Final Review 7-11

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10. Material accounts receivable from related parties should be stated separately from other receivables.

True

5. Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address.

False

6. CPAs use negative accounts receivable confirmations more frequently than positive accounts receivable confirmations.

False

A compensating balance agreement generally requires that cash be reclassified as a noncurrent asset

False

A proof of cash is an audit procedure that is performed on almost every engagement

False

Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end

False

3. An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts.

True

4. Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable.

True

7. Confirmation of accounts receivable provides some assurance that no lapping or other manipulation affecting accounts receivable is being carried on.

True

8. Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts.

True

For investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the market value of the investments

False

Lapping of accounts receivable by an employee is not possible when there is adequate segregation of duties with respect to cash disbursements

False

Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily

False

Signed checks should be returned to the cash disbursements clerk for mailing

False

The auditors should count small petty cash funds at year-end to make sure that balance is not understated on the financial statements

False

9. When it is impossible to confirm accounts receivable, the auditors may be able to satisfy themselves as to the existence of accounts receivable by alternative procedures.

True

Control over the receipt of cash sales is best achieved when two or more employees participate in each transaction

True

Verification of cash and other liquid assets on the same date may prevent substitution of one form of asset for another

True

30. An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the A. Collection of receivables. B. Purchase of merchandise inventory. C. Payment of accounts payable. D. Sale of long-term debt.

14. Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable? A. The confirmations are sent on the client's letterhead. B. The confirmations are mailed to customers by the internal auditors. C. The client's mailroom personnel closely monitor and inspect confirmations during mailing. D. The return address on the envelope used to send the confirmation request is that of the client.

15. 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 confirmations. C. The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year end. D. Confirmations will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports.

16. What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales? A. Accounts receivable are overstated at December 31, 20X0. B. Accounts receivable are understated 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.

19. Which of the following must the auditor communicate to the audit committee? A. Significant deficiencies and material weaknesses. B. Only significant deficiencies. C. Only material weaknesses. D. Neither significant deficiencies nor material weaknesses.

20. 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.

21. Which of the following would be least likely to be regarded as a test of a control? A. Tests of the additions to property by physical inspection. B. Comparisons of the signatures on cancelled checks to the authorized check signer list. C. Tests of signatures on purchase orders. D. Recalculation of payroll deductions.

22. For effective internal control, the billing function should not be performed by the: A. Sales department. B. Accounting department. C. Finance department. D. Information Processing department.

30. The definition of internal control developed by the Committee of Sponsoring Organizations (COSO) includes controls related to the reliability of financial reporting, the effectiveness and efficiency of operations, and: A. Compliance with applicable laws and regulations. B. Effectiveness of prevention of fraudulent occurrences. C. Safeguarding of entity equity. D. Incorporation of ethical business practice standards.

33. Which of the following is not ordinarily considered a factor indicative of increased financial reporting risk when an auditor is considering a client's risk assessment policies? A. Salaried sales personnel. B. Implementation of a new information system. C. Rapid growth of the organization. D. Corporate restructuring.

35. To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors: A. Trace a sample of 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.

36. When using sampling for tests of controls, which of the following audit consequences may follow? A. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too low. B. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too high. C. If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, the audit is likely to be faulty because of reduced substantive tests. D. If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, control risk will be assessed too low.

40. Which of the following types of risk is of critical importance to auditors in performing tests of controls? A. The risk of assessing control risk too low. B. The risk of assessing control risk too high. C. The risk of incorrect acceptance. D. The risk of incorrect rejection.

44. It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations the best alternative procedure the auditors might resort to would be: A. Examining subsequent receipts of year-end accounts receivable. B. Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a subsequent date. C. Requesting that management increase the allowance for uncollectible accounts by an amount equal to some percentage of the balance in those accounts that cannot be confirmed. D. Applying analytical procedures to accounts receivable and sales on a year-to-year basis.

46. Which of the following is an advantage of describing internal control through the use of a standardized questionnaire? A. Questionnaires highlight weaknesses in the system. B. Questionnaires are more flexible than other methods of describing internal control. C. Questionnaires usually identify situations in which internal control weaknesses are compensated for by other strengths in the system. D. Questionnaires provide a clearer and more specific portrayal of a client's system than other methods of describing internal control.

47. Which of the following is least likely to be considered a risk assessment procedure relating to internal control? A. Counting marketable securities at year-end. B. Inquiries of client personnel. C. Inspecting documents and reports. D. Observing the application of specific controls.

50. Which of the following would be least likely to be considered a benefit of effective internal control? A. Eliminating all employee fraud. B. Restricting access to assets. C. Detecting ineffectiveness. D. Ensuring authorization of transactions

51. After documenting the client's prescribed internal control, the auditors will often perform a walk-through of each transaction cycle. An objective of a walk-through is to: A. Verify that the controls have been implemented (placed in operation). B. Replace tests 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.

52. An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: A. No reply to a positive confirmation request is received. B. No reply to a negative confirmation request is received. C. Collectibility of the receivables is in doubt. D. Pledging of the receivables is probable.

52. The auditors have audited a sample with a standard deviation of audited values larger than they had originally estimated. In this situation, to maintain the risk of incorrect acceptance at its predetermined level without increasing the size of the sample, which of the following statements is correct? A. The adjusted allowance for sampling risk will be smaller than had been planned. B. The adjusted allowance for sampling risk will be larger than had been planned. C. The risk of incorrect rejection will necessarily decrease. D. The size of the population must be decreased.

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

55. The use of fidelity bonds protects a company from embezzlement loses and also: A. Minimizes the possibility of employing persons with dubious records in positions of trust. B. Reduces the company's need to obtain expensive business interruption insurance. C. Allows the company to substitute the fidelity bonds for various parts of internal control. D. Protects employees who made unintentional errors from possible monetary damages resulting from such errors.

55. Which of the following is not one of the criteria for revenue recognition? A. Collectibility is certain. B. Delivery has occurred or services have been rendered. C. Evidence of an arrangement exists and is persuasive. D. A fixed or determinable price to buyer exists.

56. In your review of ABC Company's financials, you note that Receivables have increased approximately 200% from the previous year, while Cash has declined. Further investigation reveals that 70% of ABC's receivables were booked within 7 days of the end of the quarter. If financial statement fraud is involved, which type is most likely? A. Fictitious revenues B. Timing differences C. Improper asset valuations D. Improper disclosures

59. Which of the following statements is correct about the sample size in statistical sampling when testing internal controls? A. The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size. B. As the likely rate of deviation decreases, the auditor should increase the planned sample size. C. The allowable risk of assessing control risk too low has no effect on the planned sample size. D. Of all the factors to be considered, the population size has the greatest effect on the sample size.

61. A situation in which the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect material misstatements on a timely basis is referred to as a: A. Control deficiency. B. Material weakness. C. Reportable condition. D. Significant deficiency.

67. Which of the following statements is correct concerning statistical sampling in tests of controls? A. The population size has little effect on determining sample size except for very small populations. B. The expected population deviation rate has little or no effect on determining sample size except for very small populations. C. As the population size doubles, the sample size also should double. D. For a given tolerable rate, a larger sample size should be selected as the expected population deviation rate decreases.

68. An advantage of using statistical sampling techniques is that such techniques: A. Mathematically measure risk. B. Eliminate the need for judgmental decisions. C. Define the values of allowance for sampling risk and tolerable misstatement required to provide audit satisfaction. D. Have been established in the courts to be superior to judgmental sampling.

69. If the independent auditors decide that the work performed by the internal auditors may have a bearing on their own procedures, they should consider the internal auditors': A. Competence and objectivity. B. Efficiency and experience. C. Independence and review skills. D. Training and supervisory skills.

69. 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.

72. In assessing the competence of a client's internal auditor, an independent auditor most likely would consider the A. Internal auditor's compliance with professional internal auditing standards. B. Client's policies that limit the internal auditor's access to management salary data. C. Evidence supporting a further reduction in the assessed level of control risk. D. Results of ratio analysis that may identify unusual transactions and events.

74. Which of the following best illustrates the concept of sampling risk? A. A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. B. An auditor may select audit procedures that are not appropriate to achieve the specific objective. C. An auditor may fail to recognize deviations in the documents examined for the chosen sample. D. The documents related to the chosen sample may not be available for inspection.

76. An auditor's purpose for performing tests of controls is to provide reasonable assurance that: A. Controls are operating effectively. B. The risk that the auditor 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.

83. When performing an audit of internal control under PCAOB requirements, auditors evaluate control: Design Effectiveness / Operating Effectiveness A. Option A - Yes / Yes B. Option B - Yes / No C. Option C - No / Yes D. Option D - No / No

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

Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the: A. Check Clearing for the 21st Century Act B. Public Company Accounting Oversight Board's Standard No. 2 C. Foreign Corrupt Practices Act D. Sarbanes-Oxley Act

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect: A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An embezzlement of cash receipts not recorded in the cash receipts journal before they had been deposited into the bank. D. A receivable collected that had previously been written off as uncollectible.

By preparing a four-column bank reconciliation ("proof of cash") for the last month of the year, an auditor will generally be able to detect: A. An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation. B. A cash sale which was not recorded on the books and was stolen by a bookkeeper. C. An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank. D. A credit sale which has been recorded twice in the sales journal.

When a client engages in transactions involving derivatives, the auditor should A. Develop an understanding of the economic substance of each derivative. B. Confirm with the client's broker whether the derivatives are for trading purposes. C. Notify the audit committee about the risks involved in derivative transactions. D. Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative.

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? A. A bank lockbox system. B. Approval of all disbursements by an individual independent of cash receipts. C. Monthly bank cutoff statements. D. Prenumbered remittance advices

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

Which of the following is the best audit procedure for the detection of Lapping? A. Comparison of postings of cash receipts to accounts with the details of cash deposits. B. Confirmation of the cash balance. C. Reconciliation of the cash account balances. D. Preparing a proof of cash.

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

80. The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United States: A. All companies. B. SEC registrants. C. Only those companies included in the Fortune 500. D. All nonpublic companies.

4. The procedures specifically outlined in an audit program are primarily designed to a. Protect the auditor in the event of litigation. b. Detect errors or irregularities. c. Test internal control structure. d. Gather evidence.

24. The effectiveness of controls is not generally tested by: A. Inspection of documents and reports. B. Performance of analytical procedures. C. Observation of the application of accounting policies and procedures. D. Inquiries of appropriate client personnel.

35. When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed level of control risk will: A. Be less than the preliminary assessed level of control risk. B. Equal the preliminary assessed level of control risk. C. Equal the actual control risk. D. Be less than the actual control risk.

12. Which of the following is least likely to be typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmations? A. Examine bills of lading. B. Physically examine items sold. C. Examine correspondence. D. Examine subsequent cash receipts.

15. Which of the following is least likely to be evidence of operating effectiveness of controls? A. Cancelled supporting documents. B. Confirmations of accounts receivable. C. Records documenting usage of computer programs. D. Signatures on authorization forms.

17. Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmations? A. Examine sales invoices. B. Inclusion of the information in the engagement letter. C. Examine correspondence. D. Examine any subsequent cash receipts.

21. 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.

22. Which of the following is not considered one of the five major components of internal control? A. Risk assessment. B. Segregation of duties. C. Control activities. D. Monitoring.

23. 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. Sending accounts receivable confirmations. C. Tracing the total sales in the sales journal to the general ledger. D. Observation of the physical inventory count at year-end.

25. On financial statement audits, 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. Performing tests of controls for all material controls. D. Its ability to provide reasonable assurance.

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

27. This organization developed a set of criteria that provide management with a basis to evaluate controls not only over financial reporting, but also over the effectiveness and efficiency of operations and compliance with laws and regulations: A. Foreign Corrupt Practices Corporation. B. Committee of Sponsoring Organizations. C. Cohen Commission. D. Financial Accounting Standards Board.

28. 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.

29. Which statement is correct concerning the definition of internal control developed by the Committee of Sponsoring Organizations (COSO)? A. Its applicability is largely limited to internal auditing applications. B. It is recognized in the Statements on Auditing Standards. C. It emphasizes the effectiveness and efficiency of operations over the reliability of financial reporting. D. It suggests that it is important to view internal control as an end product as contrasted to a process or means to obtain an end.

29. You were surprised to note that approximately 95% of returned positive accounts receivable confirmations indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that: A. The cash receipts journal was closed before year-end. B. The cash receipts journal was held open after year-end. C. There are many unrecorded liabilities. D. The sales journal was held open after year-end.

31. Which statement is correct concerning the relevance of various types of controls to a financial statement audit? A. An auditor may ordinarily ignore the consideration of controls when a substantive audit approach is used. B. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant. C. Controls over safeguarding assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant. D. All controls are ordinarily relevant to an audit.

32. Which of the following is not a component of the control environment? A. Integrity and ethical values. B. Risk assessment. C. Commitment to competence. D. Organizational structure.

32. Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts? A. Investigate confirmation exceptions for indication of amounts in dispute. B. Review accounts which have been written off as uncollectible prior to year-end. C. Investigate credit ratings for large accounts receivable. D. Discuss with the credit manager the current status of doubtful accounts.

34. The Sarbanes-Oxley Act of 2002 requires 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. Require that the company's CPA firm rotate the partner in charge of the audit. D. Review the level of management compensation.

38. Which of the following is not true about the confirmation of accounts receivable? A. Confirmation requests should bear the auditors' return address. B. Confirmation requests should be signed by the auditors. C. Confirmation requests should be mailed directly by the auditors. D. Confirmation requests should include a return envelope addressed to the office of the auditors.

39. During financial statement audits, the auditors' consideration of their clients' internal control is integral to both assess the risk of material misstatement and to: A. Assess inherent risk. B. Design further audit procedures. C. Assess compliance with the Foreign Corrupt Practices Act. D. Provide a reasonable basis for an opinion on compliance with applicable laws.

39. Which of the following is not true about the auditors' verification of notes receivable? A. The interest revenue on notes receivable is usually audited by independent computation. B. Inspecting the notes is sufficient evidence of existence of the notes. C. The auditors may evaluate the collectibility of notes by inspecting credit files. D. Confirmation of notes payable to banks may be accomplished in conjunction with the confirmation of cash balances.

40. Which of the following comes closest to outlining the auditors' responsibility for considering internal control in all financial statement audits? A. An understanding of the control environment, information and communication, risk assessment and monitoring is necessary; an understanding of control activities is only necessary for areas in which the auditor is performing tests of controls. B. The auditor must obtain an understanding of each of the five internal control components sufficient to assess the risks of material misstatement for the audit. C. When tests of controls have been performed, control risk must be assessed at a level less than the maximum. D. An understanding of the control environment is necessary, but no understanding of the other components is necessary unless control risk is to be assessed at a level less than the maximum.

41. Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use? A. The positive form for small balances, and the negative form for large balances. B. The positive form used for large balances and the negative form for the small balances. C. The positive form used for trade receivables and the negative form for other receivables. D. The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory.

42. What effect does obtaining a sample with a standard deviation larger than that estimated during planning have on the adjusted allowance for sampling risk? A. Increases. B. Decreases. C. No effect. D. Indeterminate.

43. When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if: A. Subsequent collections are to be reviewed. B. Internal control over receivables is good. C. Negative confirmations are to be used. D. There is a simultaneous examination of cash and accounts receivable.

44. Which of the following is not a responsibility that should be assigned to a company's internal audit department? A. Evaluating internal control. B. Approving disbursements. C. Reporting on the effectiveness of operating segments. D. Investigating potential merger candidates.

49. Tracing copies of sales invoices to shipping documents will provide evidence that all A. Shipments to customers were recorded as receivables. B. Billed sales were shipped. C. Debits to the subsidiary accounts receivable ledger are for sales shipped. D. Shipments to customers were billed.

49. Which of the following is not a factor that is considered a part of the client's overall control environment? A. The organizational structure. B. The information system. C. Management philosophy and operating style. D. Board of directors.

5. Which of the following is ordinarily designed to detect possible material dollar errors on the financial statements? a. Tests of controls. b. Analytical procedures. c. Computer controls. d. Post audit working paper review.

53. 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 should be reported to the audit committee. C. All such matters must be communicated to the audit committee and regulatory agencies. D. All control deficiencies are also significant deficiencies.

54. After considering the client's internal control the auditors have concluded that it is well designed and is functioning as anticipated. Under these circumstances the auditors would most likely: A. Cease to perform further substantive procedures. B. Reduce substantive procedures in areas where the internal control was found to be effective. C. Increase the extent of anticipated analytical procedures. D. Perform all tests of controls to the extent outlined in the preplanned audit program.

56. The independent auditors might consider the procedures performed by the internal auditors because: A. They are employees whose work must be reviewed during substantive testing. B. They are employees whose work might affect the independent auditors' work. C. Their work impacts upon the cost/benefit tradeoff in evaluating inherent limitations. D. Their degree of independence may be inferred by the nature of their work.

57. In the consideration of internal control, the operating effectiveness of controls is tested by: A. Flowcharts verification. B. Tests of controls. C. Substantive procedures. D. Decision tables.

59. The individual looking for guidance on revenue recognition is most likely to appropriately review: A. APB 99. B. SAB 104. C. ASR 44. D. B1 Document

60. An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that A. Obsolete inventory has not yet been reduced to fair market value. B. There was an improper cutoff of sales at the end of the year. C. An unusually large receivable was written off near the end of the year. D. The aging of accounts receivable was improperly performed in both years.

63. Well-designed internal control that is functioning effectively is most likely to detect an fraud arising from: A. The fraudulent action of several employees. B. The fraudulent action of an individual employee. C. Informal deviations from the official organization chart. D. Management fraud.

65. Controls are not designed to provide assurance that: A. Transactions are executed in accordance with management's authorization. B. Fraud will be eliminated. C. Access to assets is permitted only in accordance with management's authorization. D. The recorded accountability for assets is compared with the existing assets at reasonable intervals.

66. The scope of substantive procedures as compared to the scope of tests of controls generally vary: A. In a parallel manner. B. Inversely. C. Directly. D. Equally.

67. Which of the following is least likely to be a factor that might indicate to an auditor that an identified risk of misstatement requires special audit consideration? A. Complex calculations are involved. B. The rate of technological change is moderate in the industry. C. The potential for fraud seems high. D. Various subjective methods of application of a key accounting policy exist.

70. When performing a test of a control over cash disbursements, a CPA may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population: A. Must be recorded in a systematic pattern before the sample can be drawn. B. May occur in a systematic pattern and destroy the sample randomness. C. May systematically occur more than once in the sample. D. Must be systematically replaced in the population after sampling.

71. While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of: A. Incorrect acceptance. B. Incorrect rejection. C. Assessing control risk too high. D. Assessing control risk too low.

72. An auditor plans to examine a sample of 20 checks for counter signatures as prescribed by the client's control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and: A. Evaluate the results as if the sample size had been 19. B. Treat the missing check as a deviation for the purpose of evaluating the sample. C. Treat the missing check in the same manner as the majority of the other 19 checks, i.e., countersigned or not. D. Choose another check to replace the missing check in the sample.

73. There are many kinds of statistical estimates that an auditor may find useful, but basically every statistical estimate in auditing is of either a quantity or of an error rate. The statistical terms that roughly correspond to "quantities" and "occurrence rate", respectively, are: A. Attributes and variable. B. Variables and attributes. C. Constants and attributes. D. Constants and variables.

73. Which of the following factors would most likely be considered an inherent limitation to an entity's internal control? A. The complexity of the information processing system. B. Human judgment in the decision making process. C. The ineffectiveness of the board of directors. D. The lack of management incentives to improve the control environment.

75. Which of the following is intended to detect deviations from prescribed controls? A. Substantive procedures specified by a standardized audit program. B. Tests of controls designed specifically for the client. C. Analytical procedures as set forth in an industry audit guide. D. Computerized analytical procedures tailored for the configuration of the computer equipment in use.

77. An important statistic to consider when using a statistical sampling audit plan is the population variability. The population variability is measured by the: A. Sample mean. B. Standard deviation. C. Standard error of the sample mean. D. Estimated population total minus the actual population total.

78. Tests of controls are most likely to be performed when: A. Controls seem weak and must be properly documented. B. Inadequate substantive procedures exist to restrict audit risk to an acceptable level. C. The auditor wishes to assess control risk at the maximum. D. The client's control environment appears weak.

A practical and effective audit procedure for the detection of lapping is: A. Preparing an interbank transfer schedule. B. Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank. C. Tracing recorded cash receipts to postings in customers' ledger cards. D. Preparing a proof of cash.

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that A. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. B. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. C. The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. D. Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

An auditor may obtain information on the December 31 month end balance per bank in which of the following? December 31 Bank Statement Schedule of Bank (Cash Transfers) A. Yes Yes B. Yes No C. No Yes D. No No

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally not be able to detect: A. An unrecorded deposit made at the bank at the end of month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An unrecorded check cashed during that month. D. A bank charge during the month not recorded on the books

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.

In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to miscellaneous revenue. Select the most effective method for detecting this type of error. A. Foot the cash receipts journal for October. B. Send a bank confirmation as of year-end. C. Prepare a bank reconciliation as of year-end. D. Prepare a bank transfer schedule as of year-end.

Kiting would least likely be detected by: A. Analyzing details of large cash deposits around year end. B. Comparing customer remittance advices with recorded disbursements in the cash disbursements journal. C. Preparing a four-column bank reconciliation for all major cash accounts. D. Preparing a schedule of interbank transfers by using the client's records and bank statements around year end.

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.

The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except: A. Date due of a direct liability. B. The principal amount paid on a direct liability. C. Description of collateral for a direct liability. D. The interest rate of a direct liability.

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

Tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading) provides evidence about the: A. Completeness of recording of sales transactions. B. Occurrence of sales transactions. C. Billing of all sales transactions. D. Presentation of payables.

Which of the following is not a control that generally is established over cash receipts? A. To prevent abstraction of cash, a control listing should be prepared by mailroom personnel. B. To insure accurate posting the accounts receivable clerk should post the customers' receipts from the customers' checks C. To insure accuracy of the accounts receivable records, the records should be reconciled monthly to the accounts receivable controlling account. D. To prevent theft of cash, receipts should be deposited daily.

Which of the following procedures in the cash disbursement cycle should not be performed by the accounts payable department? A. Comparing the vendor's invoice with the receiving report. B. Canceling supporting documentation after payment. C. Verifying the mathematical accuracy of the vendor's invoice. D. Preparing the check for signature by an authorized person.

Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation? A. Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal. B. Receive a cutoff statement directly from the client's bank. C. Prepare a four column bank reconciliation using the year-end bank statement. D. Confirm the year-end balance using the standard form to confirm bank account balance information with financial institutions.

45. Which of the following is true about the auditors' consideration of internal control in a financial statement audit? A. The auditors must assess control risk at a level lower than the maximum. B. The auditors must prepare a flowchart description of internal control for their working papers. C. The auditors must obtain an understanding of the steps in processing major types of transactions. D. The auditors must perform tests of controls.

1. Of the following, which is the least persuasive type of audit evidence? a. Documents mailed by outsiders to the auditor. b. Correspondence between auditor and vendors. c. Copies of sales invoices inspected by the auditor. d. Computations made by the auditor.

11. 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 (bills of lading) file.

12. In assessing the objectivity of a client's internal auditors, the CPA would be most likely to consider internal auditor: A. Education levels. B. Experience. C. Organizational status within the company. D. Training and supervisory skills.

13. Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system which of the following is most likely to be overstated relating to the year XX financial statements? A. Sales. B. Cash. C. Inventory. D. Accounts receivable.

14. After obtaining an understanding of internal control and arriving at a preliminary assessed level of control risk, an auditor decided to perform tests of controls. The auditor most likely decided that: A. Additional evidence to support a reduction in the assessed level of control risk is not available. B. An increase in the assessed level of control risk is justified for certain financial statement assertions. C. It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures. D. There were many internal control deficiencies that would allow misstatements to enter the accounting system.

18. Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle? A. Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables. B. Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in other customers' accounts permitting a misappropriation of cash. C. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. D. The failure to prepare shipping documents may lead to an understatement of inventory balances.

2. Analytical procedures are a. Substantive tests designed to evaluate a system of internal control. b. Tests of controls designed to evaluate the validity of management's representation letter. c. Substantive tests designed to evaluate the reasonableness of financial information. d. Tests of controls designed to evaluate the reasonableness of financial information.

23. Which of the following statements is correct concerning the understanding of internal control needed by auditors? A. The auditors must understand the information system, not the accounting system. B. The auditors must understand monitoring and all preliminary accounting controls. C. The auditors must have a sufficient understanding to assess the risks of material misstatement. D. The auditors must understand the control environment, risk assessment, and all control activities.

24. An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific program steps to apply to the accounts and transactions. In a particular case, s/he might do this by: A. Tracing sales invoices to shipping documents to tests 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.

26. Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor? A. A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year. B. Internal control activities over the recording of cash receipts have been improved since the end of the prior year. C. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet. D. The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.

27. 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 a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require 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 CPAs, rather than the client.

3. Which of the following best describes the primary purpose of audit procedures? a. To detect errors or irregularities. b. To comply with generally accepted accounting principles. c. To gather corroborative evidence. d. To verify the accuracy of account balances.

31. Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? A. Merchandise received is not promptly reconciled to the outstanding purchase order file. B. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value. C. The write-off of receivables by personnel who receive cash permits the misappropriation of cash. D. Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.

33. 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.

34. 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.

36. Which of the following generally provides the least evidence regarding the valuation of accounts receivable? 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.

37. The provisions of the Foreign Corrupt Practices Act apply to: A. All U.S. corporations. B. All U.S. corporations that engage in foreign operations. C. All corporations that must file under the Securities Exchange Act of 1934. D. All U.S. partnerships and corporations.

39. Which of the following may be used to reduce the risk of nonsampling errors? A. Increasing the size of audit samples. B. Stratifying audit samples. C. Adequately planning audit samples. D. Using statistical sampling techniques.

41. Which of the following is not a primary procedure auditors use to obtain sufficient knowledge about the design of the relevant controls and to determine whether they have been implemented (placed in operation)? A. Previous experience with the entity. B. Inquiries of appropriate management personnel. C. Performance of substantive procedures. D. Inspection of document and records.

42. The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful? A. A substantial number of accounts are in disputes. B. The combination of inherent risk and control risk is high. C. Client records include a large number of relatively small balances. D. The auditors believe that recipients of the requests are unlikely to give them consideration.

43. For effective internal control, which of the following functions should not be assigned to the company's accounting department? A. Reconciling accounting records with existing assets. B. Recording financial transactions. C. Signing payroll checks. D. Preparing financial reports.

45. The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditors to: A. Consider internal control over credit sales. B. Test the accuracy of recorded charge sales. C. Estimate credit losses. D. Verify the validity of the recorded receivables.

48. Which of the following is least likely to be considered a risk assessment procedure? A. Analytical procedures. B. Inspection of documents. C. Observation of the counting of inventory. D. Observation of the performance of certain accounting procedures.

52. The major components of internal control include all of the following, except: A. Risk assessment. B. The control environment. C. Internal auditing. D. Control activities.

53. Johnson is engaged in the audit of a utility which supplies power to a residential community. All accounts receivable balances are small and internal control is effective. Customers are billed bi-monthly. In order to determine the validity of the accounts receivable balances at the balance sheet date, Johnson would most likely: A. Examine evidence of subsequent cash receipts instead of sending confirmation requests. B. Send positive confirmation requests. C. Send negative confirmation requests. D. Use statistical sampling instead of sending confirmation requests.

58. Statistical sampling generally may be applied to test internal control when the client's internal control procedures: A. Depend primarily on appropriate segregation of duties. B. Are carefully reduced to writing and are included in client accounting manuals. C. Leave an audit trail in the form of evidence of compliance. D. Enable the detection of material fraud in the accounting records.

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

58. Which of the following revenue related transactions is not linked to the accounts indicated? A. Recognize revenues too early--accounts receivable and revenue. B. Understate allowance for doubtful accounts--Bad debt expense, allowance for doubtful accounts. C. Don't write off uncollectible receivables--sales returns, sales discounts. D. Don't record discounts given to customers--Cash, sales discounts, accounts receivable.

60. At least what level of probability of a material misstatement is required for a control deficiency to be considered a material weakness? A. More than remote. B. Probable. C. Reasonable possibility. D. Sufficient.

60. To determine sample size in an attribute sampling application, what must be specified? A. Population mean, expected error rate, allowance for sampling risk. B. Allowance for sampling risk, risk of assessing control risk too low, standard deviation. C. Allowance for sampling risk, risk of assessing control risk too low, expected deviation rate. D. Population mean, standard deviation, allowance for sampling risk.

62. To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to the: A. Financial vice-president. B. Corporate controller. C. Audit committee. D. Corporate stockholders.

63. An auditor wishes to estimate inventory shrinkage by weighing a sample of inventory items. From experience, the auditor knows that a few specific items are subject to unusually large amounts of shrinkage. In using statistical sampling, the auditor's best course of action is to: A. Eliminate any of the items known to be subject to unusually large amounts of shrinkage. B. Increase the sample size to lessen the effect of the items subject to unusually large amounts of shrinkage. C. Stratify the inventory population so that items subject to unusually large amounts of shrinkage are reviewed separately. D. Continue to draw new samples until a sample is drawn which includes none of the items known to be subject to large amounts of shrinkage.

64. If all other factors specified in an attributes sampling plan remain constant, changing the specified tolerable rate from 6% to 10%, and changing the specified risk of assessing control risk too low from 3% to 7% would cause the required sample size to: A. Increase. B. Remain the same. C. Decrease. D. Change by 4%.

65. Which of the following factors does an auditor need to consider in planning a particular audit sample for a test of control? A. Number of items in the population. B. Total dollar amount of the items to be sampled. C. Acceptable level of risk of assessing control risk too low. D. Tolerable misstatement.

66. When using a statistical sampling plan, the auditors would probably require a smaller sample if the: A. Population increases. B. Desired allowance for sampling risk decreases. C. Desired risk of incorrect acceptance increases. D. Expected deviation rate increases.

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

7. In the context of an audit of financial statements, substantive tests are audit procedures that a. May be eliminated under certain conditions. b. Are designed to discover significant subsequent events. c. May be either tests of transactions, direct tests of financial balances, or analytical tests. d. Will increase proportionately with the auditor's assessment of control risk.

70. In the consideration of internal control, the auditor is basically concerned that it provides reasonable assurance that: A. Management can not override the system. B. Operational efficiency has been achieved in accordance with management plans. C. Misstatements have been prevented or detected. D. Controls have not been circumvented by collusion.

81. An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses financial statements and: A. Compliance with laws. B. Internal control over asset safeguarding. C. Internal control over financial reporting. D. Suitable criteria.

82. A report on internal control performed in accordance with PCAOB Standard No. 2 includes an opinion on internal control for: A. The entire year. B. The prior quarter. C. The "as of date." D. The end of each quarter.

84. When performing an internal control audit under PCAOB requirements, one or more material weaknesses in internal control that exist at year-end may result in what type of report(s): Qualified / Adverse A. Option A - Yes / Yes B. Option B - Yes / No C. Option C - No / Yes D. Option D - No / No

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 had 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 CPA did not sign the confirmation request before it was mailed.

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. Which of the following is most likely to be effective in detecting this fraud? A. Bank confirmation B. Bank transfer schedule prepared using only the cash receipts and cash disbursements journal. C. Comparison of bank cutoff statement to the cash receipts and disbursements records. D. Receivable confirmation

The auditors' count of the client's cash should be coordinated to coincide with the: A. Consideration of the internal controls with respect to cash. B. Close of business on the balance sheet date. C. Count of investment securities. D. Count of inventories.

Which of the following is not a control over cash disbursements? A. Disbursements should be made by check. B. A check protecting machine should be used. C. Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse. D. Voided checks should be defaced and filed with paid checks

Which of the following is one of the better auditing techniques that might be used to detect kiting? A. Review composition of authenticated deposit slips. B. Review subsequent bank statements and canceled checks received directly from the banks. C. Prepare a schedule of bank transfers. D. Prepare year-end bank reconciliation

Which of the following statements is not correct? A. Cash is important to the audit process because of its vulnerability to misappropriation, despite the fact that the balance at the balance sheet date may be immaterial. B. Payroll cash account balances kept on an imprest basis are more easily controlled that others not kept so. C. Confirmation of cash should only be performed as of the balance sheet date because the auditor expresses an opinion as of that date. D. Reviewing interbank transfers is important to the auditor because of the possibility that the client may be engaged in kiting.

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.

13. In a financial statement audit performed following AICPA Professional Standards, how frequently must an auditor test operating effectiveness of controls that appear to function as they have in past years and on which the 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.

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

17. Tests of controls do not ordinarily address: A. By whom a control was applied. B. How a control was applied. C. The consistency with which a control was applied. D. The cost effectiveness of the way a control was applied.

18. Which is most likely when the assessed level of control risk increases? A. Change from performing substantive procedures at year-end to an interim date. B. Perform substantive procedures directed inside the entity rather than tests directed toward parties outside the entity. C. Use the maximum number of dual purpose tests. D. Use larger sample sizes for substantive procedures.

19. 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.

20. A client's internal control appears strong, but the CPA has elected not to perform any tests of controls. The planned assessed level of control risk is at what level? A. Zero. B. Low. C. Moderate. D. Maximum.

26. A significant deficiency: A. Differs from a material weakness in that it involves internal control over operations 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.

28. Which of the following is most likely to be considered a risk assessment procedure relating to internal control? A. Confirm accounts receivable. B. Perform a test of a 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.

36. Under which circumstance is it likely that the extent of substantive procedures will be expanded beyond that anticipated in the audit plan? A. The auditors have determined that controls have been implemented (placed in operation) but, in accordance with the audit plan, have performed no tests of controls. B. Certain controls do not leave a trail of documentary evidence. C. Deviation rates were greater than zero and approached anticipated levels. D. The operating effectiveness of certain controls was found to be less than expected, although no material misstatements were identified.

37. Which of the following would indicate the need to use positive accounts receivable confirmations? A. A large population consisting of small balances. B. Good internal control over accounts receivable. C. Most accounts are with large reputable companies. D. A large number of accounts receivable are in dispute.

38. If the auditors do notperform tests of controls for certain assertions: A. They have performed 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.

40. 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.

42. 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.

46. Which of the following is not a primary objective of the auditors in the examination of accounts receivable? A. Determine the approximate realizable value. B. Consider the adequacy of internal control. C. Establish the existence of receivables. D. Determine the expected day of collection of each of the receivables.

47. Once a CPA has determined that accounts receivable have increased due to slow collections in a "tight money" environment, the CPA would be likely to: A. Increase the balance in the allowance for bad debts accounts. B. Review the going concern ramifications. C. Review the credit and collection policy. D. Expand tests of collectibility.

48. Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control? A. Preparation of monthly statements to customers and maintenance of the accounts payable subsidiary ledger. B. Posting to the general ledger and approval of additions and terminations relating to the payroll. C. Custody of unmailed signed checks and maintenance of expense subsidiary ledger. D. Collection of receipts on account and maintaining accounts receivable records.

50. Which of the following is the best argument against the use of negative accounts receivable confirmations? A. The cost-per-response is excessively high. B. There is no way of knowing if the intended recipients received them. C. Recipients are likely to feel that in reality the confirmation is a subtle request for payment. D. The inference drawn from receiving no reply may not be correct.

51. When there are a large number of relatively small account balances, negative confirmation of accounts receivable is feasible if the combination of inherent risk and control risk is: A. Low, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. B. High, and the individuals receiving the confirmation requests are likely to give them adequate consideration. C. High, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. D. Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.

56. During the final planning of the accounts receivable program a CPA specified a tolerable misstatement of $30,000, instead of the $20,000 contained in the preliminary audit program. What would be the impact of this change? A. A decrease in population standard deviation. B. An increase in sample standard deviation. C. An increase in required sample size. D. A decrease in the required sample size.

57. Recognizing a loan received as revenue instead of as a liability has a positive effect on the reported financial statements for all of the following except: A. It understates liabilities. B. It overstates revenues C. It overstates net income. D. It overstates assets.

57. Which of the following is an advantage of systematic selection over random number selection? A. It provides a stronger basis for statistical conclusions. B. It enables the auditor to use the more efficient "sampling with replacement" tables. C. There may be correlation between the location of items in the population, the feature of sampling interest, and the sampling interval. D. It does not require establishment of correspondence between random numbers and items in the population.

59. A material weakness involves an amount that could result in a misstatement that is A. Smaller than inconsequential. B. Larger than inconsequential. C. Tolerable. D. Material.

6. Which of the following statements relating to the competence of evidential matter is always true? a. Evidential matter gathered by an auditor from outside an enterprise is reliable. b. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory conditions. c. Oral representations made by management are not valid. d. Evidence gathered by auditors must be both valid and relevant to be considered competent.

61. The tolerable deviation rate in sampling for tests of controls is: A. Used to determine the probability of the auditor's conclusion based upon reliance factors. B. The probability that the financial statements are not materially in error. C. A measure of the reliability of substantive tests. D. The rate the auditor will tolerate without modifying the planned assessment of control risk.

62. In testing accounts receivable, an auditor sends out positive confirmation requests to 100 randomly selected customers. A customer returns the confirmation indicating that the balance is correct when, in fact, the balance is overstated. This is an example of: A. Projected misstatement. B. Sampling error. C. Standard error. D. Nonsampling error.

64. The program flowcharting symbol representing a decision is a: A. Triangle. B. Circle. C. Rectangle. D. Diamond.

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

71. Which of the following is least likely to be considered an appropriate response relating to risks the auditors identify at the financial statement level? A. Assign more experienced staff. B. Incorporate additional elements of unpredictability in the selection of audit procedures. C. Increase the scope of auditor procedures. D. Emphasize the need to remain neutral, rather than to exercise professional skepticism.

74. 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.

76. Various factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? A. Lower assessment of control risk. B. Greater reliance on analytical procedures. C. Smaller expected frequency of misstatements. D. Smaller measure of tolerable misstatement.

77. Of the following statements about internal control, which one is not valid? A. No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. B. Transactions must be properly authorized before such transactions are processed. C. Because of the cost/benefit relationship, a client may apply control procedures on a test basis. D. Control activities reasonably insure that collusion among employees can not occur.

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

85. When performing an internal control audit under PCAOB standards, one or more material weaknesses in internal control that exist at year-end may result in what type of report(s): Qualified / Disclaimer A. Option A - Yes / Yes B. Option B - Yes / No C. Option C - No / Yes D. Option D - No / No

An auditor's analytical procedures have revealed that the accounts receivable of a client have doubled since the end of the prior year. However, the allowance for doubtful accounts, as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor? A. Credit standards were liberalized in the current year. B. Twice as many accounts receivable were written off in the prior year as compared to this year. C. A greater percentage of accounts were currently listed in the "more than 90 days overdue" category than in the prior year. D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

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 test 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.

In a manufacturing company, which one of the following audit procedures would give the least assurance of the existence of the assets in the general ledger balance of investment in stocks and bonds at the audit date? A. Confirmation from the broker. B. Inspection of year-end brokers' statements. C. Vouching all changes during the year to brokers' advises and statements. D. Examination of paid checks issued in payment of securities purchased.

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. Securities are held under joint control of two or more officials.

Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? A. Tracing recorded dividend income to cash receipts 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.

Properly designed internal control will permit the same employee to: A. Receive and deposit checks, and also approve write-offs of customer accounts. B. Approve vouchers for payment, and also receive and deposit cash. C. Reconcile the bank statements, and also receive and deposit cash. D. Sign checks, and also cancel supporting documents.

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.

The auditors should insist that a representative of the client be present during the physical examination of the securities in order to: A. Lend authority of the auditor's directives. B. Detect forged securities. C. Coordinate the return of all securities to proper locations. D. Acknowledge the receipt of securities returned

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

Which of the following is correct concerning "window dressing" for cash? A. A segregation of duties within the cash function effectively eliminates its occurrence. B. It generally involves manipulation of inventory. C. It is illegal, and an audit is designed to provide reasonable assurance of its detection. D. Many forms of it require no action by the auditors.

Which of the following is not a control that generally is established over cash transactions? A. Separating cash handling from recordkeeping. B. Centralizing the receipt of cash. C. Depositing each day's receipts intact. D. Obtaining a receipt for every disbursement.

Which of the following is not confirmed on the standard form used for cash balances at financial institutions? A. Cash checking account balances. B. Cash savings account balances. C. Loans payable. D. Securities held for the client by the financial institution.

Your client left the cash receipts 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 statements? A. Sales are understated. B. Accounts receivable are understated. C. Inventory is overstated. D. Net income is overstated.

1. The department approving a sales transaction should be the shipping department.

False

2. Accounts receivable that are written-off should not be turned over to a collection agency.

False

62. Internal control over sales transactions is very important to the effectiveness of an organization. a. For effective control over credit sales, describe four major functions that should be segregated. b. In addition to adequate segregation of duties, describe two other internal controls over sales transactions.

Functions that should be segregated to provide for effective internal control over sales transactions include (only four required): Authorization of sales. Credit approval. Issuance of merchandise from stock. Shipping of merchandise. Billing of accounts. Maintenance of accounting records. b. Other internal controls over sales transactions include (only two required): Verification of invoices. Prenumbered shipping documents that are accounted for by the billing department. Credit approval obtained prior to shipment of goods. Mailing of monthly customer statements. Control over written-off receivables.

63. Fraudulent sales are occasionally recorded at year-end as a means of overstating financial results. As examples, companies may engage in inappropriate bill and hold transactions or channel stuffing. a. Describe two conditions that might indicate the recording of fraudulent sales. b. Define bill and hold transactions and describe the audit significance of such transactions. c. Define channel stuffing and describe the audit significance of this practice.

The following conditions may indicate the recording of fraudulent transactions: Unusually large increases in year-end sales to a single customer or a few. Large increases in revenue and receivables along with increases in gross profit margins that are inconsistent with the client's experience or industry averages. Inappropriate changes in accounting principles that result in an increase in recorded revenue. Substantial sales returns following the balance sheet date. b. Bill and hold transactions are sales that are billed but goods are not shipped. The audit significance is that stringent accounting requirements must be met for the transaction to qualify as sales. c. Channel stuffing involves providing large inducements to resellers to buy substantially more inventory than they can resell in a normal period of time. The audit significance is that an adequate allowance for sales returns must be established to appropriately account for the transactions.

61. Confirmation of accounts receivable is generally accepted auditing procedure. In performing this procedure, auditors use positive confirmations or negative confirmations or a combination of both. a. Describe three conditions which should exist for the auditors to use the negative form of request. b. If a response is not received to an initial positive confirmation request, describe the action that should be taken by the auditors, including a discussion of alternative auditing procedures.

a. The conditions that should exist for the auditors to use negative confirmation requests include: 1. The combined assessed level of inherent and control risk is low, 2. A large number of small balances, and 3. Reason to believe the person receiving the confirmation will give it consideration. b. If the initial response to a positive confirmation is not received, the auditors should: 1. Send a second request. 2. Consider sending a third request or telephoning the customer. 3. For significant nonrespondents perform alternative auditing procedures including: Examining subsequent cash receipts. Vouching transactions making up the account balance to invoices and shipping documents. Establishing the validity of the customer.

Final Review 7-11

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