's authorization and access to assets is limited by a segregation of functions. D. Transactions are recorded as necessary to permit the preparation of the financial statements in conformity with generally accepted accounting principles.

A. Controls are operating effectively.

34. 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.

31. When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables? A. The account balances as of year-end will generally be confirmed. B. The auditors will in general use blank rather than positive confirmation requests. C. The auditors will be required to confirm accounts as of an interim data (during the year under audit) and as of year-end. D. Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports.

A. The account balances as of year-end will generally be confirmed.

42. To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors: A. Trace a sample of a the bills of lading to sales invoices. B. Confirm a sample of accounts payable. C. Review the aging of accounts receivable. D. Trace a sample of recorded sales to shipping documents.

A. Trace a sample of the bills of lading to sales invoices.

9. After documentting the client's prescribed internal control, the auditor will often perform a walk-through of each transaction cycle. An primary objective of a walk-through is to: A. Verify that the controls have been implemented (placed in operation). B. Replace test of controls. C. Evaluate the major strengths and weaknesses in the client's internal control. D. Identify weaknesses to be communicated to management in the management letter.

A. Verify that the controls have been implemented (placed in operation).

36. Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice? A. Footing the sales journal. B. Confirming accounts receivable. C. Tracing the total sales in the sales journal to the general ledger. D. Observation of the physical inventory count at year-end.

B. Confirming accounts receivable.

38. The confirmation of accounts receivable is most closely associated with: A. Business risk. B. Detection risk. C. Inherent risk. D. Relative risk.

B. Detection Risk

12. Which of the following is not a component of the control environment? A. Integrity and ethical values. B. Monitoring performance. C. Commitment to attracting, developing, and retained competent employees. D. Organizational structure.

B. Monitoring performance.

32. What type of error is the certified public account (CPA) most likely to discover when he/she examines all shipping reports dates in January of 20X1, shipped free on board (FOB) shipping point, which were recorded in December of 20X0 as credit sales? A. Accounts receivable are understated at December 31, 20X0. B. Accounts receivable are overstated at December 31, 20X0. C. Operating expenses are overstated for the 12 months ended December 31, 20X0. D. Sales returns and allowance are overstated at December 31, 20X0.

B. Accounts receivable are overstated at December 31, 20X0.

35. 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 receivables 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.

8. Which of the following is correct with respect to control deficiencies discovered during an audit? A. Auditors must communicate and recommend corrections relating to all material weaknesses in internal control to management. B. All material weaknesses in internal control must be reported to the audit committee in writing. C. All such matters must be communicated to the audit committee and regulatory agencies. D. All control deficiencies are also significant deficiencies.

B. All material weaknesses in internal control must be reported to the audit committee in writing.

11. The Sarbanes-Oxley Act of 2002 require that the audit committee: A. Annually reassess control risk using information from the CPA firm. B. Be directly responsible for the appointment, compensation, and oversight of the work of the CPA firm. C. Rotate audit firms every 4 years. D. Review the level of management compensation.

B. Be directly responsible for the appointment, compensation, and oversight of the work of the CPA firm.

19. The auditors use a bank cutoff statement to compare: A. Deposits in transit on the year-end cash general ledger account to deposit in the cash receipts journal. B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. C. Deposits listed on the cutoff statement to disbursements in the cash disbursements journal. D. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank statement.

B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

26. On receiving the bank cutoff statement, the auditor should trace: A. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. C. Deposits listed on the cutoff statement to deposits in the cash receipts journal. D. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank reconciliation.

B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

39. Which of the following manipulations would understate receivables on the financial statements? A. Understatement of cash sales. B. Closing the sales journal prior to year-end. C. Closing the cash receipts journal prior to year-end. D. Underestimating the allowance for doubtful accounts.

B. Closing the sales journal prior to year-end.

46. Cutoff test 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 of: A. Presentation. B. Completeness. C. Rights. D. Existence.

B. Completeness.

In November, two months before year-end, the bookkeeper erroneously recorded the receipts of a one year bank loan with a debit to cash and a credit to interest revenue. The most effective method for detecting this type of error is: A. Fool the cash receipts journal for November. B. Send a bank confirmations as of year-end. C. Prepare a bank reconciliation as of year-end. D. Prepare a bank transfer schedule as of year-end.

B. Send a bank confirmation as of year-end.

27. 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.

B. Treasurer.

29. An Auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: A. Verify the cash balance reported on the bank confirmation inquiry form. B. Verify reconciling items on the client's bank reconciliation. C. Detect lapping. D. Detect kiting.

B. Verify reconciling items on the client's bank reconciliation.

15. On financial statement audit, it is required that the auditors obtain an understanding of internal control, including: A. Its operating effectiveness. B. Whether it has been implemented (placed in operation). C. Whether it has been flowcharted. D. Its ability to provide reasonable assurance.

B. Whether it has been implemented (placed in operation).

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

C. Accounts receivable subsidiary ledger.

7. The auditors who become aware of a significant deficiency in internal control are required to communicate this to the: A. Client's legal counsel. B. Compensation committee. C. Audit Committee. D. Internal auditors.

C. Audit Committee

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide evidence concerning the: A. Collectability of the balances confirmed. B. Ownership of the balances confirmed. C. Existence of the balances confirmed. D. Internal control over balances confirmed.

C. Existence of the balance confirmed.

5. In the consideration of internal controls, the auditor is basically concerned that is provides reasonable assurance that: A. Management cannot override the system. B. The company will not have financial difficulty. C. Misstatements have been prevented or detected. D. Controls have not been circumvented by collusion.

C. Misstatements have been prevented or detected.

41. 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 sale transactions.

6. Which of the following audit tests would be regarded as a test of control? A. Test of the specific items making up the balance in a given general ledger account. B. Test confirming receivables. C. Test of the signatures on canceled checks to board of director's authorization. D. Test of the additions to property, plant, and equipment by physical inspection.

C. Test of the signatures on canceled checks to board of director's authorizations.

40. Which of the following is consistent with effective internal control over sales transactions? A. The accounting department prepares a shipping report authorizing the shipment of goods. B. The accounting department accounts for all receiving reports. C. The billing department accounts for all shipping documents. D. The accounts payable department annually approves the extension of credit to customers.

C. The billing department accounts for all shipping documents.

24. Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? A. The cashier prepares the daily deposit. B. The cashier makes the daily deposit at a local bank. C. The cashier posts the receipts to the accounts receivable subsidiary ledger. D. The cashier endorses the checks.

C. The cashier posts the receipts to the accounts receivable subsidiary ledger.

25. As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a confirmation request for a bank account that has been closed during the year. After the client's treasurer has signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure? A. The confirmation request was signed by the treasurer. B. Sending the request was meaningless because the account was closed before the year-end. C. The request was mailed by the assistant treasurer. D. The Certified Public Accountant (CPA) did not sign the confirmation request before it was mailed.

C. The request was mailed by the assistant treasurer.

37. Which of the following statements represents the correct audit procedure and related assertion? A. Tracing sales invoices to shipping documents to test the completeness of reported sales. B. Tracing shipping documents to sales invoices to test the occurrence of reported sales. C. Tracing sales invoices to shipping documents to test the occurrence of reported sales. D. Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.

C. Tracing sales invoices to shipping documents to test the occurrence of reported sales.

2. Which of the following would least likely be included in an auditor's test of controls? A. Inspection. B. Observation. C. Inquiry. D. Analytical procedures.

D. Analytical Procedures.

23. Garcia was engaged to audit the financial statements of Delta Corporation for the year ended September 30, 20X0. Having completed an examination of the investment securities, which of the following is the best method verifying the accuracy of recorded dividend income? A. Tracing recorded dividend income to cash receipt records and validated deposit slips. B. utilizing analytical techniques and statistical sampling. C. Comparing recorded dividends with amounts appearing on federal information form 1099s. D. Comparing recorded dividends with a standard financial reporting service's record of dividends.

D. Comparing recorded dividends with a standard financial reporting service's record of dividends.

Internal control over marketable securities is enhanced when: A. Securities are held by the cashier. B. Securities are registered in the name of the custodian. C. Detailed records of securities are maintained by the custodian of the securities. D. Custody of securities is maintained by a stockbroker or bank.

D. Custody of securities is maintained by a stockbroker or bank.

28. Which of the following could not be more efficiently performed with date analytics? A. Identification of possible duplicate payments. B. Identification of unusual expense reimbursements. C. Identification of cash recorded from an unusual accounting source. D. Identification of an unrecorded cash deposit.

D. Identification of an unrecorded cash deposit.

14. A significant deficiency: A. Differs from a material weakness in that it involves internal control over compliance with laws and regulations rather than internal control over financial reporting. B. Involves an amount of discovered misstatements greater than the amount used as the planning measure of materiality. C. Is identical to a material weakness except that it need not be communicated to those responsible for oversight of the company's financial reporting. D. Is less severe than a material weakness.

D. Is less severe than a material weakness.

16. Your client left the cash receipt journal open after year-end for an extra day and included January 1 cash receipts in the 12/31/XX totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the year XX financial statement? A. Sales are understated. B. Accounts receivable are understated. C. Inventory is overstated. D. Net income is overstated.

D. Net income is overstated.

22. The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that: A. Recorded cash disbursement transactions are properly authorized. B. Proper cash purchase discounts have been recorded. C. Cash disbursements are for goods and services actually received. D. No discrepancies exist between the data on the checks and the data in the journal.

D. No discrepancies exist between the data on the checks and the data in the journal.

1. Which of the following is a likely approach for testing the segregation of duties? A. Personal inquiry and confirmation. B. Counting variations in levels of performance. C. Analytical procedures. D. Observing employees performing processes.

D. Observing employees performing processes.

4. Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both: A. Journalize cash receipts and disbursements and prepare the financial statements. B. Monitor internal controls and evaluate whether the controls are operating as intended. C. Adopt new accounting pronouncements and authorize the recording of transactions. D. Record and conceal fraudulent transactions in the normal course of assigned tasks.

D. Record and conceal fraudulent transactions in the normal course of assigned tasks.

33. A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end? A. Cash receipts. B. Payroll. C. Purchases. D. Sales.

D. Sales.

17. An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the best evidence on operating effectiveness? A. Select and examine receiving reports and tests whether the related canceled checks are dated no earlier than the receiving reports. B. Select and examine receiving reports and test whether the related canceled checks are dated no later than the receiving reports. C. Select and examine canceled checks and test whether the related receiving reports are dated no earlier than the checks. D. Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.

D. Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.

10. A control deficiency that is less severe than a material weakness, but important enough to merit attention by those responsible for oversight of the company's financial reporting is referred to as a(n): A. Control deficiency. B. Inherent limitation. C. Reportable deficiency. D. Significant deficiency.

D. Significant deficiency.

43. To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from: A. The sales journal. B. The billing clerk's file of sales orders. C. Duplicate copies of sales invoices. D. The shipping clerk's file of duplicate copies of bills of lading.

D. The shipping clerk's file of duplicate copies of bills of lading.

13. Which of the following is most likely to be considered an audit risk assessment procedure relating to internal control? A. Confirm accounts receivable. B. Perform a test of control relating to payroll. C. Take test counts of the year-end inventory. D. Trace a transaction through the information system relevant to financial reporting.

D. Trace a transaction through the information system relevant to financial reporting.