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Practice exam 2

Terms in this set (143)

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.
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 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."
In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose:
Individual invoices.
Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?
Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.
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.
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 auditing the revenue and collection cycle, auditors normally select balances to confirm from the
Accounts receivable listing.
Control: Are names of newly-hired employees reported in writing to the payroll department?
detective control
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.
An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping cash received in the mail. In attempting to uncover this embezzlement scheme, the auditor would most likely compare the
Details of bank deposit slips with details of credits to customer accounts.
Which of the following accounts does not appear in the acquisition and expenditure cycle?
Sales returns
The best way to enact a broad fraud prevention program is to install airtight control systems of checks and supervision.
Initiate programs to help employees share personal and professional problems
PROCEDURE: Study loan documents for terms and security of loans obtained for purchase of PP&E.
Rights and Obligations
When verifying debits to the perpetual inventory records of a nonmanufacturing company, auditors would be most interested in examining a sample of purchase orders.
Invoices.
The primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to
determine the nature, timing, and extend of tests to be performed in the audit
Should your procedures for unrecorded liabilities be affected by the fact that your client made a journal entry to record bills that were received later?
The statement that the client has done a journal entry in the books of accounts to record the invoices of the vendors which were lately received should make simpler the test for unrecorded liabilities of the independent auditors and decrease the likelihood of a need for an additional adjustment, but the auditors' test is nonethelss requisite
Embezzlement is a type of fraud that involves
An employee's misappropriating an employer's money or property entrusted to the employee's control in the employee's normal job
Which of the following accounts would most likely be audited in connection with a related balance-sheet account?
Property Tax Expense.
When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on:
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

AND

The magnitude of the potential misstatement resulting from the deficiency or the deficiencies.
On the basis of audit evidence gathered and evaluated, an auditor decides to increase assessed control risk from that originally planned. To achieve an audit risk level that is substantially the same as the planned audit risk level, the auditor will
Decrease detection risk
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.
Under properly designed internal control, the same employee most likely would match vendors' invoices with receiving reports and also:
Recompute the calculations on vendors' invoices.
Which report would not be appropriate for a public accounting firm to provide on financial reporting controls?
disclaimer of opinion--significant deficiencies exist
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 not be able to determine that
the cash received and remittance advice received were maintained in a single batch.
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:
Collection of receivables.
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 a preventive control?
training
Embezzlement is a type of fraud that involves an employee's mistaken representation of opinion that causes incorrect accounting entries.
false
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.
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 is true with respect to the auditors' report on internal control over financial reporting?
a.
The report will express an opinion on the effectiveness of internal control over financial reporting.
b.
The auditor will issue an adverse opinion if one or more material weaknesses exist.
c.
The report may be presented with the report on the entity's financial statements as a combined report.
d.
Both b and c.
Correcte.
All of the above.
An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?
Inquiry and inspection of records.
When completing the audit of internal controls for a public company, the PCAOB requires auditors to audit internal controls over compliance with regulations.
False
DESCRIPTION: The company actively trains manager's to ensure that they are up-to-date on current issues in financial reporting.
Control Environment
Control: Are timekeeping and cost accounting records (such as hours, dollars) reconciled with payroll department calculations of hours and wages?
Preventive
Audit Procedure: Trace recorded sales invoices to posting in the general ledger control account and in the correct customer's account.
c. dual-purpose test

4. Completeness
The auditor's tests of controls revealed that required approvals of cash disbursements were absent for a large number of sample transactions examined. Which of the following is least likely to be the appropriate auditor response?
The auditor will increase planned detection risk.
When planning the audit of internal controls for an issuer, the audit team should
Identify significant accounts, locations, and assertions.
Control: Are time cards or piecework reports prepared by the employee approved by her or his supervisor?
preventive control
A material weakness is a situation in which
There is a remote likelihood that a material misstatement would be detected on a timely basis.
DESCRIPTION: Internal auditors verify that the company's human resources department receives university transcripts documenting all college degrees earned before an individual can begin their first day of employment with the company.
Monitoring
Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization?
Human error in decision making.
CONTROL: All voided and spoiled payroll checks are properly mutilated and retained.
C. Completeness

III. Payroll and Personnel
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.
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.
When completing the audit of internal controls for a public company, the PCAOB requires auditors to audit internal controls over
Financial reporting.
Audit Procedure: Select a sample of shipping documents from the shipping department file and trace shipments to recorded sales invoices.
dual-purpose test

Completeness
CONTROL: Recorded sales are supported by sales orders, shipping documents, and invoices.
A. Existence or Occurrence

I. Revenue and Cash Collection
Audit Procedure: Evaluate the adequacy of the allowance for doubtful accounts.
b. Substantive test

3. Valuation and Allocation
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 employees are processing the controls according to the policy and procedures manuals at the company.
False
Control: Is payroll periodically compared to personnel files?
b. detective control
Which of the following would an auditor most likely consider in evaluating the control environment of an audit client?
Management's operating style.
If a budgetary reporting system provides adequate reports, but the reports are not analyzed and acted upon:
The control has been implemented but is not operating effectively.
Tests of controls in a GAAS audit are required for obtaining evidence about the operating effectiveness of client control activities.
True
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.
DESCRIPTION: The company periodically assesses the design of the organizational chart that establishes the formal lines of reporting and authorization protocols to identify incompatible duties and possible opportunities or incentives to commit fraud.
Risk Assessment
List the two broad objectives management considers in designing an effective system of internal control?
1. Reliability of Financial Reporting
2. Efficiency and Effectiveness of Operations
DESCRIPTION: Before a cash disbursement can be processed, a voucher package must be submitted to the accounts payable department.
Control Activities
When completing the audit of internal controls for a public company, AS 5 requires auditors to test
Both operating and design effectiveness.
When completing the audit of internal controls for a public company, AS 5 requires auditors to test
None of the above.
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.
True
Which of the following is an inherent limitation in internal control?
Faulty human judgment.
Audit Procedure: Obtain financial statements or credit reports on large past due accounts and inquire of the credit manager about collections.
b. Substantive test

3. Valuation and Allocation
CONTROL: Receiving reports are automatically and continuously posted to the perpetual inventory record.
C. Completeness

II. Acquisition and Disbursement
During an audit of cash, the auditor is most concerned with the management assertion of
Existence.
Which of the following control activities would best protect against the preparation of improper or inaccurate cash disbursements?
None of the above.
Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be likely to be detected by an auditor?
Overstating the accounts receivable control account.
Immediately upon receipt of cash, a responsible employee should prepare a remittance listing.
True
Which of the following controls would be most effective in detecting a failure to record cash received from customers paying on their accounts?
Monthly statements are sent to customers and any discrepancies are resolved by someone independent of cash handling and accounting.
A key internal control in the sales and collection cycle is the separation of duties between cash handling and record keeping. The objective most directly associated with this control is to verify that
Existing cash receipts are recorded.
GoodenCo's management decided not to include a footnote about a material uninsured lawsuit against the company on the grounds that the primary user of the statements, a small local bank, will probably not understand the footnote anyway.
No, Not Applicable
Which of the following is most indicative of fraudulent activity?
Internal auditors cannot locate several credit memos to support reductions of customers' balances.
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.
GoodenCo's controller prepared and mailed a check to a vendor for a carload of material that was not received. The vendor's chief accountant, who is a friend of GoodenCo's controller, mailed a vendor's invoice to GoodenCo, and the controller prepared a receiving report. The vendor's chief accountant deposited the check in an account he had set up with a name almost identical to the vendor's.
Yes, Misappropriation of Assets
Incorporating elements of unpredictability in the selection of audit procedures to be performed by auditors include which of the following
A. Selecting items for testing that have lower amounts or are otherwise outside customary selection parameters.

and

B. Performing audit procedures on an unannounced basis.

Both a and b.
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.
Ford Motors Inc. bases their management stock compensation and bonus plan structure entirely on whether the company exceeds the consensus analyst forecast of earning per share.
Yes, Motivation
Which of the following internal control procedures most likely would deter lapping of collections from customers?
Segregation of duties between receiving cash and posting the accounts receivable ledger
In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also:
Is responsible for mailing the checks.
Toyota's management is amenable to proposed adjustments and quickly remediates accounting issues that their auditor identify as marginal or inappropriate accounting.
No, Not Applicable
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.
Sales are normally recorded on the date of the customer purchase order.
False.
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.
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.
Write-offs of doubtful accounts should be approved by
None of the above.
Assertion: Sales billed at the wrong price or wrong quantity

Control: Periodic sales total compared to same period accounts receivable postings
3. Valuation and Allocation

No
PROCEDURE: Prenumbered shipping doc prepared, sequence checked
Computer scan the shipping document file for missing numbers in sequence
Question: Do customers receive a monthly statement even when the ending balance on the account is zero?
G. NONE OF THE ABOVE

g. NONE OF THE ABOVE.
An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year-end?
Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end.
PROCEDURE: Sales order approved for credit
a.
Select a sample of inventory from the warehouse floor and vouch the amounts to sales journal and accounts receivable subsidiary ledger noting agreement between the two records.
b.
Count the number of shipping documents (subtract beginning number from ending number) and compare to same period count of sales invoices (to look for different number of documents).
c.
Select a sample of random numbers representing recorded sales invoices, and compare prices on sales invoice to approved price list.
d.
Select a sample of random numbers representing recorded sales invoices, and find the sales invoice associated with the random number (failure to find this means an invoice wasn't recorded). Alternatively, use the computer to add up the recorded sales invoice numbers and compare to a sum of digits check total.

Correcte.
NONE OF THE ABOVE
During the confirmation of accounts receivable, an auditor receives a confirmation via the client's fax machine. Which of the following actions should an auditor take?
Accept the confirmation but verify the source and content through a telephone call to the respondent.
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.
Assertion: January sales recorded in December
4. Completeness
Assertion: Goods shipped, sales not recorded

Control: Sales order approved for credit
4. Completeness
b. No
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.
Assertion: The client company has a legal right to all accounts receivable at the balance sheet date.
2. Rights and Obligations

a) Review loan agreements for indications of whether accounts receivable have been factored or pledged.

c) Obtain an understanding of the business purpose of transactions that resulted in accounts receivable balances.
If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?
Allowance for doubtful accounts.
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.
Question: Are sales invoices checked for the accuracy of quantities billed? Prices used? Mathematical calculations?
E. Select a sample of recorded sales invoices and vouch quantities thereon to bills of lading, vouch prices to price lists, and recalculate the math.

10. Vouching and Recalculation
If the objective of an auditor's test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the:
Shipping documents to the sales invoices.
The control procedure "credit sales approved by credit department" is directed toward which transaction assertion?
Accuracy
Description: Use a checklist of accrued expenses to determine whether the company has been conscientious about expense and liability accruals including accruals for wages, interest, utilities, sales and excise taxes, payroll taxes, income taxes, real property taxes, rent, sales commissions, royalties, and warranty and guarantee expense.
Yes
Procedure: Inquire with appropriate personnel to ensure payroll checks and signature plates kept in a secure location.
1. Existence or Occurrence

d. Payroll Expense/Liability
PROCEDURE: Select major additions for the year and a random sample of other additions and inspect the physical assets.
Existence or Occurrence.
Description: Review the year-end unmatched shipping reports to customers and determine whether entries are recorded in the proper accounting period.
No.
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.
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 requisitions.
False
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 auditor's principal objective in analyzing repairs and maintenance expense accounts is to:
Discover expenditures that were expensed but should have been capitalized.
PROCEDURE: Study loan documents for terms and security of loans obtained for purchase of PP&E.
Rights and Obligations.
An audit team would most likely examine the detail support for charges to which of the following accounts?
Legal expense.
Which of the following internal control activities is not usually performed in the vouchers payable department?
Accounting for unused prenumbered purchase orders and receiving reports.
An audit team would most likely examine the detail support for charges to which of the following accounts?
Miscellaneous Expense..

and

Legal expense.
An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all:
Cash disbursements.
Should your test for unrecorded liabilities be affected by the fact that a letter is obtained in which a responsible management official certifies that, to the best of that person's knowledge, all liabilities have been recorded? Explain.
there should be a test for unrecorde liabilities to many frauds occur
Procedure: Confirm accounts payable with vendors, especially regular suppliers showing small or zero balances in the year‑end accounts payable. Be sure to verify the vendors' addresses so that confirmations will not be misdirected, perhaps to conspirators in a scheme to understate liabilities.
3. Completeness

a. Accounts Payable
Which of the following accounts does not appear in the acquisition and expenditure cycle?
Sales returns.
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 recognition of the excess maintenance costs by Curtis's supervisor.
False
Which of the following would overstate current-period net income?
a.
Capitalizing an expenditure that should be expensed.
b.
Failing to record a liability as an expense.

Correctc.
Both a and b.
Item: Are vendors' invoices matched against purchase orders and receiving reports before a liability is recorded?
Observe client personnel making comparisons between source documents noting that amounts match. Examine initials for approval. Review correcting journal entries that result from the comparison.

Purchases or other liabilities may be recorded for transactions at incorrect amounts.
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.
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.
Description: List the unmatched vendor invoices and determine when the goods were received, focusing on the unmatched receiving reports and receiving reports prepared after the year‑end. Determine which invoices, if any, should be recorded.
Yes.
Procedure: Inquiries directed to management about terms of sale to obtain initial information about customers' rights of cancellation or return.
Completeness
e. Unearned Revenue
Item: Are purchase orders above a certain level approved by an officer?
For a sample of cash disbursements, vouch to approval signatures on invoices, receiving reports and purchase orders.

Costs and expenses might be incurred and the company may pay for goods that are not in compliance with company policy resulting in both fraudulent purchases as well as noncompliance with manufacturing specifications or contracts with customers.
In performing a search for unrecorded retirements of fixed assets, an auditor most likely would
Inspect the property ledger and the insurance and tax records, and then tour the client's facilities.
Description: Study the accounts payable trial balance for indications of dates showing fewer payables than usual recorded near the year‑end. (A financial officer may be delaying the recording of vendor invoices.)
Yes.
Which of the following describes a weakness in accounts payable procedures?
The accounts payable manager issues purchase orders.
To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is:
Stamped "paid" by the check signer.
Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?
Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.
Procedure: Observe to ensure that payroll checks are distributed by a person not involved in processing or recording payroll.
1. Existence or Occurrence
d. Payroll Expense/Liability
PROCEDURE: Vouch a sample of charges in the Repairs account and determine whether they are proper repairs, not capital items.
Presentation and Disclosure.
For which of the following accounts would the matching concept be the most appropriate?
Cost of goods sold.
Control: The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.
No.
PROCEDURE: For a sample of construction work orders, vouch time and material charges to supporting payroll and material usage records. Review the reasonableness of the hours worked, the work description, and the material used.
Valuation and Allocation.
Which of the following would overstate current-period net income?
Capitalizing an expenditure that should be expensed.

Failing to record a liability as an expense.
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.
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
Question: Are the duties of the accounts receivable bookkeeper separate from all cash functions?
C. Look to see who is performing bookkeeping and cash functions. Determine who is assigned to each function by reading organization charts. Ask other employees.

14. Observation and Inquiry
Question: Are customer accounts regularly balanced with the control account?
B. Review the client's working paper showing the balancing/reconciliation. Do the balancing yourself.

f. Accounting entries could be made inaccurately or incompletely and the control account may be overstated or understated.
Assertion: Goods shipped, sales not recorded

Control: Sales dollar batch totals compared to sales journal
4. Completeness

a. Yes
PROCEDURE: Prenumbered sales invoices, sequence checked
Select a sample of random numbers representing recorded sales invoices, and find the sales invoice associated with the random number (failure to find this means an invoice wasn't recorded). Alternatively, use the computer to add up the recorded sales invoice numbers and compare to a sum of digits check total.
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