Exam 2 Homework and Quiz Questions
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.
**Substantive tests of details**
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
**detecting management fraud**
Which of the following is least likely to be considered a risk assessment procedure in a financial statement audit?
Tests of controls
Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees?
a bank lockbox system
When performing an audit of internal control, the period or date on which the opinion relates under PCAOB standards is the:
as of date
Which of the following is the best example of a substantive procedure?
confirming balances of accounts receivable
Auditors must communicate internal control significant deficiencies to:
the audit committee
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.
**Acknowledge the receipt of securities returned**
Which of the following best describes what is meant by the term "fraud risk factor"?
**Facts often observed in circumstances where frauds have occurred**
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**
The audit committee of a company must be made up of
**members of the board of directors who are not officers or employees**
An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31, 20X0. By this procedure, the auditor would be most likely to learn which of the following?
An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.
Which of the following statements regarding the audit of negotiable notes receivable is correct?
Confirmation in writing from the holder of the note is considered an acceptable alternative to inspection.
Which of the following is most likely to be included in an auditor's inquiry of management while obtaining information to identify the risk of material misstatement due to fraud?
Does management have knowledge of fraud or suspect fraud?
Which of the following statements regarding auditor documentation of the client's internal control is correct?
No one particular form of documentation is required, and the extent of documentation may vary.
Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions?
proof of cash
Under PCAOB standards, when a significant deficiency exists, the auditors' report on internal control is most likely to include an opinion that is:
unqualified
Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes?
**Confirmation**
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**
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.
**An investment committee of the board of directors**
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
**Consider the organizational level to which the internal auditors report the results of their work.**
Tests of controls do not address
**how controls were originated**
Which of the following would most likely be detected by an auditor's review of the client's sales cutoff?
**inflated sales for the year**
In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also:
**is responsible for mailing the checks**
Which portion of an audit is least likely to be completed before the balance sheet date? a. Tests of controls b. Issuance of an engagement letter. c. Substantive procedures d. Assessment of control risk
**issuance of an engagement letter**
Which of the following is least likely to be a test of controls?
**observation of confirmations**
Tests of controls ordinarily are designed to provide evidence of:
**operating effectiveness**
The preliminary assessments of control risk are often referred to as:
**the planned assessed level of control risk**
Tracing of a transaction from source documents to the accounting records is generally an audit procedure that is designed to establish:
Completeness
The confirmation of the client's trade accounts receivable as a means of obtaining audit evidence is ordinarily considered to be a:
substantive procedure
In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: Which of the following is a risk factor for misappropriation of assets? a. Generous performance-based compensation systems. b. Management preoccupation with increased financial performance. c. An unreliable accounting system. d. Strained relationships between management and the auditors.
**An unreliable accounting system**
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.
**Assess the allowance for uncollectible accounts for reasonableness**
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.**
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.**
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**
Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by:
**Direct participation by the owner in key record-keeping and control activities of the business.**
Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement? a. Analysis of balance sheet accounts b. Analysis of income statement accounts. c. All matters of continuing accounting significance. d. Facts that might bear on the integrity of management.
**Facts that might bear on the integrity of management**
To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except:
**General ledger**
A primary objective of procedures performed 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.
**Knowledge necessary to determine the nature, timing, and extent of further audit procedures**
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.
**Management review of weekly performance reports**
Which of the following elements underlies the application of GAAS, particularly the standards of fieldwork and reporting?
**Materiality and audit risk**
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**
Which of the following is the 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.
**Over-recorded sales due to a lack of control over the sales entry function**
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
**Preparing bank reconciliations**
Reconciliation of the bank account should not be performed by an individual who also:
**Processes cash disbursements**
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
**Recording the sales when the customer is likely to return the goods**
In order to guard against the missappropriation 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**
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.
**Send positive confirmation requests**
Three conditions generally are present when fraud occurs. Select the one below that is NOT one of those conditions. a. Incentive or pressure b. Opportunity. c. Supervisory position d. Attitude
**Supervisory position**
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.
**Verification by reference to dividend record books**
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**
Which of the following should not normally be included in the engagement letter for an audit?
**a listing of the client's branch offices selected for testing**
To test the existence assertion for recorded receivables, an auditor would select a sample from the.
**accounts receivable subsidiary ledger**
At the completion of the audit, the auditors are least likely to know:
**actual control risk**
The auditors should confirm accounts receivable unless the auditors' assessment of the risk material misstatement is low:
**and accounts receivable are immaterial, or the use of confirmations would be ineffective**
Assume the following general flow of documents in an accounting system. Reply to the following question: Source Documents > Journals > Ledgers Tracing from source documents to journals most directly tests
**completeness (understatements)**
Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices?
**completeness**
The primary objective of tests of details of transactions performed as substantive procedures is to: a. Comply with GAAS b. Attain assurance about the reliability of the accounting system. c. Detect material misstatements in the financial statements. d. Evaluate whether management's policies and procedures are operating effectively.
**detect material misstatements in the financial statements**
The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as
**detection risk**
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
**eliminates all risks**
To have an adequate basis to issue a management report on internal control under Section 404(a) of SOX, management must do all except
**establish internal control with no material weakness**
Assume the following general flow of documents in an accounting system. Source documents > Journals > Ledgers Vouching from journals (or ledgers) to source documents most directly tests
**existence (overstatements)**
As one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. This test provides evidence as to whether: a. Each recording sale represents a bona fide transaction. b. All sales have been recorded in the sales journal. c. All debit entries in the accounts receivable subsidiary ledger are properly supported by sales journal entries. d. Recorded sales have been properly posted to customer accounts
**recorded sales have been properly posted to customer accounts**
To determine that all sales have been recorded, the auditors would select a sample of transactions from the:
**shipping documents file**
Which of the following is an example of missappropriation of assets relating to sales?
**theft of cash register sales**
Which of the following is most likely to be an overall response to fraud risks identified in an audit?
**use less predictable audit procedures**
Auditors should have an understanding of the various terms that relate to their consideration of internal control of an organization. For each term presented below, select the category that most clearly defines or includes the term. The categories may be selected once, more than once, or not at all. 1. Accounting information system 2. Control environment 3. Flowchart 4. Controls over operating effectiveness. 5. Less severe than a material weakness 6. Monitoring 7. Questionnaire 8. Walk-through 9. Allows a reasonable possibility of a material misstatement. 10. Reasonable assurance
1. Component of internal control 2. Component of internal control 3. Documentation 4. Test of control 5. Significant deficiency. 6. Component of internal control. 7. Documentation 8. Implemented 9. Material weakness 10. Relationship of costs and benefits
To determine that sales transactions have been recorded in the proper accounting period, the auditors perform a cutoff review. Which of the following best describes the overall approach used when performing a cutoff review?
Analyze transactions occurring within a few days before and after year-end.
Which of the following is an effective audit planning and control procedure that helps prevent misunderstandings and inefficient use of audit personnel?
Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information.
Which of the following is a frequent control over cash disbursements?
Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.
Which of the following is most likely to be an overall response to fraud risks identified in an audit?
Consider further management's selection and application of significant accounting principles
The financial management of a company should take steps to see that company investment securities are protected. Which of the following is not a step that is designed to protect investment securities?
Custody of securities should be assigned to persons who have the accounting responsibility for securities.
Which of the following is not a basic principle relating to control activities?
Design controls that restrict board of director oversight.
Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable?
Have customers send payments directly to the company's depository bank.
Which of the following is most likely to provide an auditor with the most assurance about the effectiveness of the operation of internal control?
Observation of client personnel applying the control
Tests of controls are most likely in which of the following situations?
The assessed level of the risk of misstatement includes a presumption that controls operate effectively.
Which of the following is an effective control over accounts receivable?
The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records.
Which of the following statements is not correct regarding the auditor's determination of materiality?
The planning level of materiality will normally be the larger of the amount considered for the balance sheet versus the income statement.
Assume the following general flow of documents in an accounting system. Reply to the following question: Source Documents > Journals > Ledgers The auditors are concerned about source documents that reflect valid transactions that have not been recorded in the journals. Which procedure would be effective?
Trace **from** source documents **to** journals
Assume the following general flow of documents in an accounting system. Reply to the following question: Source Documents > Journals > Ledgers The auditors are concerned about transactions that have been recorded for improper amounts. Which procedure would be most effective?
Trace **from** source documents **to** journals. OR Vouch **from** journals **to* source documents
Which of the following symbols indicate that a file has been consulted?
Trapezoid to triangle
Assume the following general flow of documents in an accounting system. Reply to the following question: Source Documents > Journals > Ledgers The auditors are concerned about transactions that have been recorded in the journals (and subsequently in the ledgers) that are not valid—that is, a transaction is recorded, but it did not actually occur (e.g., a fraudulent overstatement of sales). Which procedure would be most effective?
Vouch **from** journals **to** source documents
For each of the procedures described in the table below, identify the audit procedure performed and classification of the audit procedure using the following: a. Requested responses directly from customers as to amounts due. b. Compared total bad debts this year with the totals for the previous two years. c. Questioned management about likely total uncollectible accounts. d. Watched the accounting clerk record the daily deposit of cash receipts. e. Examined invoice to obtain evidence in support of the ending recorded balance. f. Compared a sample of sales invoices to credit files to determine whether the customers were on the approved customer list. g. Examined a sample of sales invoices to see if they were initialized by the credit manager indicating credit approval.
a. Confirmation; Substantive procedures b. Analytical procedure; Substantive procedures c. Inquiry; Substantive procedures. d. Observation; Test of controls e. Inspection of records or documents; Substantive procedures f. Reperformance; Test of controls g. Inspection of records or documents; Test of controls
You have been hired to perform the audit of Hanmei, Inc.'s financial statements. When planning such an audit, you often may need to access the profession's auditing standards to perform research. For each of the following circumstances, select the topic most closely related in the Professional Standards Topics below a. Possible risk factors related to misappropriation of assets. b. The relationship between materiality used for planning versus evaluation purposes. c. Hanmei, Inc., has transactions with the corporation president's brother d. Comparing a client's unaudited results for the year with last year's audited results e. Requirements relating to identifying violations of occupational safety and health regulations f. The need to "brainstorm" among audit team members about how accounts could be intentionally misstated. g. Details on considering design effectiveness of controls. h. The importance of considering the possibility of overstated revenues (e.g., through premature revenue recognition)
a. Consideration of fraud in a financial statement audit b. Materiality in planning and performing an audit. c. Related parties d. Analytical procedures e. Consideration of laws and regulations f. Consideration of fraud in a financial statement audit. g. Understanding the entity and its environment and assessing the risks of material misstatement. h. Consideration of fraud in a financial statement audit.
For each of the following factors, indicate whether it increases or decreases the risk of material misstatement and whether it creates a risk of fraud: a. NFB is a continuing audit client b. The banking industry has been significantly impacted by the downturn in the economy in recent years. c. NFB operates in a growing, prosperous area and has remained profitable over the years. d. Government regulation and overview of the banking industry is extensive and effective. e. NFB'S BOD is controlled by Smith, the majority stockholder, who also acts as the CEO. f. Interest rates have been very volatile recently. g. Management at the bank's branch offices has authority for directing and controlling NFB's operations and is compensated based on branch profitability. h. The internal auditor reports directly to Harris, a minority shareholder, who also acts as chairman of the board's audit committee. i. The accounting department has experienced little turnover in personnel during the five years Green has audited NFB. j. During 20X1, NFB increased the efficiency of its accounting operations by installing a new, sophisticated computer system. k. NFB's formula has consistently underestimated the allowance for loan losses in current years. L. Management has been receptive to Green's suggestions relating to accounting adjustments
a. Decrease, No b. Increase, Yes c. Decrease, No d. Decrease, No e. Increase, Yes f. Increase, Yes g. Increase, Yes h. Decrease, no i. Decrease, no j. Increase, yes k. Increase, yes L. Decrease, no
Auditors perform a number of procedures relating to cash—some unique, some not unique. For each substantive procedure below, identify its primary objective or indicate that the procedure serves no purpose. a. Prepare a bank transfer schedule. b. Prepare a 4-column proof of cash. c. Use a standard confirmation form to confirm account balance information d. Obtain bank cutoff statements. e. Search for large checks to directors, officers, and employees.
a. Detect kiting b. Reconcile cash receipt and disbursement totals between company records and bank records c. Verify year-end cash and liability balance information. d. Verify reconciling items on the year-end bank reconciliation e. Identify related party transactions
You are performing an audit of Systex Corporation and evaluating various controls. Classify the following controls as being primarily preventive, detective, or corrective. a. Annual physical inventory. b. Monthly reconciliation of bank accounts c. Segregation of duties over purchasing d. Supervisory approval of time cards. e. Dual signatures for checks. f. Adjustment of perpetual inventory records to physical counts. g. Management review of budget/actual information. h. Internal audits of payroll.
a. Detective. b. Detective. c. Preventive d. Preventive e. Preventive f. Corrective. g. Detective h. Detective
You are involved with the audit of Jelco Company for year 1 and have been asked to consider the confirmation reply results indicated below. For each confirmation reply, select the proper action to be taken from the following possible actions: a. We mailed the check for this on December 31. b. We returned those goods on December 2. You have been able to determine that the goods were received by the client on December 29, but not recorded until January 2. c. We also owe for two more invoices for purchases we made around year-end; Not sure of the exact date d. We are satisfied with Jelco and plan to purchase from them in the future. e. While that's what we owe, we didn't owe it on December 31 because we didn't receive the goods until January 2 of year 2. f. You received no reply to a negative confirmation request to Adams Co. g. You received no reply to a positive confirmation request to Blake Co. Subsequently you recalled that Blake Co. has a policy of not responding to confirmations - in writing or orally.
a. Examine shipping documents and/or subsequent cash receipts. b. Exception; propose an adjustment. c. Verify whether the additional invoices noted on the confirmation reply pertain to the year under audit or the subsequent year. d. Not an exception; no further audit work is necessary. e. Examine shipping documents and/or subsequent cash receipts. f. Not an exception; no further audit work is necessary g. Examine shipping documents and/or subsequent cash receipts.
A situation when the design or operation of 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 is referred to as a(n):
control deficiency
The purpose of tests of controls is to provide reasonable assurance that the:
controls are operating efficiently
An audit committee's responsibilities normally would not include:
discussing all details of the audit plans of the independent auditors.
Which of the following is ordinarily considered a test of a control?
examine signatures on checks
Hawkins, CPA, requested permission to communicate with the predecessor auditors of a prospective client. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the:
integrity of management
As compared to manual processing, electronic processing of cash transactions generally makes kiting:
more difficult to accomplish
The auditors have not been able to confirm a large account receivable, but they have satisfied themselves as to the proper amount of the receivable by means of alternative auditing procedures. The auditors' report on the financial statements should include:
neither a comment on the use of alternative auditing procedures nor an opinion qualification.
A successor auditor should attempt communication with a predecessor auditor:
prior to accepting the engagement.
Internal control over cash receipts is weakened when an employee who receives customer mail receipts also:
records credits to individual accounts receivable
The least crucial element of internal control over cash is:
separation of cash receipts from preparing deposits
The auditor is examining copies of sales invoices only for the initials of the person responsible for checking the extensions. This is an example of a:
test of controls
The use of the positive (as opposed to the negative) form of receivables confirmation is indicated when:
there is reason to believe that a substantial number of accounts may be in dispute
Which of the following audit procedures is most effective in testing credit sales for understatement?
trace sample of initial sales slips through summaries to recorded general ledger sales
A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the:
treasurer
Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate:
treasurer
The auditors who are engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to:
verify reconciling items on the client's bank reconciliation