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13. When auditors begin auditing cash, they follow a standard sequence of work. The exact procedures will be tailored based on the nature of the controls that have been implemented and by the results of the auditors' risk assessment process.
1. Use the understanding of the client and its environment to consider inherent risks related to cash 2. Obtain an understanding of internal control over cash 3. Assess the risk of material misstatement and design further audit procedures (test of controls) 4. Perform further audit procedures tests of controls 5. Perform further audit procedures substantive procedures for cash transactions and balances
8.Which of the following items would be the most persuasive type of audit evidence?
A confirmation of bank balances as of year-end received by the auditor directly from the bank. Choice A (Correct): As indicated in AU-C Section 500, the reliability of audit evidence is directly related to the source from which it is obtained, the conditions under which it is developed and acquired, and its form. Thus, while evidence obtained directly by the auditor is generally more reliable than evidence obtained from outside sources, there are exceptions to this rule depending on the nature of the evidence. In this case, since estimates are subjective, the confirmation obtained directly from the bank is more reliable, and thus more persuasive than the auditor's analytical procedure. Information prepared by an outsider but received from the client, such as a copy of a bank statement, is less reliable than evidence prepared by an outsider and received directly by the auditor, since the client has had a chance to tamper with the document. The least reliable type of evidence is that which was prepared by the client, such as a letter of representation signed by client management or executives. Choice B (Incorrect): As indicated in AU-C Section 500, the reliability of audit evidence is directly related to the source from which it is obtained, the conditions under which it is developed and acquired, and its form. Information prepared by an outsider but received from the client, such as a copy of a bank statement, is less reliable than evidence prepared by an outsider and received directly by the auditor, since the client has had a chance to tamper with the document. Choice C (Incorrect): As indicated in AU-C Section 500, the reliability of audit evidence is directly related to the source from which it is obtained, the conditions under which it is developed and acquired, and its form. The least reliable type of evidence is that which was prepared by the client, such as a letter of representation signed by client management or executives. Choice D (Incorrect): As indicated in AU-C Section 500, the reliability of audit evidence is directly related to the source from which it is obtained, the conditions under which it is developed and acquired, and its form. Thus, while evidence obtained directly by the auditor is generally more reliable than evidence obtained from outside sources, there are exceptions to this rule depending on the nature of the evidence. In this case, since estimates are subjective, the confirmation obtained directly from the bank is more reliable, and thus more persuasive than the auditor's analytical procedure.
4. Which of the following items would be the least persuasive type of audit evidence?
A letter of representation signed by the client's president and chief executive officer. As indicated in AU-C Section 500, the reliability of audit evidence is directly related to the source from which it is obtained, the conditions under which it is developed and acquired, and its form. The least reliable type of evidence is that which was prepared by the client, such as a letter of representation signed by client management or executives. Information prepared by an outsider but received from the client, such as a copy of a bank statement, is more reliable than evidence prepared by the client. While evidence obtained directly by the auditor is generally more reliable than evidence obtained from outside sources, there are exceptions to this rule depending on the nature of the evidence. Since estimates are subjective, the confirmation obtained directly from the bank is more reliable, and thus more persuasive than the auditor's analytical procedure. Choice A (Incorrect): As indicated in AU-C Section 500, the reliability of audit evidence is directly related to the source from which it is obtained, the conditions under which it is developed and acquired, and its form. Evidence obtained directly from outside sources is generally more reliable than evidence obtained from the client. Choice B (Incorrect): As indicated in AU-C Section 500, the reliability of audit evidence is directly related to the source from which it is obtained, the conditions under which it is developed and acquired, and its form. Evidence created by an outside source is generally more reliable than evidence created by the client. Choice D (Incorrect): As indicated in AU-C Section 500, the reliability of audit evidence is directly related to the source from which it is obtained, the conditions under which it is developed and acquired, and its form. Evidence obtained directly by the auditor is generally more reliable than evidence obtained from outside sources and the client.
3. A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows: Employee Reviews Clerk 1 Review vendor invoices for proper signature approval. Clerk 2 Enters vendor invoice into the accounting system and verifies payment terms. Clerk 3 Posts entered vendor invoices to accounts payable ledger for payment and mails checks. Treasurer Review the vendor invoices and signs each check. Which of the following would indicate a weakness in the company's internal controls?
Clerk 3 mails the checks and remittances after they have been signed
10. Narbona, CPA, is reviewing controls over cash received through a bank night depository. Which controls would she find most important?
Dual control (joint custody) is established over the contents of the night depository box from the time of removal until initial recording is completed.
11. As payments are received, one mailroom employee is assigned the responsibility of prelisting receipts and preparing the deposit slip prior to forwarding the receipts, deposit slip, and remittance advices to accounts receivable for posting. Accounts receivable personnel re-foot the deposit slip, stamp a restrictive endorsement on the back of each check, and then forward the receipts and deposit slip to the treasury department. Evaluate the internal control of the described process. Which of the following is a reasonable assessment of internal control in this process?
Inadequate internal control because of a lack of separation of duties.
2. An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?
Inquiry and inspection of records.
1. Which of the following management policies would increase the probability of fraud in a company?
Measuring performance and awarding bonuses based on short-term operating results.
7. Which of the following would be considered corroborative evidence?
Minutes from meetings of the board of directors. Corroborative evidence, which support the information derived from the accounting records, includes minutes, confirmations, data about competitors, and information obtained by the auditor through inquiry, observation, and inspection of documents. Checks, invoices, and contracts; general and subsidiary ledgers; and worksheets and spreadsheets supporting cost allocations, computations, reconciliations, and disclosures make up the accounting records.
9. cont. Substantive Tests The auditor in the Scott engagement has chosen to increase attention on the financial statement assertion of valuation. Procedures that might be used in an audit are listed below. From the following list, choose the two procedures that would be most appropriate to perform in an audit that is giving increased attention to the valuation assertion. Select "Yes" for only two procedures.
Observing the client count the physical inventory. (No) Testing shipping and receiving cutoff procedures. (No) Obtaining confirmation from lenders regarding inventories pledged under loan agreements. (No) Examining paid vendors' invoices. (Yes) Obtaining confirmation of inventories at locations outside the entity. (No) Examining an analysis of inventory turnover. (Yes) Tracing test counts recorded during the physical inventory observation to the inventory listing. (No)
12. Which of the following should be performed by the persons opening the mail and recording payments?
Restrictive endorsement on all checks.
2. Which of the following audit procedures would most likely provide evidence regarding the existence of cash and cash equivalents?
Review bank confirmations to verify bank balances Bank confirmations provide evidence of existence since they are an independent verification of cash being held by financial institutions on behalf of the entity. Reviewing bank reconciliations will primarily provide evidence about the valuation of cash and will not provide evidence of its existence unless amounts are traced to other documentation such as bank statements. Analytical procedures to determine if amounts and volume of transactions match expectations will provide evidence of completeness, not existence. Testing the translation of foreign currency transactions will provide evidence related to the valuation of cash denominated in another currency, but not its existence.
9. Risk Factors Based on the information in Scott's Company Profile, which of the following is the factor most likely to increase audit risk? Select "Yes" for only one factor.
The company has begun to focus on a strategic advertising plan so it may expand its domestic market into other states. (No) During year 2, management issued additional long-term debt with complex financial covenants. (Yes) Scott is divided into two divisions, which serve the major markets of the company's products. (No) The new CFO was an audit manager from the predecessor audit firm. (No)
6.When evaluating the sufficiency and appropriateness of audit evidence, the auditor should consider all of the following except:
The extent to which the auditor was involved in maintaining the client's accounting records and preparing the financial statements. The extent to which the auditor was involved in maintaining the client's accounting records and preparing the financial statements is significant in determining if the auditor's independence has been impaired and whether or not the auditor may accept the engagement. It does not, however, relate to either the sufficiency or the appropriateness of evidence obtained in the engagement. Comparing the client's responses to inquiries to the auditor's knowledge about the client, which may be obtained from previous engagements, assists the auditor in evaluating the reliability of evidence obtained and, as a result, its appropriateness. The results of tests of controls provide the auditor with evidence related to the reliability of the client's financial records, which affects the reliability and appropriateness of evidence obtained directly from the client's systems.
5. Which of the following relates to the sufficiency of audit evidence?
When no exceptions were discovered in a preliminary sample, the auditor decided that no further testing was necessary. The sufficiency of audit evidence relates to the quantity of evidence obtained. This would include decisions related to how much testing was necessary or the size of samples used in audit tests. Decisions regarding whether reconciliation to records is adequate in place of observation, whether to use positive or negative confirmations, and what types of supporting documentation are necessary to examine all relate to the appropriateness of audit evidence, not the sufficiency.
6. An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using:
a bank lockbox system.
14. Auditors are concerned with assertions in creating their audit steps. When creating and tailoring audit steps, auditors must keep the assertions and objectives in mind.
a) Existence and accuracy i. Obtain analyses of cash balances and reconcile them to the general ledger b) Existence, occurrence, accuracy, cut off and rights i. Count cash on hand i. Confirm cash balances with financial institutions c) Cutoff, existence, occurrence, rights and completeness i. Verify the clients cutoff of cash transactions i. Analyze bank transfers occurring at year end d) Presentation and disclosure i . Investigate payments to related parties
7. An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the:
cutoff bank statement is reconciled
5. Auditors ordinarily send a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balances. A purpose of this procedure is to:
seek information about contingent liabilities and security agreements.
8. To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is:
stamped "paid" by the check signer
4. In the audit of cash the auditor obtains a bank cutoff statement primarily to:
test the propriety of items appearing on the client's year-end bank reconciliation.
9. An auditor would least likely initiate a discussion with a client's audit committee concerning:
the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.
1. Which of the following will generally not be included in a standard bank confirmation?
• The dates on which inactive accounts were closed. A standard bank confirmation will provide information about balances in deposit accounts and balances of outstanding loans as of the balance sheet date. It also provides information about arrangements related to compensating balances and collateral for loans. It does not ordinarily provide information about the dates on which inactive accounts were closed.