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audit exam 2

Terms in this set (128)

The Most important fundamental component of an entity's internal control is
People who operate the control system

"People" is the most important fundamental component
The Primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to
determine the nature, timing, and extent of further audit tests to be performed in the audit
Effectiveness of audit procedures would be reduced by
Performing Procedures during the interim period as opposed to at the fiscal year-end date
According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to
Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed.
To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except for:
Confirmation of balances.
Which of the following is a preventive control?
Separation of duties between the payroll and personnel departments
In most audits of large entities, control risk assessment contributes to audit efficiency, which means that
Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs
Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client
An internal control questionnaire
Tests of controls in a GAAS audit are required for
Obtaining evidence about the operating effectiveness of client control activities
A transaction-level internal control activity is best described as
An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company
When planning the audit of internal controls for an issuer, the audit team should
Identify significant accounts, locations, and assertions.
A material weakness is a situation in which
It is reasonably possible taht a material misstatement would not be detected on a timely basis
When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on
Both the magnitude of the potential misstatement resulting from the deficiency or the deficiencies and whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure.
Which of the following does not accurately summarize auditors' requirements regarding internal control
Test controls: Public- yes Nonpublic-yes
When completing the audit of internal controls for a public company, the PCAOB requires auditors to audit internal controls over
Financial reporting
When completing the audit of internal controls for a public company, AS 5 requires auditors to report on
Management's report on internal control- NO
An audit of internal control- Yes
AS 5 requires auditors to issue a report on the audit of
Internal Controls
When completing the audit of internal controls for a public company, AS 5 requires auditors to test
Both operating and design effectiveness
Which of the following would probably not be considered an indication of material weakness
Overproduction by the manufacturing plant
Which report would not be appropriate for a public accounting firm to provide on financial reporting controls
Disclaimer of opinion- significant deficiencies exist
A disclaimer is used
when the auditor's scope is limited but not when significant deficiencies exist, so it is not an appropriate report.
The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the
Authorization of transactions from the custody of related assets.
Which of the following statements is not true with respect to the auditors' report on internal control over financial reporting?
The report will be dated as of the date of the financial statements.
If the auditors encounter a significant scope limitation in evaluating a public company's internal control over financial reporting, which of the following types of opinions on the effectiveness of the company's internal control over financial reporting would be appropriate?
Disclaimer of opinion.
Which of the following information would be included in the introductory paragraph of the auditors' report on internal control over financial reporting if the report is presented separately from the auditors' report on the entity's financial statements?
Statements identifying the responsibility of the auditors and management for internal control over financial reporting.
If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must
Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period
of reliance.
Matters that could affect the necessary extent of testing for a control activity as it related to the degree of auditor reliance on a control activity would not include the following:
The frequency of the performance of the control by the company during the period being audited.

The length of time that the auditor is planning to rely on the operating efficiency of the control activity.

The expected rate of deviation for a control activity.

All of the above are matters that could affect the necessary extent of testing of a control.
The auditor should assess control risk for each relevant assertion by evaluating the evidence obtained from all sources, including
The auditor's testing of controls for the audit of internal control on a public company.

Misstatements detected during the financial statement audit.

Any control deficiencies identified during the audit.

All of the above.
Once the auditor detects a control deficiency, which of the following steps must he or she take first?
Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion.
Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks?
Testing the operating effectiveness of the relevant controls would not be efficient.
When testing a control activity's operating effectiveness, procedures the auditor performs to test operating effectiveness would likely include
Inquiry of appropriate personnel and reperformance of the control activity.
Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?
Require employees to have their direct supervisors approve their time cards.
A sales clerk enters a customer's six-number customer account. The computer program uses the first five numbers to calculate a sixth number. This resulting number is then compared to the sixth number entered by the sales clerk. This is an example of a
check digit.
Which of the following would probably not be considered an indication of a material weakness?
Overproduction by the manufacturing plant.
When auditing with "fraud awareness," auditors should especially notice and follow up employee activities under which of these conditions?
The company always estimates the inventory but never takes a complete physical count.
The best way to enact a broad fraud prevention program is to
Practice management "of the people and for the people" to help them share personal and professional problems.
A good fraud prevention program should address employees' motivation to steal from the company. The best method for doing this is to
Establish employee assistance programs.
A code of ethics is an important element of a fraud prevention program. Which of the following would diminish the effectiveness of a company's code of conduct?
The violation of the code of ethics by senior management.
Which of the following is least indicative of fraudulent activity?
Bank reconciliation has no outstanding checks or deposits older than 15 days.
Which of the following combinations is a good way to conceal employee fraud but an ineffective means of perpetrating management (financial reporting) fraud?
Overstating sales revenue and overstating bad debt expense.
Allison Everhart, an employee in accounts payable, believes she can run a fictitious invoice through the accounts payable system and collect the money. She knows payments are subject to an audit. Which account would be the best place to hide the fraud?
Consulting service expense.
Which of these arrangements of duties could most likely lead to an embezzlement or theft?
The inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records.
Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances?
The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
Which of the following is an effective audit procedure that an auditor might use to detect kiting between intercompany banks?
Prepare a schedule of the bank transfers.
Kiting involves
a mismatching of dates of recording cash transactions around year-end, and the schedule of bank transfers is
designed to show all the relevant dates so the auditor can see that the entries were made in the proper periods.
Immediately upon receipt of cash, a responsible employee should
Prepare a remittance listing.
Each morning the controller gets the prior day's list of remittances, a copy of the payment report, and a copy of the deposit slip returned from the bank. When comparing these items, the controller would be able to determine that
The cash received and remittance advice received were maintained in a single batch.
Upon receipt of customers' checks in the mail room, a responsible employee should prepare a remittance list that is forwarded to the cashier. A copy of the list should be sent to the
Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?
Understating the sales journal.
Embezzlement is a type of fraud that involves
An employee misappropriating an employer's money or property entrusted to the employee's control in the employee's normal
job.
Which of the following control activities would best protect against the preparation of improper or inaccurate cash disbursements?
All signed checks must be reviewed and compared with supporting documentation by the treasurer before mailing.
During an audit of cash, the auditor is most concerned with the management assertion of
Existence.
In preparing for the audit of cash, the auditors perform analytical procedures concerning cash balances. Which of the following would be the best source of information for use in the estimate of cash?
Cash budgets.
Which of the following control activities could prevent a paid disbursement voucher from being presented for payment a second time?
The official signing the check should compare it with the voucher and should stamp "paid" on the voucher documents.
Fraud risk factors are events or conditions that indicate which of the following:
All of these are correct.

An opportunity to carry out a fraud.

An attitude or rationalization that justifies a fraudulent action.

An incentive or pressure to perpetrate fraud
If the auditor believes that a misstatement is or might be intentional and the effect on the financial statements could be material or cannot be readily determined, the auditor should do which of the following?
Perform procedures to obtain additional audit evidence to determine whether fraud has occurred or is likely to have occurred.
In what way can audit procedures be modified to address assessed fraud risks?
Perform procedures close to year-end.

Obtain more reliable information.

All of these are valid modifications.

Apply computer-assisted techniques to all items.
Incorporating elements of unpredictability in the selection of audit procedures to be performed by auditors include all of the following except
Sending attorney letters to every attorney listed under the legal expense account.
Fraud risk factors are events or conditions that indicate

I. An incentive or pressure to perpetrate fraud.
II. An opportunity to carry out the fraud.
III. An attitude or rationalization that justifies the fraudulent action.

Which of the following statements is true?
I, II, and III are fraud risk factors.
Narbona, CPA, is reviewing controls over cash received through a bank night depository. Which controls would she find most important?
Dual control (joint custody) is established over the contents of the night depository box from the time of removal until initial recording is completed.
An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if
the client does not take the remedial action that the auditor considers necessary.
When auditing financial statements and finding indications of a possible misappropriation of assets, independent auditors should
identify persons who are likely responsible for the misappropriation and obtain evidence about some other fraud indications in their work.

determine the methods by which the misappropriation was carried out.

investigate fully to determine the total amount of the misappropriation.

determine which accounts are affected and the amount by which they are overstated or understated.

do all of these.
An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the
cutoff bank statement is reconciled.
Revenues are normally considered to have been earned when
The company has substantially accomplished what it must to be entitled to the benefits.
Sales are normally recorded on the date of the
Sales invoice.
When auditing the revenue and collection cycle, auditors normally select balances to confirm from the
Accounts receivable listing.
Which of the following accounts is not normally part of the revenue and collection cycle?
Purchases Returns and Allowances.
The control procedure "credit sales approved by credit department" is directed toward which transaction assertion?
Accuracy
Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable?
Have customers send payments directly to the company's depository bank.
Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable?
Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting
evidence.
Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?
Unrecorded sales.
An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that
Entries in the accounts receivable subsidiary ledger were properly invoiced.
An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor is most likely concerned about
Fictitious sales.
An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor interviewed the sales manager, who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor test the sales manager's representation?
Obtain copies of all price lists in use during the year and vouch the prices to sales invoices.
To conceal a theft involving receivables, a dishonest bookkeeper might charge which of the following accounts?
Sales returns.
Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern?
"These goods were returned for credit on November 15."
A client has a separate sales group for its largest "preferred" customers, a select group of customers who normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform?
Send out positive confirmations on a large sample of these customers.
Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily to
Estimate credit losses.
Which of the following might be detected by auditors' cutoff review and examination of sales journal entries for several days prior to the balance sheet date?
Inflating sales for the year.
Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the
Existence of the balances confirmed.
Which of the following is the best reason for prenumbering in numerical sequence documents such as sales orders, shipping documents, and sales invoices?
Enables personnel to check the numerical sequence for missing documents and unrecorded transactions.
When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to
Sales invoices with shipping documents and customer sales invoices.
In the audit of accounts receivable, the most important emphasis should be on the
Existence assertion.
When accounts receivable are confirmed at an interim date, auditors need not be concerned with
Sending negative confirmations to all customers as of the year-end date.
The negative request form of accounts receivable confirmation is useful particularly when the
Assessed Level of Risk of Material Misstatement Relating to Receivables Is- Low

Number of Small Balances Is - Many

Proper Consideration by the Recipient Is- Likely
When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that
Shipments to customers were invoiced.
Write-offs of doubtful accounts should be approved by
The treasurer.
When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except
Do nothing for immaterial balances.
Which of the following internal control activities most likely would deter lapping of collections from customers?
Separation of duties between receiving cash and posting the accounts receivable ledger.
The financial records of the Movitz Company show that R. Dennis owes $4,100 on an account receivable. An independent audit is being carried out, and the auditors send a positive confirmation to R. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here?
Inherent risk was particularly high for accounts receivable.
An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?
The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period
An auditor is required to confirm accounts receivable if the accounts receivable balances are
Material to the financial statements.
During the confirmation of accounts receivable, an auditor receives a confirmation via the client's fax machine. Which of the following actions should the auditor take?
Accept the confirmation but verify the source and content through a telephone call to the respondent.
The use of confirmations to test accounts receivable is considered a generally accepted audit procedure.
True
Favorite Soda Company distributes beverages in the Portland, Oregon area. Which of the following would be the test to determine that shipments made were actual sales?
Vouch bills of lading to the customer order documents.
If the auditor obtains sufficient competent evidence on the client's accounts receivable balance by alternative procedures because it is impractical to confirm accounts receivable, the auditor's opinion should be unqualified and could be expected to
avoid mentioning the alternative procedures.
A small business owner can best offset the lack of separation of duties by
being actively involved in the accounting process.
Which of the following audit procedures is the most effective in testing sales for understatement?
Trace a sample of shipping documents to sales invoices recorded in the sales journal.
Which of the following accounts does not appear in the acquisition and expenditure cycle?
Sales returns.
For which of the following accounts would the matching concept be the most appropriate?
Cost of goods sold.
Which of the following would not overstate current-period net income?
Failing to record a check paying an item in Vouchers Payable.
A client's purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes auditors' primary concern with respect to liabilities resulting from the purchasing system?
Accounts payable are not materially understated.
Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time?
The official who signs the check should compare the check with the voucher and should stamp "PAID" on the voucher documents.
Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a cash-on-delivery (COD) basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over.
Purchase orders.
Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?
Examine a sample of cash disbursements in the period subsequent to year-end.
Which of the following procedures is least likely to be performed before the balance-sheet date?
Search for unrecorded liabilities.
To determine whether accounts payable are complete, auditors perform a test to verify that all merchandise received has been recorded. The population for this test consists of all
Receiving reports.
When verifying debits to the perpetual inventory records of a nonmanufacturing company, auditors would be most interested in examining a sample of purchase
Invoices.
A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only 48 tables, but the receiving department at the furniture company accepted the tables. The invoice was eventually received but was for the original 84 tables. The furniture company paid the entire amount. Which of the following controls would have been least likely to have prevented this erroneous payment?
Personnel in the furniture company's purchasing department should compare the purchase requisition with the purchase order.
Curtis, a maintenance supervisor, submitted maintenance invoices from a phony repair company and received the checks at a post office box. This should have been prevented by
Refusal by the purchasing department to approve the vendor.
An audit team would most likely examine the detail support for charges to which of the following accounts?
Legal expense.
Which of the following accounts would most likely be audited in connection with a related balance-sheet account?
Property Tax Expense.
When auditing account balances of liabilities, auditors are most concerned with management's assertion about
Completeness.
In a test of controls, auditors may trace receiving reports to vouchers recorded in the voucher register. This is a test for
Completeness
A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows:

Employee Responsibility
Clerk 1 Reviews vendor invoices for proper signature approval
Clerk 2 Enters vendor invoices into the accounting system and verifies payment terms
Clerk 3 Posts entered vendor invoices to the accounts payable ledger for payment and mails checks
Treasurer Reviews the vendor invoices and signs each check

Which of the following would indicate a weakness in the company's internal control?
Clerk 3 mails the checks and remittances after they have been signed.
Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?
Examining vendor statements for amounts not reported as purchases.
An audit team most likely would assess control risk at the maximum if the payroll department supervisor is responsible for
Authorizing payroll rate changes for all employees.
Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries?
Personnel.
Matthew Corp. has changed from a system of recording time worked on clock cards to a computerized payroll system in which employees record time in and out with magnetic cards. The computerized system automatically updates all payroll records. Because of this change
Part of the audit trail is altered.
Effective control over the cash payroll function would mandate which of the following?
Each employee should be asked to sign a receipt.
A large retail enterprise has established a policy that requires the paymaster to deliver all unclaimed payroll checks to the internal audit department at the end of each payroll distribution day. This policy was most likely adopted to
Detect any fictitious employee who may have been placed on the payroll.
Auditors ordinarily ascertain whether payroll checks are properly endorsed during the audit of
Clock cards.
In determining the effectiveness of an entity's policies and procedures relating to the occurrence assertion for payroll transactions, auditors most likely would inquire about and
Observe the separation of duties concerning personnel responsibilities and payroll disbursement.
Which of the following activities most likely would be considered a weakness in an entity's internal control over payroll?
The employee who distributes payroll check returns unclaimed payroll checks to the payroll department.
Which of the following activities performed by a department supervisor most likely would help to prevent or detect a payroll fraud?
Approving a summary of hours each employee worked during the pay period.
Which of the following expense accounts would not normally be tested by listing all debits and examining any significant items?
Payroll Expense
The usual source for journal entries posted to the general ledger to record the purchase of inventory is
vouchers payable journal from the accounts payable department.
Improperly capitalizing an expense item results in
overstatement of profit in the current year and understatement in future years.
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