1. Which of the following is ordinarily considered an "extended procedure" in external auditors' independent audits of financial statements?
A. Send positive confirmations on recorded customer accounts receivable balances.
B. Perform physical observation and testcount during the client's inventorytaking.
C. Measure the time lag between the date of recording cash receipts in the books to the date of deposit credit in the bank.
D. Conduct interviews with the client's sales billing personnel to learn about sales recording control procedures.
2. Auditors ordinarily send a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balances. A purpose of this procedure is to
A. provide the data necessary to prepare a proof of cash.
B. request that a cutoff bank statement and related checks be sent to the audit.
C. detect kiting activities that may otherwise not be discovered.
D. seek information about contingent liabilities and security agreements.
3. An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by
A. confirmation and observation.
B. observation and inquiry.
C. analytical procedures and confirmation.
D. inquiry and analytical procedures.
4. Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances?
A. The cashier prepares the daily deposit.
B. The cashier makes the daily deposit at a local bank.
C. The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
D. The cashier endorses the checks.
5. When auditing with "fraud awareness," auditors should especially notice and follow up employee activities under which of these conditions?
A. The company always estimates the inventory but never takes a complete physical count.
B. The petty cash box is always locked in the desk of the custodian.
C. Management has published a company code of ethics and sends frequent communication newsletters about it.
D. The board of directors reviews and approves all investment transactions.
6. Narbona, CPA is reviewing controls over cash received through a bank night depository. Which controls would she find most important?
A. Responsibilities are rotated for processing night depository receipts among employees of the various departments.
B. Dual control (joint custody) is established over the contents of the night depository box from the time of removal until initial recording is completed.
C. Vacations are required for all employees engaged in night depository activities.
D. All deposit tickets related to night deposits are numbered.
7. A small business owner can best offset the lack of segregation of duties by
A. Creating an internal audit department
B. Installing the latest computer equipment and software
C. Being actively involved in the accounting process
D. Relying on the external auditor to detect errors.
8. Confirmations of accounts receivable provide the most evidence for which of the following assertions?
B. Valuation or Allocation.
C. Rights and obligations.
9. In determining the adequacy of the allowance for uncollectible accounts, the least valuable evidence would be obtained from
A. an aging schedule of past due accounts which the auditor has tested.
B. correspondence with the client's collection agency.
C. financial statements of individual customers.
D. no reply to negative confirmations.
10. In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?
A. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
B. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
C. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
D. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
11. In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of
A. existence or occurrence.
B. valuation or allocation.
D. rights and obligations.
12. Which of the following responses to a confirmation of balances at December 31 would be most troubling to an auditor?
A. We paid this amount on December 28.
B. We received this amount on January 2.
C. We returned this amount on December 28 under our standing agreement with the company.
D. This amount isn't due until January 15.
13. When confirming accounts payable, emphasis should be put on what kind of accounts?
A. Accounts with small or zero balances.
B. All accounts should be equally emphasized.
C. Accounts with large balances.
D. Accounts listed in the accounts payable subsidiary.
14. Which of the following situations indicates a potential material weakness in internal control over acquisition and expenditure?
A. Purchase orders are not prepared for services acquired directly under authorization of department heads.
B. Voucher packages are authorized and checks are signed by the same person.
C. Unacceptable goods are not scheduled on receiving reports.
D. The same person signs checks and stamps vouchers "paid."
15. Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment (fixed asset) account are not understated?
A. Depreciation expense.
B. Gain on disposal of equipment.
C. Accounts payable.
D. Repairs and maintenance expense.
16. An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by
A. confirmation and observation.
B. observation and inquiry.
C. analytical procedures and confirmation.
D. inquiry and analytical procedures.
17. Improperly capitalizing an expense item results in.
A. understatement of profit in the current year and overstatement in future years.
B. understatement of profit in the current year and in future years
C. overstatement of profit in the current year and understatement in future years
D. overstatement of profit in the current year and in future years.
18. Which of the following would be an indicator of potential fraud?
A. Photocopies of invoices in the voucher file.
B. Vendor invoices in numerical order.
C. Vendors with only post office box addresses.
D. All of the above indicate potential fraud.
19. An important method used by the auditor to learn of material contingencies is
A. Examining documents in the client's possession concerning contingencies.
B. Inquiring and discussing them with management.
C. Obtaining an attorney letter.
D. Confirming accounts receivable with the client's customers.
20. Which of the following items would appear in management's representations with no limitation due to materiality?
A. Statements that a physical inventory was taken and inventory is properly valued.
B. Information regarding all misstatements detected during the audit.
C. Recommendations for improvements in the client's operations.
D. The availability of all financial records and related data to the auditor.
21. The Orange Corporation was audited for the year ended December 31 and the reports were delivered on February 15. After the fieldwork was completed on January 25, the auditor learned of a two-for-one stock split on February 1. If dual dating is used, what are the proper dates for the audit reports?
A. December 31 and January 25.
B. January 25 and February 1.
C. January 25 and February 15.
D. February I and February 15.
22. A second-partner review of the audit documentation and financial statements is performed to ensure that the:
A. "To-do lists" are reviewed and cleared.
B. Audit program procedures are "signed off."
C. Tick-mark notations are cleared.
D. Audit work meets the quality standards of the firm.
23. The primary objective of analytical procedures used in the final review stage of an audit is to
A. Obtain evidence from details tested to corroborate management assertions.
B. Obtain evidence on the validity of the assessment of control risk.
C. Assist the auditor in evaluating the overall financial statement presentation.
D. Identify areas that represent specific risks relevant to the audit.
24. An entity's income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor most likely could have detected this irregularity by
A. Tracing a sample of journal entries to the general ledger.
B. Evaluating the effectiveness of the internal control policies and procedures.
C. Investigating the reconciliations between controlling accounts and subsidiary records.
D. Performing analytical procedures designed to disclose differences from expectations.
25. Select the description that best illustrates sampling risk.
A. Applying audit procedures, which are inappropriate for the audit objectives.
B. Failing to recognize misstatements or deviations in the documents examined.
C. Arriving at incorrect statistical conclusions due to computational errors.
D. Choosing a sample which has proportionately more errors than the population.
26. An auditor is most likely to use statistical sampling under which of the following situations?
A. Random numbers can be associated with population items.
B. Strictly defensible results based on mathematics are not necessary.
C. The auditor has a very good knowledge of the population.
D. The population is very diverse with some segments especially prone to misstatement.
27. What is the primary drawback with respect to the use of sampling?
A. Individuals may fail to obtain a true understanding of the question they are examining.
B. The time spent in planning and selecting the sample may exceed the time savings from examining only a subset of the items.
C. The conclusion reached by examining a sample of items may differ from the conclusion that would be reached if the entire population were examined.
D. Sampling cannot be used to examine account balances that are material to the financial statements.
28. Which of the following most closely represents an unrestricted random selection procedure?
A. Identifying a starting point within the population and bypassing a fixed number of items.
B. Matching items in the population to a series of randomly-selected numbers.
C. Randomly selecting invoices to customers whose last names start with "W".
D. Randomly picking items from an accounts receivable file.
29. If the adjusted sample deviation rate exceeds the tolerable deviation rate, the auditor would most likely:
A. Accept the account balance as fairly stated.
B. Reject the account balance as fairly stated.
C. Increase the planned effectiveness of substantive procedures.
D. Not increase the planned effectiveness of substantive procedures.
30. Why is the auditor most concerned with the risk of assessing control risk too low rather than the risk of assessing control risk too high?
A. The risk of assessing control risk too high is not a type of sampling risk.
B. The risk of assessing control risk too low exposes the auditor to an efficiency loss.
C. The risk of assessing control risk too low may result in the auditor failing to perform sufficient substantive procedures.
D. The risk of assessing control risk too low cannot be controlled by the auditor during the sampling process.
31. The SEC requires all of the following for revenue to be recognized except
A) Cash is collected
B) Persuasive evidence of an arrangement exists.
C) Delivery has occurred or services have been rendered.
D) The seller's price to the buyer is fixed or determinable.
32. Which of the following audit procedures most likely would provide an auditor with the most assurance about the effectiveness of the operation of a client's internal control?
A. Confirmation with outside parties.
B. Inquiry of client personnel.
C. Recomputation of transaction amounts.
D. Observation of client personnel.
33. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the
A. factors that raise doubts about the auditability of the financial statements.
B. operating effectiveness of internal control policies and procedures.
C. risk that material misstatements exist in the financial statements.
D. possibility that the nature and extent of substantive tests may be reduced.
34. Proper segregation of duties reduces the opportunities to allow persons to be in positions to both
A. journalize entries and prepare financial statements.
B. record cash receipts and cash disbursements.
C. establish internal controls and authorize transactions.
D. perpetuate and conceal errors and fraud.
35. Which of the following is a step in an auditor's decision to assess control risk at below the maximum?
A. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls.
B. Perform tests of details of transactions and account balances to identify potential errors and fraud.
C. Identify specific internal control policies and procedures that are likely to detect or prevent material misstatements.
D. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing.
Micro Chip Corporation (MCC) has a special PO Box for customer payments. Jane is responsible for:
- going to the post office every day,
- emptying the post office box,
- opening the mail,
- making a prelist,
- sending the remittance advices to accounts receivable, and
- sending the checks to the cashier's office.
Jane has opening a business account at her bank for Master Cleaning Company (MCC). Several of Micro Chips checks are made out with only the initials MCC. Jane selects certain checks made out only with the initials MCC and deposits them in her business account. She would destroy the remittance advice.
1) Name two controls that would prevent or detect this fraud.
2) Name two audit procedures that might detect this fraud.
You are auditing Green Corporation for the calendar year 2006. Among other items related to the audit, Green Corporation was being sued for personal injury resulting from the malfunction of one of their products. The lawsuit was initiated by Sue Ewe in September, 2006. Management and the company's outside legal counsel estimated the loss from the suit to be approximately $250,000. This amount is accrued and properly disclosed in the footnotes of the financial statements. You have no reason to believe that the estimate is inaccurate. You completed your audit and dated your report March 2, 2007. The financial statements were issued on March 14, 2007. On March 20, 2007, you read in a national business periodical that the jury in the trial awarded Sue Ewe $1.5 million.
Discuss the nature of these events and what responsibility, if any, you have regarding the news of March 20, 2007.
SECTION 4: 7 points.
In the “Financial Shenanigans” book, the author recommends examining financial reports for signs of fraud. Explain some warning signs that the auditor should be aware of and explain the significance of such signs for the audit.
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