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audit exam 2
| Question | Answer |
|---|---|
| Once a CPA firm confirms they want to conduct an audit they will submit a proposal that includes | nature of services offered, qualifications of firm's personnel, anticipated fees |
| audit committee nature | subcommittee of BOD, at least 3 independent outside directors, should not receive consulting, advisory, or other compensation from company, must be financially literate |
| function of audit committee | oversees company's accounting and report policies and practices, responsible for recommending appointment, compensation, and oversight of auditors |
| SAS 84 requires Communication with predecessor auditor before | accepting the engagement |
| Successor auditors must ask management to authorize the predecessor auditor to | respond fully to successor's inquiries because of the confidential client relationship |
| information obtained from predecessor auditors contains | integrity of management, disagreements of predecessor auditor with management as to acct principles, auditing procedures, and reason for changing auditors |
| Engagement letter nature | used to establish written understanding with the client regarding the services to be performed, including the objectives of engagement, mgmt responsibilities, the auditors responsibilities, and limitations of engagement |
| purpose of engagement letter | to eliminate misunderstandings between the CPA firm and the client |
| Who prepares engagement letter and when? | The CPA firm drafts the engagement letter which is signed by both representatives of the CPA firm and client prior to beginning the engagement |
| PCAOB first standard of field work | the auditor must adequately plan the work and must properly supervise any assistants |
| auditor's responsibility for detecting fraud | to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud |
| material misstatement includes | material error, material fraud, and certain illegal acts |
| further responsibilities of auditor for detecting fraud | assess risks of material misstatement, document procedures performed and conclusions reached, exercise professional skepticism and due care, communicate possible fraud to management, audit committee, and others |
| 2 types of misstatements arise from fraudulent activities | fraudulent financial reporting and misappropriation of assets |
| fraudulent financial reporting | intentional misstatements, omissions of amoutns or disclosures in the financial statements |
| misappropriation of assets | theft of an entity's assets also referred to as defalcations committed usually by employees against the entity |
| conditions for fraud | a pressure or an incentive to commit fraud, a perceived opportunity to do so, attitude/rationalization |
| management has the ability to perpetrate fraud by | overriding controls or directing employees to carry out fraud |
| auditor's responsibility for detection | cannot obtain absolute assurance but only reasonable assurance that material misstatements in the financial statements will be detected |
| audit plan | an overview of the engagement outlines the nature and characteristics of the client, its environment and the overall audit strategy |
| audit program | detailed list of procedures |
| direction of testing | verify existence and completeness |
| prior to the balance sheet date-interim period the auditor should | test of internal controls, audit of assets and related accounts, record liabilities |
| at year end-at or near balance sheet date the auditor should | exam for proper cut off of revenues and expenses and complete testing of internal controls and assets |
| after year end to audit report date the auditor should | search for unrecorded liabilities, examine for subsequent events, complete audit, issue management letter, issue audit report |
| What is meant by making a proper year end cut off? | refers to the process of assigning transactions occurring near the balance sheet date to the proper accounting period |
| tests of controls | designed to proved the auditors with assurance that prescribed internal control policies and procedures are in use and operating effectively |
| substantive procedures | designed to detect material misstatement in specific financial statement amounts |
| What is the purpose of the team meeting on fraud risk? | designed to allow the more experienced team members to share insights and exchange ideas about how and where the entity's financial statements might be susceptible to material misstatement due to fraud, to discuss how to design procedures |
| Auditors auditing a firm for the first time must obtain | an understanding of the client and it's environment in order to determine whether the client should be accepted and perform risk assessment |
| What are the 3 ways in which the auditors may respond to fraud risks in an audit? | a modification in the approach having an overall effect on how the audit is conducted, an alteration in the nature, timing, and extent of the procedures performed, and performance of procedures to further address the risk of mgmt override |
| General objective of observe the client's physical inventory | provides evidence to the existence assertion, establishes valuation, provide evidence about cut off of purchases and sales |
| general objective of locate on the client's premises a sample of equipment items listed in the subsidiary plan and equipment ledger | establish existence of assets, does not establish rights |
| general objective of obtain a listing of inventory and reconcile the total to the general ledger | valuation |
| general objective: trace a sample of shipping documents to recorded sales transactions | completeness and cut off |
| general objective: identify related parties | presentation and disclosure |
| general objective: vouch selected purchases of securities to broker's advices | establishes existence, rights, and valuation, and provides evidence of cutoff |
| An unreliable accounting system provides an opportunity for an individual to | missappropriate assets |
| The audit committee of a company must be made of | members of the board of directors who are not officers or employees |
| The portion of the audit that is least likely to be completed before the balance sheet date | substantive procedures |
| What should auditors obtain from the predecessor auditors before accepting an audit engagement | facts that might bear on the integrity of mgmt |
| As one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. This test provides evidence as to whether: | recorded sales have been properly posted to customer accounts |
| The primary objective of tests of details of transactions performed as substantive procedures is to: | detect material misstatements in the financial statements |
| The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist when in fact such misstatement does exist is referred to as: | detection risk |
| What element underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting | materiality and audit risk |
| What best describes what is meant by the term fraud risk factor? | factors often observed in circumstances where frauds have occurred |
| The auditors are concerned about source documents that reflect valid transactions that have not been recorded in the journals. What procedure would be most effective? | Vouch from journals to source documents |
| The auditors are concerned about transactions that have been recorded in the journals that are not valid. Which procedure would be most effective? | trace from source documents to journals |
| The auditors are concerned about transactions that have been recorded for improper amounts. Which procedure would be most effective? | Either trace from source documents to journals or vouch from journals to source documents |
| Tracing from source documents to journals most directly tests | completeness |
| Vouching from journals to source documents most directly tests: | existence |
| an auditor is required to establish an understanding with the client regarding the services to be performed for each engagement. This understanding generally includes: | the auditor's responsibility for ensuring that those charged with governance are aware of any significant deficiencies or material weaknesses in internal control that come to the auditor's attention |
| The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the | engagement letter |
| An auditor's engagement letter most likely will include | management's acknowledgement of its responsibility for maintaining effective internal control |
| What factor most likely would cause an auditor to decline a new audit engagement? | concluding the the entity's management probably lacks integrity |
| In assessing whether to accept a client for an audit engagement, a CPA should consider the | client's business risk and CPA's business risk |
| What condition most likely would pose the greatest risk in accepting a new audit engagement | there will be client imposed scope of limitation |
| Before accepting an engagement to audit a new client, an auditor is required to | make inquiries of the predecessor auditor after obtaining the consent of the prospective client |
| an auditor ordinarily should request to review the predecessor's audit documentation relating to | contingencies and internal control |
| What circumstance would permit an independent auditor to accept an engagement after the close of the fiscal year? | Remedy of the limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory |
| Upon discovering material misstatements in a client's financial statements that the client would not revise, a predecessor auditor withdrew from the engagement. If asked by the auditor ab the termination of engagement the predecessor should | suggest the auditor obtain the client's permission to discuss the reasons |
| Early appointment of the auditor enables preliminary work to be performed by the auditor that benefits the client because it permits the audit to be performed in a | more efficient manner |
| With respect to the auditor's planning of a year-end audit, what statement is always true? | It is an acceptable practice to carry out part of the audit at interim dates |
| AU 311, Planning and Supervision, states that the auditor should establish an overall audit strategy and an audit plan. What audit standard is most closely related to this requirement? | The auditor must adequately plan the work and must properly supervise any assistants |
| What is required documentation in an audit in accordance with auditing standards? | An audit plan documenting the procedures to be used to reduce audit risk |
| What is most likely the first step an auditor will perform after accepting an initial audit engagement? | tour the client's facilities and review the general records |
| In designing written audit plans, an auditor should select specific audit procedures that relate primarily to the | financial statement assertions |
| What ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable bases for the expression of an opinion? | The auditor's judgement |
| Most of the independent auditor's work in formulating an opinion on financial statements consists of | obtaining and examining evidence |
| Because of the risk of material misstatements due to fraud, an audit of financial statements in accordance with auditing standards should be planned and performed with an attitude of | professional skepticism |
| What statement reflects an auditor's responsibility for detecting fraud? | An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements |
| What circumstance would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting? | management is interested in maintaining the entity's earnings trend by using aggressive accounting practices |
| What statement describes why a properly planned and performed audit may not detect a material misstatement due to fraud? | audit procedures that are effective for detecting an error may be ineffective for detecting fraud that is concealed through collusion |
| If an independent audit leading to an opinion on financial statements causes the auditor to believe that a material misstatement due to fraud exists they should first | consider the implications for other aspects of the audit and discuss the matter with appropriate levels of mgmt |
| Moor, CPA, discovers a likely fraud during an audit but concludes that its effects, if any, could cont be so material as to affect the opinion. Moor should: | report the finding to the appropriate representative of the client with the recommendation that it be pursued to a conclusion |
| Adequate planning and design of an audit is necessary for an auditor to restrict which type of audit risk? | detection risk |
| B&M auditors have been accepted as the auditors of 3W. What are B&M's responsibilities with regard to contacting 3W's predecessor auditors? | B&M should attempt communications with the predecessor auditors and ask if the had any accounting disagreements with 3W. |
| An engagement letter is best described as | a letter from the auditors to company mgmt that specifies the responsibilities of both the company and the auditors in completing the audit and the timing for its completion |
| Materiality can best be described as | the amount at which judgments based on the financial statements may be altered |
| What is least likely to be required on an audit? | make a legal determination of whether fraud has occurred |
| What is most likely to be an overall response to fraud risks identified in an audit? | Use less predictable audit procedures |
| What is most likely to be presumed to represent a fraud risk on an audit? | improper revenue recognition |
| What is least likely to be included in an auditor's inquiry of mgmt while obtaining info to identify the risks of material misstatement due to fraud? | Are financial reporting operations controlled by and limited to one location? |
| An audit plan is | documentation that provides an overview of the company and a general plan for the audit work to be accomplished, timing of the work, and other matters of concern to the audit |
| An audit program is | the detailed plan of audit procedures to be performed in the course of the audit |
| What statement best describes the interaction of the systems and substantive approaches in the audit plan | systems approach focuses on testing controls to make sure they are effective, while the substantive approach is the detailed testing of specific accounts for accuracy |
| tracing from source documents to journals most directly addresses which financial statement assertion? | completeness |
| COSO | a process designed to provide reasonable assurance regarding the achievement of objectives |
| objectives of COSO | reliability of financial reporting, effectiveness and efficiency of operations, compliance with applicable laws and regulations |
| Foreign Corrupt Practices Act of 1977 | provided for internal control provisions that require all publicly held companies to maintain an adequate system of internal control. violations of act can result in fines up 1 mill and imprisonment of members of mgmt |
| components of internal control | the control environment, risk assessment, accounting info system, control activities, and monitoring |
| control environment characteristics | foundation for all other components |
| the control environment includes | integrity and ethical values, management philosophy, active participation by BOD and audit committee, assignment of authority and responsibility, HR policies and procedures |
| Risk assessment characteristics | risk that organization's objectives will not be achieved, basis for determining how risks should be managed |
| risk assessment includes | management's process for identifying, analyzing and responding to risks, changes in personnel, rapid growth, changes in regulatory or operating environment, technology, introduction to new lines of bus., products, or processes, risk of misstatement |
| the accounting info system characteristics | includes accounting systems and methods and records to record, process, summarize, and report entity's transactions |
| the accounting info system includes | chart of accounts, manual of accounting policies, procedures for communicating policies |
| control activities characteristics | procedures to help ensure that mgmt directives are carried out |
| control activities includes | performance reviews, information processing controls, physical controls, segregation of duties |
| monitoring characteristics | used to assess the quality of internal control over time |
| monitoring includes | continuous monitoring of customer complaints, reviewing reasonableness of mgmt reports, periodic audits by internal auditors |
| inherent limitations of internal control | misunderstanding of instructions, mistakes by judgment, mistakes caused by carelessness, distraction, or fatigue, sep of duties circumvented by collusion, mgmt override of internal control |
| controls over financial reporting | preventive, detective, corrective |
| preventive controls | aimed at avoiding the occurrence of misstatements in financial statements |
| detective controls | discover misstatements after they have occurred |
| corrective controls | needed to remedy the situation that permits error to occur |
| auditors consideration of internal control-2nd standard of field work | a sufficient understanding of the entity and its environment is to be obtained to assess the risk of material misstatement of the financial statements whether due to error or fraud and to design the nature timing and extent of further audit procedures |
| sources of information about internal control | previous experience with the entity, inquiries of appropriate mgmt and staff, inspection of documents and records, observation of entity's activities and operations |
| methods of documentation | internal control questionnaire, written narrative, flowcharts |
| assessment based on expectation that controls are absent or unlikely to be effective or evaluating effectiveness is not efficient results in | auditor documents conclusion and goes to extensive substantive testing does not perform test of controls |
| assessment based on expectations that control procedures have been designed to detect or prevent material misstatements, assessed level at which reliance may be tentatively placed on IC as a result: | more evidence is needed to evaluate effectiveness of design and operations of IC, auditor conducts tests of controls to evaluate effectiveness of controls, then evaluates results and reassess control risks, then develops substantive tests |
| substantive tests | designed to detect material misstatements in the financial statements, consists of analytical procedures and detail tests of transactions |
| tests of controls | used to determine the effectiveness of IC procedures are controls actually working properly |
| the independent auditor should obtain an understanding of the work of the internal auditors to | determine its relevance to the audit |
| auditor must assess the competence and objectivity of the | internal auditors |
| competence | education level, professional experience, and professional certifications |
| objectivity | consider the organizational status of the director of internal audit, including whether the director reports to an officer of sufficient status to ensure broad audit coverage, and has direct access to the audit committee of the BOD |
| auditors must communicate in writing both | significant deficiencies and material weaknesses to mgmt and those charged with governance |
| management letter | may agree to report control deficiencies that are significant as well as other matters to mgmt and the BOD |
| advantages of questionnaire | easy to complete, comprehensive list of questions makes it unlikely that important portions of internal control will be overlooked |
| disadvantages of questionnaire | may be answered without adequate thought give to question, questions may not fit client's internal control structure |
| advantages of written narrative | tailor made for engagement, requires a detailed analysis and thus forces auditor to understand functioning of internal control |
| disadvantages of written narrative | description may become very long and consuming, weakness in structure is not always obvious, auditor may overlook important portions of internal control |
| advantages of flowchart | a graphic representation of internal control structure, unlikely that important portions of internal control will be overlooked, avoids long wording description |
| disadvantages of flowchart | preparation is time consuming, weakness in structure is not always obvious |
| objective of internal auditors | to aid corporate mgmt in efficient administration by investigating and reporting upon compliance with company policies, reliability of acct and statistical records and reports, adequacy of IC, efficiency of operating procedures |
| objective of independent auditors | to determine whether the financial statements fairly reflect the financial position, operating results, and cash flows of the business |
| What are the purposes of the consideration of IC required by GAAS? | its quality has a major effect on the nature, timing, and extent and nature of the audit procedures necessary to complete the audit. |
| internal control and its purpose | a process designed to provide reasonable assurance regarding the achievement of objective regarding reliable financial reporting, effectiveness and efficiency of operations, and compliance w/ applicable laws and regulations |
| What would least likely be considered an objective of internal control? | detecting mgmt fraud |
| An entity's ongoing monitoring activities include: | mgmt review of weekly performance reports |
| a primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with | knowledge necessary to determine the nature, timing, and extent of further audit procedures |
| An auditor may compensate for a weakness in internal control by increasing the extent of | substantive tests of details |
| Controls over financial reporting are often classified as preventative, detective, or corrective. What would be an example of a detective control? | preparing bank reconciliations |
| When the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPA's procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should: | consider the organizational level to which the internal auditors report the results of their work |
| effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by: | direct participation by the owner in key record keeping and control activities of the business |
| What is not an advantage of establishing an enterprise risk mgmt system within an organization? | eliminates all risks |
| Management of Warren company has decided to respond to a particular risk by hedging the risk with future contracts. This is an example of: | Avoidance |
| When the auditors are performing a first time internal control audit in accordance with the SOX act and PCAOB standards they must: | test controls for all significant accounts |
| type of control for annual physical inventory | detective |
| type of control for monthly reconciliation of bank accounts | detective |
| type of control for segregation of duties over purchasing | preventative |
| type of control for supervisory approval of time cards | preventative |
| type of control for dual signatures for checks | preventative |
| type of control for adjustment of perpetual inventory records to physical counts | corrective |
| type of control for management review of budget/actual information | detective |
| type of control for internal audits of payroll | detective |
| component for management surveys customers about their satisfaction with the company's service | monitoring |
| component for the HR dept investigates the educational background of prospective employees | control environment |
| component for invoices are reviewed for accuracy before they are mailed to customers | control activities |
| component for management periodically evaluates the threats to preparing reliable financial statements | risk assessment |
| component for the internal auditors periodically evaluate the controls in the various depts of the company | monitoring |
| component for management has developed and distributed a code of conduct | control environment |
| component for budgets and forecasts are used by the production depts to control expenses | control activities |
| component for the accounting dept uses a manual of acct policies and procedures | accounting information system |
| component for entry into the warehouse is strictly controlled by security personnel | control activities |
| component for management has prepared and distributed an organization chart | control environment |
| Tests of controls do not address | how controls were originated |
| what is least likely to be a test of controls | observation of confirmations |
| tests of controls ordinarily are designed to provide evidence of | operating effectiveness |
| The preliminary assessments of control risk are often referred to as | the planned assessed level of control risk |
| At the completion of the audit, the auditors are least likely to know | actual control risk |
| The independent auditor should understand the internal audit function as it relates to internal control because the | work performed by internal auditors may be a factor in determining the nature timing and extent of the independent auditor's procedures |
| If the independent auditor decides that it is efficient to consider how the work performed by the internal auditors may affect the nature, timing, and extent of audit procedures, they should assess the internal auditors': | competence and objectivity |
| In assessing the competence and objectivity of an entity's internal auditor, an independent auditor is least likely to consider information obtained from: | the results of analytical procedures |
| In assessing the competence of an internal auditor, the independent CPA would most likely obtain information about the: | quality of the internal auditor's documentation |
| During the audit of financial statements, an internal auditor may provide direct assistance to an independent CPA in: | obtaining an understanding of internal control, performing tests of controls, performing substantive tests |
| In an audit of financial statements, an auditor 's primary consideration regarding a control is whether it | affects management's financial statement assertions |
| Internal control is a function of management, and effective control is based upon the concept of charge and discharge of responsibility and duty. What is one of the overriding principles of internal control? | Responsibility for the performance of each duty must be fixed |
| The PCAOB'S AS no. 5 states that internal controls may be preventive or detective. What is a preventive control? | Requiring 2 persons to open mail |
| The cost benefit relationship is a primary criterion that should be considered in designing internal control. True or false? | True |
| What would not be considered an inherent limitation of the potential effectiveness of an entity's internal control? | incompatible duties |
| Internal control can provide only reasonable assurance of achieving entity objectives. One factor limiting the likelihood of achieving those objectives in a small entity is that: | effective separation of duties may not be feasible. |
| What is considered an environmental control factor? | HR policies and practices |
| Proper separation of duties reduces the opportunities for persons to be in positions to both: | perpetrate and conceal errors or fraud |
| It is important for the auditor to consider the competence of the audit client's employees because their competence bears directly and importantly upon the: | achievement of the objectives of internal control |
| A proper separation of duties requires that an individual: | recording a transaction not compare the accounting record of the asset with the asset itself |
| Audit evidence concerning the separation of duties ordinarily is best obtained by: | observing the employees as they apply specific controls |
| As part of the understanding internal control in planning an audit of a nonissuer, an auditor does not need to: | obtain knowledge about the operating effectiveness of internal control |
| The primary purpose of procedures performed to obtain an understanding of internal control in a financial statement audit is to provide an auditor with: | knowledge necessary to plan the audit |
| The ultimate purpose of understanding the client, the environment, and internal control is to contribute to the auditor's evaluation of the risk that: | material misstatements may exist in the financial statements |
| A CPA's understanding of internal control in a financial statement audit of a nonissuer: | is usually more limited than that made in an examination of internal control integrated with an audit of financial statements |
| A secondary result of the auditor's understanding of internal control in an audit of nonissuer's financial statements is that the understanding may: | bring to the auditor's attention possible control deficiencies |
| When obtaining an understanding of an entity's internal control, an auditor should concentrate on the substance of controls rather than their form because: | management may establish appropriate controls but not act on them |
| In obtaining an understanding of a nonissuer's internal control in a financial statement audit, an auditor is not obligated to: | search for significant deficiencies in the operation of internal control |
| The auditor's consideration of the client's internal control is documented to substantive: | compliance with auditing standards |
| When documenting the understanding of a client's internal control, the independent auditor sometimes uses a systems flowchart, which can best be described as: | symbolic representation of a system or series of sequential processes |
| What is a step in an auditor's decision to rely on the internal controls? | identify specific controls that are likely to detect or prevent material misstatements and perform tests of controls |
| Risk assessment procedures performed to obtain an understanding of an entity's internal control also may serve as tests of controls. True or false? | True |
| The objective of tests of details of transactions performed as tests of controls is to: | evaluate whether controls operated effectively |
| To test the effectiveness of controls an auditor ordinarily selects tests from a variety of techniques including: | reperformance |
| An auditor wishes to evaluate the design and perform tests of controls over a client's cash disbursements procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by: | observation and inquiry |
| Internal control is primarily establish within a company to: | provide reasonable assurance that the company's objectives will be achieved |
| Providing reasonable assurance with respect to what is not required under the internal control provisions of the Foreign Corrupt Practices Act? | Access to assets is limited to members of management |
| What is considered a control environment factor by the COSO definition of internal control? | integrity and ethical values |
| Billy Jo is responsible for custody of the finished goods in the warehouse. If his company wishes to maintain strong internal control, what responsibility is incompatible to his job? | being responsible for the accounting records for all receipts and shipments of goods from the warehouse. |
| What is least likely when an auditor performs an integrated audit of a public company's financial statements? | Omitting tests of controls for several major accounts |
| Tests of controls are used to test whether controls are: | operating effectively |
| Tests of controls are least likely to conclude: | inquiries of client vendors |
| What is most likely to be considered an inherent limitation of a client's internal control? | human errors |
| What is one of the most fundamental and effective controls? | segregation of incompatible duties across several people |
| Control risk is most likely to be assessed at a level below the maximum when: | tests of controls have been performed |
| The results of the consideration of internal control are least likely to affect the auditors' decision pertaining to: | the assessment of inherent risk |
| Major controls over cash | separation of duties, separate cash handling from record keeping, centralize receiving of cash, record cash receipts immediately, deposit each days receipts intact, make all disbursements by check |
| Check requirements | prenumbered, voided should be defaced, protection machine should be used to print amount, signers should be authorized by BOD, documents supporting should be perforated |
| Imprest system should be used for | petty cash requirements |
| Documents supporting petty cash requirements should perforated to | prevent reuse |
| Checks to replenish fund should be drawn payable to | bank or petty cash custodian |
| Functions of treasurer: | credit approval, handling and depositing cash receipts, signing checks, investing idle cash, and custody of cash and other negotiable assets |
| functions of controller: | maintains accounting records, reconciles bank statements, etc. never handles cash |
| audit objectives | control, existence, completeness, presentation and disclosure, rights and obligations |
| control | determine the adequacy of internal control over cash |
| existence, rights | cash balances stated in balance sheet properly represent cash and cash items on hand, in transit, and in bank |
| completeness | all cash is properly recorded |
| presentation and disclosure | cash is properly classified and adequately disclosed in financial statements |
| substantive tests for cash | count and list all cash on hand in front of teller, send confirmation letter to bank to verify amounts on deposit, obtain or prepare a reconciliation, obtain cutoff bank statement, verify proper cutoff of cash receipts, trace bank transfers |
| lapping | concealment of cash shortage by delaying the proper recording of payments to a customers account |
| procedures for detecting lapping | confirm a/r on a surprise basis using positive confirmation, compare customer remittance advices, verify propriety of noncash credits to AR, perform surprise inspection of deposits, foot cash receipts journal, reconcile balance per customer |
| Use analytical procedures to calculate the | age of accounts receivable and the turnover of accounts receivable |
| lapping increases _______ and decreases ________ | age, turnover |
| kiting | improper cutoff of cash involving bank transfer around the BS date resulting in a pad of a cash position, concealment of a cash shortage, or concealment of bank overdraft |
| pad a cash position: | practice of recording transfer as a deposit in one accounting period and as a disbursement in a subsequent accounting period causing total cash to be inflated |
| concealment of a cash shortage: | conceals cash shortage in bank, transfer brings account into agreement with books |
| objective of obtaining a bank cutoff statement subsequent to the balance sheet date | permits the examination of many checks listed as outstanding in the bank reconciliation and establishes a collectibility of customer checks included in undeposited receipts on the balance sheet date |
| objective of comparing paid checks returned with the bank statement to the list of outstanding checks in the previous reconciliation | the auditors obtain assurance that the cash cutoff at the beginning of the bank reconciliation period is accurate, and that cash shortages are not being obscured by manipulation of the outstanding checks list |
| objective of tracing all bank transfers during the last week of the audit year and the first week of the following year | designed to disclose kiting whereby a check drawn on one bank is not recorded as a disbursement as of the balance sheet date, although the deposit of the check in another bank is properly recorded |
| objective of investigating any checks representing large or unusual payments to related parties | to determine that transactions were properly authorized and recorded and are adequately disclosed in the financial statements |
| purpose of bank transfer schedule | to trace bank transfers to disclose overstatement of cash balances resulting from kiting |
| What would most likely reduce the risk of diversion of customer receipts by a client's employees? | a bank lock box system |
| To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is: | stamped paid by the check signer |
| In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: | is responsible for mailing checks |
| To gather evidence regarding the balance per bank reconciliation the auditors would least likely examine: | the general ledger |
| You have been assigned to year end audit of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to: | coordinate the count of cash with the count of marketable securities and other negotiable assets |
| What would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales a retail outlet? | observe the consistency of the employees' use of cash registers and tapes |
| Reconciliation of the bank account should not be performed by an individual who also | processes cash disbursements |
| The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover the embezzlement scheme, the auditors most likely would compare the: | details of the bank deposit slips with details of credits to customer accounts |
| In order to guard against the misappropriation of company owned marketable securities what is the best course of action that can be taken by a company with a large portfolio of marketable securities? | require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent |
| Hall company had large amounts of funds to invest on a temporary basis. The BOD decided to purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The best person: | an investment committee of the BOD |
| The auditors who physically examine securities should insist that a client representative be present in order to: | acknowledge the receipt of securities returned |
| The best way to verify the amounts of dividend revenue received during the year is: | verification by reference to dividend record books |
| primary objective of preparing a bank transfer schedule | detect kiting |
| primary objective of preparing a four column proof of cash | reconcile cash receipt and disbursement and disbursement totals between company records and bank records |
| primary objective of using a standard confirmation form to confirm account balance information | verify year end cash and liability balance information |
| primary objective of obtaining bank cutoff statements | verify reconciling items on the year end bank reconciliation |
| primary objective of searching for large checks to directors, officers, and employees | identify related party transactions |
| If internal control is well designed, the same employee may be permitted to | mail signed checks and also cancel supporting documents |
| Operating control of the check signing machine normally should be the responsibility of the | CFO |
| What should not appear in an internal control questionnaire relating to cash disbursements? | Are prelistings made of all cash receipts? |
| What is a standard control over cash disbursements? | Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations |
| What control is an entity most likely to use to assist in satisfying the completeness assertion related to noncurrent investments? | the internal auditor compares the securities in the bank safe deposit box with recorded investments |
| When an entity uses a trust company as custodian of its trading securities, the possibility of concealing the fraud most likely will be reduced if: | the trust company has no direct contact with the entity employees responsible for maintaining investment accounting records. |
| What procedure is most likely to give the greatest assurance that securities held as investments are safeguarded? | access to securities requires the signatures and presence of 2 designated officials |
| When counting cash on hand, the auditor must exercise control over all cash and other negotiable assets to prevent: | substitution |
| An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year end balance. A purpose of this procedure is to: | seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation |
| On receiving a client's bank cutoff statement, an auditor most likely will trace | prior year checks listed in the cutoff statement to the year end outstanding checklist |
| what is not an assertion tested in an audit of trading securities? | the securities are authentic |
| In establishing the existence and ownership of an investment held by a corporation in the form of publicly traded stock, an auditor should inspect the securities or | confirm the number of shares owned that are held by an independent custodian |
| An auditor is most likely to verify the interest earned on bond investments by | recomputing the interest earned on the basis of face amount, interest rate, and period held |
| A local gas station has one clerk that accepts cash payments for gas and rings them up on the cash register. What would be the best control to provide assurance that the cashier isn't keeping some of the cash? | Compare cash register totals to a total that is automatically generated by each gas pump |
| The accounting functions and the cash receipts functions should be handled by which departments? | The controller should have control of the accounting functions and the treasurer should ahve control of cash receipt functions. |
| a primary use by the auditor of a bank cutoff statement is to compare: | checks dated prior to year end to the outstanding checks listed on the year end bank reconciliation |
| It is most likely to be efficient to test the controls over financial investments when: | the company trades or holds a large number of securities |
| To gather evidence regarding the balance per bank reconciliation, an auditor could examine all of the following: | cutoff bank statement, year end bank statement, bank confirmation |
| What is the risk that is of most concern to auditors when auditing cash? | inherent risk |
| What is most likely to indicate fraud? | several overpayments are made for goods received from a supplier |
| An auditor examining check disbursements discovered a missing check number. Upon inquiry to the person responsible for disbursements and reconciliation of cash account, she is told that the check number is missing bc it was voided. What is the next step? | Examine the voided checks file to determine whether the check is in the file |
| What procedure or document is most effective for detecting kiting? | a bank transfer schedule |
| Jones embezzeled $50,000 from his company's account in Bank A. At year end he hid the shortage by making a deposit on 12/31 in Bank A, drawn on Bank B. He has not recorded the transaction. This is an example of: | Kiting |
| A security owned by a company is from another company that recently declared bankruptcy. What is the auditor's primary concern with the investment? | valuation |
| A company owns a large amount of debt securities that pay interest twice a year. On the financial statements the company accrued the 5 months of interest it was due as interest receivable. The auditor should: | Verify the company owns the security, check the accuracy of the accrual, and require no adjustment |
| a four column bank reconciliation will generally assist an auditor in detecting: | an unrecorded deposit made at the beginning of the month, the amount was withdrawn late in the month again with no book entry |
| What is confirmed on the standard form used for cash balances at financial institutions? | loans payable |
| major controls over accounts receivable | orders from customers should be recorded and reviewed by as sales order dept, numerically controlled sales orders should be prepared for all orders received, orders should be approved by credit dept |
| employees other than the a/r personnel should perform the following functions: | handling cash and maintaining cash records, opening incoming mail, credit and collection, reviewing and mailing customer statements, approval of adjustment credits and write off of uncollectible accounts |
| writeoffs of uncollectible notes or accounts receivable should require prior: | authorization from company official |
| Treasurer notes and accounts written off should be carried in a | separate ledger |
| major controls over notes receivable | custodian notes receivable should have access to cash or to the general accounting records, acceptance and renewal of notes should be authorized in writing by an official, writeoffs of n/r should be approved in writing by official |
| Should the formal request for confirmation be made by the client or auditor? | the client should request on the client's letterhead |
| Should the return envelope for confirmation be addressed to the client, to the auditors in care of the client, or to the auditor's office? | to the auditor's office |
| audit objective of confirming accounts receivable and notes receivable by direct communication with debtors | existence, completeness, and valuation |
| What alternative auditing procedures may be undertaken in connection with the confirmation of accounts receivable where customers having substantial balances fail to reply after second request forms have been mailed to them? | send additional requests with return receipt requested, telephone to ascertain the balance or the reason for failure to respond, examine the duplicate invoices, shipping records, purchase orders, and any payments made subsequent bs date |
| What is the criteria according to the SEC Staff Accounting Bulletin No. 104 that must be met for revenue recognition? | persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, seller's price is fixed or determinable, collectibility is reasonably assured |
| What are 2 techniques that management might use to overstate revenue? | recording of fictitious contracts with customers and recording revenue before a contract is executed |
| What is an audit confirmation request? | written communication received by the auditors directly from a party outside the client organization, affirms the existence of, and rights to, an amount recorded in the client's accounting records |
| What characteristics should an audit confirmation response possess if a CPA firm is to consider it to be valid evidence? | must be received directly by the CPA firm from the outside party who has replied to the confirmation request |
| positive confirmation request | requires a reply from the client's customer in every case |
| negative confirmation request | requires a reply only if the balance for which confirmation has been requested is incorrect |
| In confirming a client's A/R, what characteristics should be present in the accounts if the CPA firm is to use negative confirmation? | the combined assessed level of inherent and control risk is low, a large number of small balances is involved, and the auditors have no reason to believe that the recipients of the requests are not likely to give them consideration |
| What is least likely to be considered an inherent risk relating to receivables and revenue? | over recorded sales due to a lack of control over the sales entry function |
| What would provide the most assurance concerning valuation of A/R? | assess the allowance for uncollectible accounts for reasonableness |
| What is most likely to be an example of fraudulent financial reporting relating to sales? | recording sales when the customer is likely to return the goods |
| What is an example of misappropriation of of assets relating to sales? | theft of cash register sales |
| There is a presumption that auditors will confirm A/R unless the auditors assessment of material misstatement is low and | accounts receivable are immaterial, or the use of confirmations would be ineffective |
| To determine that all sales have been recorded, the auditors would select a sample of transactions from the: | shipping documents file |
| What would most likely be detected by an auditor's review of the client's sales cutoff? | inflated sales for the year |
| to test the existence assertion for recorded receivables, the auditors would select a sample from the | accounts receivable subsidiary ledger |
| Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? | completeness |
| To determine the existence of accounts receivable balances at the balance sheet date, a CPA would most likely: | send positive confirmation requests |
| What is the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write off of a trade account receivable | Write offs must be approved by a responsible official after review of credit dept recommendations and supporting evidence |
| What employee should report to the CFO? | credit manager |
| An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of: | valuation |
| Alpha Co. uses its sales invoices for posting perpetual inventory records. Inadequate internal control over the invoicing function allows goods to be shipped that are not invoiced. The inadequate controls could cause an: | understatement of revenues and receivables and an overstatement of inventory |
| What control most likely would help ensure that all credit sales transactions of an entity are recorded? | The billing dept supervisor matches prenumbered shipping documents with entries in the sales journal |
| An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of followup on errors reported by the customers. This test of controls most likely is performed to support mgmt's financial statement assertions of: | existence or occurrence |
| Cash receipts from sales on account have been misappropriated. What act would conceal this defalcation and be least likely to be detected by an auditor? | understating the sales journal |
| What is 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 |
| Upon receipt of customer's checks in the mail room,a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the: | accounts receivable bookkeeper to update the subsidiary accounts receivable records |
| What control is most likely to deter lapping of collections from customers? | separation of duties between receiving cash and posting the accounts receivable ledger |
| Proper authorization of write offs of uncollectible accounts should be approved in which department? | CFO |
| To conceal defalcations involving receivables, an experienced bookkeeper would be expect to charge which account? | sales returns |
| For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve: | write offs of customer accounts |
| To safeguard the assets through proper internal control, accounts receivable that are written off should be transferred to: | a separate ledger |
| Sound internal control procedures dictate that defective merchandise returned by customers should be presented initially to the | receiving clerk |
| 2 assertions for which confirmation of accounts provides primary evidence are: | rights and obligations and existence |
| Auditors may use positive or negative forms of confirmation requests for accounts receivable. An auditor most likely will use: | a combination of the 2 forms. positive used for large balances and negative used for small balances |
| In the confirmation of accounts receivable, the auditor will most likely: | request confirmation of a sample of the inactive accounts |
| Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because | the auditor cannot infer that all nonrespondents have verified their account information |
| an auditor confirm a representative number of open accounts receivable as of 12/31 and investigates respondents' exceptions and comments. by this procedure, the auditor is most likely to learn what? | one of the cashiers has been covering a personal embezzlement by lapping |
| What is not an overall objective of the auditor in the audit of revenues? | to verify cash deposited during the year |
| In the audit of which general ledger accounts will tests of controls be particularly appropriate? | sales |
| 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 |
| If the objective of a test of details of transactions is to detect overstatements of sales, the auditors direction of testing should be from the | accounting records to the source documents |
| An inappropriate audit procedure relative to accounts receivable is to determine that the | accounts are collected by the balance sheet date |
| What would most likely give the most assurance concerning the valuation assertion about accounts receivable? | assessing the allowance for uncollectible accounts for reasonableness |
| What procedures will an auditor most likely perform for year end accounts receivable confirmations when the auditor did not receive replies to second requests? | inspect the shipping records documenting the merchandise sold to debtors |
| The best control to prevent lapping is | separation of recordkeeping for receivables from custody of cash |
| the most practical and effective audit procedure for detecting lapping is | comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank |
| An analysis of the aged accounts receivables is most directly related to which substantive test objective? | valuation |
| What is one of the most conclusive forms of evidence in establishing the existence of accounts receivable? | the confirmation of accounts |
| What would be least likely to diminish the validity of evidence obtained from confirmation of accounts receivable? | the confirmation requests are sent on the client's letterhead |
| When scheduling audit work, the auditor's are most likely to confirm accounts receivable balances at an interim date if | internal control is strong |
| What is the best argument against the use of negative accounts receivable confirmations? | the inference drawn from receiving no reply may not be correct |
| What procedure is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts? | Review amounts of accounts which have been written off as uncollectible prior to year end. |
| What is a proper alternative audit procedure for nonresponses to positive accounts receivable confirmation requests? | examination of subsequent cash receipts in payment of the receivable |
| Tracing copies of shipping documents to sales invoices will provide evidence that all: | shipments to customers were billed |
| A number of window dressing practices represent proper and appropriate business practices. True or false? | True |
| Confirmation in writing from the holder of the note is ordinarily considered as an acceptable alternative to inspection of the note. True or false? | True |
| objectives of observing taking of inventory | determine credibility of inventory quantities, observe that quantity information is correct, quality or condition of inventory, personnel adherence to instruction s for taking inventory, adequacy of storage facilities |
| For what purposes do the auditors make and record test counts of inventory quantities during their observation of the taking of the physical inventory? | to ascertain that the individual is taking the inventory are making an accurate count. the extent of test counting will be determined by the inventory taking procedures |
| When perpetual inventory records are maintained, is it necessary for a physical inventory to be taken at the balance sheet date? | a physical inventory at least once a year is generally essential regardless of whether perpetual inventories are maintained. |
| What is meant by a "bill and hold" scheme? | sales of merchandise are improperly billed to customers prior to delivery, with the goods being held by the seller. overstate revenues and net income |
| Why is the observation of physical inventory a mandatory auditing procedure? | provides strong evidence to existence and quality of inventory |
| Under what circumstances is observation of physical inventory impossible? | auditors were not appointed by the client until after the physical inventory had been taken. |
| Why is the auditors' review of the client's control of inventory tags important during the observation of physical inventory? | because the danger that fictitious inventory tags might be created by dishonest client personnel after the auditors have completed their observation of the physical inventory |
| What is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold? | establish that the client includes on inventory on hand at year end in inventory totals |
| The receiving department is least likely to be responsible for: | preparation of a shipping document |
| the document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the | bill of lading |
| What should be included as part of inventory costs of a manufacturing company? | direct labor, raw materials, and factory overhead |
| the organization established by congress to narrow the options in cost accounting that are available under generally accepted account principles is the: | Cost Accounting Standards Board |
| When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is: | existence |
| Instead of taking a physical inventory count on the balance sheet date, the client may take physical counts prior to the year end of internal control is adequate and: | well kept records of perpetual inventory are maintained |
| the auditor's analytical procedures will be facilitated if the client: | uses a standard cost system that produces variance reports |
| When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably: | want the client to schedule the physical inventory count at the end of the year |
| What is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory? | Observe merchandise and raw materials during the client's physical inventory taking |
| The primary objective of a CPA's observation of a client's physical inventory count is to: | obtain direct knowledge that the inventory exists and has been properly counted |
| An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete inventory to address: | valuation |
| An auditor selects items from the client's inventory listing and identifies the items in the warehouse. This procedure is most likely related to: | existence |
| an auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion is most likely related to presentation and disclosure and: | valuation |
| during the inventory count an auditor selects items and determines that the proper description and quantity were recorded by the client. This procedure is most closely related to: | completeness |
| An auditor would most likely analyze inventory turnover rates to obtain evidence about: | valuation |
| Assertion and procedure for the entity has legal title to inventories | rights and obligations; select a sample of recorded items and examine supporting vendors invoices and contracts |
| Assertion and procedure for recorded inventory quantities include all products on hand | completeness and cutoff; select a sample of items during the physical inventory count and determine that they have been included on count sheets |
| Assertion and procedure for inventories are reduced, when appropriate, to replacement cost or net realizable value | valuation; examine current vendors price list |
| Assertion and procedure for cost of inventories is properly calculated | valuation; select a sample of recorded items and examine supporting vendors invoices and contracts |
| Assertion and procedure for the major categories of inventories and their basis of valuation are adequately reported in the financial statements | presentation and disclosure; review drafts of the financial statements |
| An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merch. What procedure provides the greatest assurance that this control is operating effectively? | Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks |
| What control most likely would be used to maintain accurate inventory records? | periodic inventory counts are used to adjust the perpetual inventory records |
| Apex Manufacturing Corp mass produces eight diff products. the controller who is interested in strengthening internal control over the accounting for materials used in production is most likely to implement: | perpetual inventory system |
| the objectives of internal control for a production cycle are to provide assurance that transactions are properly executed and recorded and that: | custody of work in process and finished goods is properly maintained |
| What procedure is least likely to be performed before the balance sheet date? | search for unrecorded liabilities |
| In an audit of inventories, an auditor is least likely to verify that: | all inventory owned by the client is on hand at the time of the count |
| What audit procedure probably provides the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories? | Inspect contracts and agreements to determine whether any inventory is pledged as collateral or subject to any liens |
| An auditor is most likely to inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertions about: | presentation and disclosure |
| an auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence of: | completeness |
| a client maintains perpetual inventory records in both quantities and dollars. If the assessed risk of material misstatement is high, an auditor will probably: | request the client to schedule the physical inventory client to schedule the physical inventory count at the end of the year |
| Periodic or cycle counts of selected inventory items are made at various times during the year rather than a single inventory count at the year end. What is necessary if the auditor plans to observe at interim dates? | perpetual inventory records are maintained |
| If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded | purchases |
| When outside firms of nonaccountants specializing in the taking of PI are used to count, list , price and subsequently compute the total $ amt of inventory on hand, the auditor will: | make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions |
| An auditor is most likely to learn of slow moving inventory through | review of perpetual inventory records |
| Purchase cutoff procedures should be designed to test whether all inventory: | purchased and received before year end was recorded |
| The year end physical inventories should include steps to verify that the client's purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year end was not recorded as: | sale in the current period |
| an auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion most likely related to the auditors objective to obtain evidence ab the financial statement assertions regarding inventory including presentation and | valuation |
| To adequately provide for the segregation of duties, purchase requisitions should be initiated by what department? | stores or warehouse |
| what is an internal control weaknesses for a company whose inventory of supplies consists of a large number of individual items? | The storekeeper is responsible for maintenance of perpetual inventory records |
| A washing machine manufacturer puts bar codes on all boxes containing washing machines. The bar codes are scanned prior to shipping. This is indicative of what type of system? | perpetual inventory system |
| In most audits are more auditors concerned with an under or overstatement of ending inventory and why? | Overstatement because net income would be overstated also |
| In conjunction with the observation of a client's physical inventory, the auditors should: | evaluate the adequacy of the client's counting procedures |
| An auditor has accounted for a sequence of inventory tags and is now tracing information on a representative number of tags to the inventory summary sheets. Which assertion does this procedure relate to most directly? | completeness |
| A client's physical count of inventories was higher than the inventory quantities per the perpetual records. This situation could be the result of the failure to record: | purchases |
| a client's physical count of inventories was lower than the inventory quantities per the perpetual records. This situation could be the result of the failure to record: | sales |
| Purchase cut off procedures should be designed to test that merchandise is included in the inventory of the client when the client: | holds legal title to the merchandise |
| An inventory turnover analysis is most likely to help the auditors to detect | obsolete merchandise |
| When the auditors discover an overstatement of accounts payable, they would most likely also expect to find an overstatement of: | inventory |
| An auditor is auditing year 2 of a new client. The auditor did not observe the counting of year 1 ending inventory and has ? ab the validity of the year 1 beginning inventory figure. inventory is material. the auditor will: | be able to issue an unqualified opinion on the ending balance sheet |
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