16. Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes?
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.
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.
38. If the auditors do not perform 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.
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.
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.
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.
47. Smith Corporation has numerous customers. A customer file is kept on disk storage. Each account in the customer file contains name, address, credit limit, and account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to:
A) Develop test data that would cause some account balance to exceed the credit limit and determine if the system properly detects such situations.
B) Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit.
C) Require a printout of all account balances so they can be manually checked against the credit limits.
D) Request a printout of a sample of account balances so they can be individually checked against the credit limits.
48. In their consideration of a client's IT controls, the auditors will encounter general controls and application controls. Which of the following is an application control?
A) The operations manual.
B) Hash total.
C) Systems documentation.
D) Control over program changes.
50. The purpose of using generalized computer programs is to test and analyze a client's computer:
D) Processing logic.
54. The completeness of computer-generated sales figures can be tested by comparing the number of items listed on the daily sales report with the number of items billed on the actual invoices. This process uses:
A) Self-checking numbers.
B) Control totals.
C) Validity tests.
D) Process tracing data.
58. A company's labor distribution report requires extensive corrections each month because of labor hours charged to inactive jobs. Which of the following data processing input controls appears to be missing?
A) Completeness test.
B) Validity test.
C) Limit test.
D) Control total.
59. Passwords for microcomputer software programs are designed to prevent:
A) Inaccurate processing of data.
B) Unauthorized access to the computer.
C) Incomplete updating of data files.
D) Unauthorized use of the software.
19. A dual purpose test simultaneously:
A) Addresses two different accounts.
B) Functions as a substantive test and as a test of controls.
C) Functions as an analytical procedure and a substantive test.
D) Substantiates an ending balance and the transactions making up the balance.
55. Which of the following situations will result in the auditors concluding that the risk of material misstatement is too high when using nonstatistical sampling for substantive tests?
A) The projected misstatement exceeds the tolerable misstatement.
B) The allowance for sampling risk exceeds the projected misstatement.
C) The risk of incorrect acceptance exceeds the risk of incorrect rejection.
D) The tolerable misstatement exceeds the sample net misstatement.
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.
11. 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.
23. 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.
47. 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.
49. Which of the following cash transfers is most likely to result in a misstatement of cash at December 31, 19X7?
A) Transfer A
B) Transfer B
C) Transfer C
D) Transfer D
53. The Parmalat fraud case involved:
A) A fraudulent cash confirmation.
B) Kiting of funds between banks in India and banks in Pakistan.
C) A bank reconciliation performed by the client that systematically understated cash.
D) Major unrecorded disbursements for equipment.
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?
D) 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.
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.
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.
62. 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.