Auditing

Financial statement assertions are established for account balances,

Classes of transactions Disclosures
a. Yes Yes
b. Yes No
c. No Yes
d. No No

a. Yes Yes

Which of the following is not a financial statement assertion relating to account balances?

a. Completeness.
b. Existence.
c. Rights and obligations.
d. Valuation and competence.

d. Valuation and competence.

As the acceptable level of detection risk decreases, an auditor may

a. Reduce substantive testing by relying on the assessments of inherent risk and control risk.
b. Postpone the planned timing of substantive tests from interim dates to the year-end.
c. Eliminate the assessed level of inherent risk from consideration as a planning factor.
d. Lower the assessed level of control risk from the maximum level to below the maximum.

b. Postpone the planned timing of substantive tests from interim dates to the year-end.

The risk that an auditor will conclude, based on substantive tests, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as

a. Sampling risk.
b. Detection risk.
c. Nonsampling risk
d. Inherent risk

b. Detection risk.

As the acceptable level of detection risk decreases, the assurance directly provided from

a. Substantive tests should increase.
b. Substantive tests should decrease.
c. Tests of controls should increase.
d. Tests of controls should decrease.

a. Substantive tests should increase.

Inherent risk and control risk differ from detection risk in that they

a. Arise from the misapplication of auditing procedures.
b. May be assessed in either quantitative or non-quantitative terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditor’s discretion.

c. Exist independently of the financial statement audit.

Relationship between control risk and detection risk is ordinarily

a. Parallel.
b. Inverse.
c. Direct.
d. Equal.

b. Inverse.

Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?

a. The anticipated sample size of the planned substantive tests.
b. The entity’s annualized interim financial statements
c. The results of the internal control questions.
d. The contents of the management representation letter.

b. The entity’s annualized interim financial statements

Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?

a. Internal control.
b. Corroborating evidence.
c. Quality control.
d. Materiality and relative risk.

d. Materiality and relative risk.

Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?

a. The results of the initial assessment of control risk.
b. The anticipated sample size for planned substantive tests.
c. The entity’s financial statements of the prior year.
d. The assertions that are embodied in the financial statements.

c. The entity’s financial statements of the prior year.

Holding other planning considerations equal, a decrease in the amount of misstatement in a class of transactions that an auditor could tolerate most likely would cause the auditor to

a. Apply the planned substantive tests prior to the balance sheet date.
b. Perform the planned auditing procedures closer to the balance sheet date.
c. Increase the assessed level of control risk for relevant financial statement assertions.
d. Decrease the extent of auditing procedures to be applied to the class of transactions.

b. Perform the planned auditing procedures closer to the balance sheet date.

When issuing an unqualified opinion, the auditor who evaluates the audit findings should be satisfied that the

a. Amount of know misstatement is documented in the management representation letter.
b. Estimate of the total likely misstatement is less than a material amount.
c. Amount of known misstatement is acknowledged and recorded by the client.
d. Estimate of the total likely misstatement includes the adjusting entries already recorded by the client.

b. Estimate of the total likely misstatement is less than a material amount.

Before accepting an engagement to audit a new client, a CPA is required to obtain

a. An understanding of the prospective client’s industry and business.
b. The prospective client’s signature to the engagement letter.
c. A preliminary understanding of the prospective client’s control environment.
d. The prospective client’s consent to make inquires of the predecessor audit, if any.

d. The prospective client’s consent to make inquires of the predecessor audit, if any.

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding

a. Disagreements the predecessor had with the client concerning auditing procedures and accounting principles.
b. The predecessor’s evaluation of matters of continuing accounting significance.
c. The degree of cooperation the processor received concerning the inquiry of the client’s lawyer.
d. The predecessor’s assessment of inherent risk and judgments about materiality.

a. Disagreements the predecessor had with the client concerning auditing procedures and accounting principles.

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s

a. Opinion of any subsequent events occurring since the predecessor’s audit report was issued.
b. Understanding as to the reasons for the change of auditors.
c. Awareness of the consistency in the application of GAAP between periods.
d. Evaluation of all matters of continuing accounting significance.

b. Understanding as to the reasons for the change of auditors.

Which of the following matters is generally included in an auditor’s engagement letter?

a. Management’s responsibility for the entity’s compliance with laws and regulations.
b. The factors to be considered in setting preliminary judgments about materiality.
c. Management’s vicarious liability for illegal acts committed by its employees.
d. The auditor’s responsibility to search for significant internal control deficiencies.

a. Management’s responsibility for the entity’s compliance with laws and regulations.

During the initial planning phase of an audit , a CPA most likely would

a. Identify specific internal control activities that are likely to prevent fraud.
b. Evaluate the reasonableness of the client’s accounting estimates.
c. Discuss the timing of the audit procedures with the client’s management.
d. Inquire of the client’s attorney as to whether any unrecorded claims are probable of assertion.

c. Discuss the timing of the audit procedures with the client’s management.

Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?

a. A written audit plan setting forth the procedures necessary to accomplish the auditor’s objectives.
b. An indication that the accounting records agree or reconcile with the financial statements.
c. A client engagement letter that summarizes the timing and details of the auditor’s planned field-work.
d. The assessment of the risks of material misstatement.

c. A client engagement letter that summarizes the timing and details of the auditor’s planned field-work

21. Arrangements concerning which of the following are least likely to be included in engagement letter?

a. A predecessor auditor.
b. Fees and billing.
c. CPA investment in client securities.
d. Other services to be provided in addition to the audit.

c. CPA investment in client securities.

The auditor should document the understanding established with a client through a(n)

a. Oral communication with the client.
b. Written communication with the client.
c. Written or oral communication with the client.
d. Completely detail audit plan.

b. Written communication with the client.

Which of the following factors most likely would influence an auditor’s determination of the auditability of an entity’s financial statements?

a. The complexity of the accounting system.
b. The existence of related-party transactions.
c. The adequacy of the accounting records.
d. The operating effectiveness of control procedures.

c. The adequacy of the accounting records.

Which of the following is most likely to require special planning considerations related to asset valuation?

a. Inventory is comprised of diamond rings.
b. The client has recently purchased an expensive copy machine.
c. Assets costing less than $250 are expensed even when the expected life exceeds one year.
d. Accelerated depreciation methods are used for amortizing the costs of factory equipment.

a. Inventory is comprised of diamond rings.

A CPA wishes to determine how various publicly held companies have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult for information?

a. AICPA Codification of Statements on Auditing Standards
b. AICPA Accounting Trends and Techniques.
c. SEC Quality Control Review.
d. SEC Statement 10-K Guide.

b. AICPA Accounting Trends and Techniques.

The audit program usually cannot be finalized until the

a. Consideration of the entity’s internal control has been completed.
b. Engagement letter has been signed by the auditor and the client.
c. Reportable conditions have been communicated to the audit committee of the board of directors.
d. Search for unrecorded liabilities has been performed and documented.

a. Consideration of the entity’s internal control has been completed.

Audit programs should be designed so that

a. Most of the required procedures can be performed as interim work.
b. Inherent risk is assessed at a sufficiently low level.
c. The auditor can make constructive suggestions to management.
d. The audit evidence gathered supports the auditor’s conclusion.

d. The audit evidence gathered supports the auditor’s conclusion.

With respect to planning an audit, which of the following statements is always true?

a. It is acceptable to perform a portion of the audit of a continuing audit client at interim dates.
b. An engagement should not be accepted after the client’s year-end.
c. An inventory count must be observed at year-end.
d. Final staffing decisions must be made prior to completion of the planning stage.

a. It is acceptable to perform a portion of the audit of a continuing audit client at interim dates.

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the

a. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
b. Procedures to be undertaken to discover litigation, claims, and assessments.
c. Pending legal matters to be included in the inquiry of the client’s attorney.
d. Timing of inventory observation procedures to be performed.

c. Pending legal matters to be included in the inquiry of the client’s attorney.

To obtain an understanding of a continuing client’s business, and auditor most likely would

a. Perform tests of details of transactions and balances.
b. Review prior year working papers and the permanent file for the client.
c. Read current issues of specialized industry journals.
d. Reevaluate the client’s internal control environment.

b. Review prior year working papers and the permanent file for the client.

An auditor obtains knowledge about a new client’s business and its industry to

a. Make constructive suggestions concerning improvements to the client’s internal control.
b. Develop an attitude of professional skepticism concerning management’s financial statement assertions.
c. Evaluate whether the aggregation of known misstatements cause the financial statements taken as a whole to be materially misstated.
d. Understand the events and transactions that may have an effect on the client’s financial statements.

d. Understand the events and transactions that may have an effect on the client’s financial statements.

Which of the following procedures would an auditor least likely perform while obtaining an understanding of a client in a financial statement audit?

a. Coordinating the assistance of entity personal in data preparation.
b. Discussing matters that may affect the audit with firm personnel responsible for nonaudit services to the entity.
c. Selecting a sample of vendor’s invoices for comparison to receiving reports.
d. Reading the current year’s interim financial statements.

c. Selecting a sample of vendor’s invoices for comparison to receiving reports.

In auditing the financial statements of Star Corp, Land discovered information leading Land to believe that Star’s prior year’s financial statements, which were audited by Tell, require substantial revisions. Under these circumstances, Land should

a. Notify Star’s audit committee and stockholders that the prior year’s financial statements cannot be relied on.
b. Request Star to reissue the prior year’s financial statements with the appropriate revisions.
c. Notify Tell about the information and make inquiries about the integrity of Star’s management.
d. Request Star to arrange a meeting among the three parties to resolve the matter.

d. Request Star to arrange a meeting among the three parties to resolve the matter.

Analytical procedures used in planning an audit should focus on

a. Reducing the scope of tests of controls and substantive tests.
b. Providing assurance that potential material misstatements will be identified.
c. Enhancing the auditor’s understanding of the client’s business.
d. Assessing the adequacy of the available evidence.

c. Enhancing the auditor’s understanding of the client’s business.

Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?

a. Turnover of personnel in the accounting department.
b. Objectivity of audit committee members.
c. Square footage of selling space.
d. Management’s plans to repurchase stock.

c. Square footage of selling space.

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the

a. Auditor’s system of quality control has been maintained at a high level.
b. Results are consistent with the conclusion to be presented in the auditor’s report.
c. Audit procedures performed are approved in the professional standards
d. Audit has been performed by persons having adequate technical training and proficiency as auditors.

b. Results are consistent with the conclusion to be presented in the auditor’s report.

Which of the following is least likely to be considered a risk assessment procedure?

a. Analytical procedures.
b. Confirmation of ending accounts receivable.
c. Inspection of documents
d. Observation of the performance of certain accounting procedures.

b. Confirmation of ending accounts receivable.

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity’s internal control?

a. Incompatible duties.
b. Management override.
c. Mistakes in judgment.
d. Collusion among employees.

a. Incompatible duties.

When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that

a. Internal control may be ineffective due to mistakes in judgment and personal carelessness.
b. Adequate safeguards over access to assets and records should permit an entity to maintain proper accountability.
c. Establishing and maintaining internal control is an important responsibility of management.
d. The cost of an entity’s internal control should not exceed the benefits expected to be derived.

d. The cost of an entity’s internal control should not exceed the benefits expected to be derived.

An entity’s ongoing monitoring activities often include

a. Periodic audits by the audit committee.
b. Reviewing the purchase function.
c. The audit of the annual financial statement.
d. Control risk assessment in conjunction with quarterly reviews.

b. Reviewing the purchase function.

Management philosophy and operating style most likely would have a significant influence on an entity’s control environment when

a. The internal auditor reports directly to management.
b. Management is dominated by one individual.
c. Accurate management job descriptions delineate specific duties.
d. The audit committee actively oversees the financial reporting process.

b. Management is dominated by one individual.

Which of the following is a provision of the Foreign Corrupt Practices Act?

a. It is a criminal offense for an audit to fail to detect and report a bribe paid by an American business entity to a foreign official for the purpose of obtaining business.
b. The auditor’s detection of illegal acts committed by official of the auditor’s publicly held client in conjunction with foreign officials should be reported to the Enforcement Division of the Securities and Exchange Commission.
c. If the auditor of a publicly held company concludes that the effects on the financial statements of a bribe given to a foreign official are not susceptible of reasonable estimation, the auditor’s report should be modified.
d. Every publicly held company must devise, document, and maintain internal control sufficient to provide reasonable assurances that internal control objectives are met.

d. Every publicly held company must devise, document, and maintain internal control sufficient to provide reasonable assurances that internal control objectives are met.

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 vendor’s 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

a. Cash disbursements.
b. Approved vouchers.
c. Receiving reports.
d. Vendor’s invoices.

a. Cash disbursements.

Which of the following procedures most likely would provide an auditor with evidence about whether an entity’s internal control activities are suitably designed to prevent or detect material misstatements?

a. Reperforming the activities for a sample of transactions.
b. Performing analytical procedures using data aggregated at a high level.
c. Vouching a sample of transactions directly related to the activities.
d. Observing the entity’s personal applying the activities.

d. Observing the entity’s personal applying the activities.

Which statement is correct concerning the relevance of various types of controls to a financial audit?

a. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken.
b. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant.
c. Controls over safeguarding of assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant.
d. All controls are ordinarily relevant to an audit.

b. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant.

In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required to

a. Document the auditor’s understanding of the entity’s internal control.
b. Search for significant deficiencies in the operation of internal control.
c. Perform tests of controls to evaluate the effectiveness of the entity’s internal control.
d. Determine whether controls are suitably designed to prevent or detect material misstatements.

a. Document the auditor’s understanding of the entity’s internal control.

An auditor should obtain sufficient knowledge of an entity’s information system to understand the

a. Safeguards used to limit access to computer facilities.
b. Process used to prepare significant accounting estimates.
c. Controls used to assure proper authorization of transactions.
d. Controls used to detect the concealment of fraud.

b. Process used to prepare significant accounting estimates.

When obtaining an understanding of an entity’s internal control, an auditor should concentrate on the substance of controls rather than their form because

a. The controls may be operating effectively but may not be documented.
b. Management may establish appropriate controls but not enforce compliance with them.
c. The controls may be so inappropriate that no reliance is contemplated by the auditor.
d. Management may implement controls whose costs exceed their benefits.

b. Management may establish appropriate controls but not enforce compliance with them.

Decision tables differ from program flowcharts in that decision tables emphasize

a. Ease of manageability for complex programs.
b. Logical relationships among conditions and actions.
c. Cost benefit factors justifying the program.
d. The sequence in which operations are performed.

b. Logical relationships among conditions and actions.

During the consideration of internal control in a financial statement audit, an auditor is not obligated to

a. Search for significant deficiencies in the operation of the internal control.
b. Understand the internal control and the information system.
c. Determine whether the control activities relevant to audit planning have been implemented.
d. Perform procedures to understand the design of internal control.

a. Search for significant deficiencies in the operation of the internal control.

Which of the following statements regarding auditor documentation of the client’s internal control is correct?

a. Documentation must include flowcharts.
b. Documentation must include procedural write-ups.
c. No documentation is necessary although it is desirable.
d. No one particular form of documentation is necessary, and the extent of documentation may vary.

d. No one particular form of documentation is necessary, and the extent of documentation may vary.

Which of the following may not be required on a particular audit of a nonissuer (nonpublic) company?

a. Risk assessment procedures.
b. Tests of controls.
c. Substantive procedures.
d. Analytical procedures.

b. Tests of controls.

17. Assessing control risk at a low level most likely would involve

a. Performing more extensive substantive tests with larger sample sizes than originally planned.
b. Reducing inherent risk for most of the assertions relevant to significant account balances.
c. Changing the timing of substantive tests by omitting interim-date testing and performing the tests at year-end.
d. Identifying specific controls relevant to specific assertions.

d. Identifying specific controls relevant to specific assertions.

18. When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the

a. Extent of tests of controls.
b. Level of detection risk.
c. Extent of tests of details.
d. Level of inherent risk.

c. Extent of tests of details.

An auditor may compensate for a weakness in internal control by increasing the

a. Level of detection risk.
b. Extent of tests of controls.
c. Preliminary judgment about audit risk.
d. Extent of analytical procedures.

d. Extent of analytical procedures.

Which of the following statements is correct concerning an auditor’s assessment of control risk?

a. Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity’s internal control.
b. Evidence about the operation of internal control in prior audits may not be considered during the current year’s assessment of control risk.
c. The basis for an auditor’s conclusions about the assessed level of control risk need not be documented unless control risk is assessed at the maximum level.
d. The lower the assessed level of control risk , the less assurance the evidence must provide that the control procedures are operating effectively.

a. Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity’s internal control.

How frequently must an auditor test the operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely in the current year?

a. Monthly.
b. Each audit.
c. At least every second audit.
d. At least every third audit.

b. Each audit.

Before assessing control risk at a level lower than the maximum, the auditor obtains reasonable assurance that controls are in use and operating effectively. This assurance is most likely obtained in part by

a. Preparing flowcharts.
b. Performing substantive tests.
c. Analyzing tests of trends and ratios.
d. Inspection of documents.

d. Inspection of documents.

An auditor generally tests the segregation of duties related to inventory by

a. Personal inquiry and observation.
b. Test counts and cutoff procedures.
c. Analytical procedures and invoice recomputation.
d. Document inspection and reconciliation.

a. Personal inquiry and observation.

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including

a. Inquiry and analytical procedures.
b. Reperformance and observation.
c. Comparison and confirmation.
d. Inspection and verification.

b. Reperformance and observation

Which of the following types of evidence would an auditor most likely examine to determine whether controls are operating as designed?

a. Confirmations of receivables verifying account balances.
b. Letters of representations corroborating inventory pricing.
c. Attorneys’ responses to the auditor’s inquiries.
d. Client records documenting the use of computer programs.

d. Client records documenting the use of computer programs.

Which of the following is not a step in an auditor’s assessment of control risk?

a. Evaluate the effectiveness of internal control with tests of controls.
b. Obtain an understanding of the entity’s information system and control environment.
c. Perform tests of details of transactions to detect material misstatements in the financial statements.
d. Consider whether controls can have a pervasive effect on financial statement assertions.

c. Perform tests of details of transactions to detect material misstatements in the financial statements.

To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including

a. Inquiry.
b. Analytical procedures.
c. Calculation.
d. Confirmation.

a. Inquiry.

Which of the following procedures concerning accounts receivable would an auditor most likely perform to obtain evidence in support of an assessed level of control risk below the maximum?

a. Observing an entity’s employee prepare the schedule of past due accounts receivable.
b. Sending confirmation request to an entity’s principle customers to verify the existence of account receivable.
c. Inspecting an entity’s analysis of accounts receivable for unusual balances.
d. Comparing an entity’s uncollectible accounts expense to actual uncollectible accounts receivable.

a. Observing an entity’s employee prepare the schedule of past due accounts receivable.

29. The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United States?

a. All companies.
b. SEC registrants.
c. All issuer (public) companies and nonissuer (nonpublic) companies with more than $100,000,000 of net worth.
d. All nonissuer companies.

b. SEC registrants.

Which of the following is correct concerning the level of assistance auditors may provide in assisting management with its assessment of internal control?

a. No assistance of any type may be provided.
b. No limitations on assistance exist.
c. Only very limited assistance may be provided.
d. As less risk is assumed by the auditors, a higher level of assistance is appropriate.

c. Only very limited assistance may be provided.

Which of the following need not be included in management’s report on internal control under Section 404a of the Sarbanes-Oxley Act of 2002?

a. A statement that the company’s auditor has issued an audit report on the company’s internal control over financial reporting.
b. Identification of the framework for evaluating internal control.
c. Management’s assessment of the effectiveness of internal control.
d. Management’s statement of responsibility to establish and maintain internal control that has no significant deficiencies.

d. Management’s statement of responsibility to establish and maintain internal control that has no significant deficiencies.

Which of the following is an accurate statement about internal control weaknesses?

a. Material weaknesses are also control deficiencies.
b. Significant deficiencies are also material weaknesses.
c. Control deficiencies are also reportable conditions.
d. Control deficiencies always merit attention by those responsible for oversight of the company’s financial reporting.

a. Material weaknesses are also control deficiencies.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a misstatement of the company’s annual or interim financial statements of at least what amount will not be prevented or detected on a timely basis?

a. An amount greater than zero.
b. An amount greater than zero, but not significant.
c. A significant amount.
d. A material amount.

d. A material amount.

The minimum likelihood of loss involved in the consideration of a control deficiency is

a. Remote.
b. Reasonably possible.
c. Probable.
d. Not explicitly considered.

d. Not explicitly considered.

According to Public Company Accounting Oversight Board Auditing Standard 5, what type of transaction involves establishing a loan loss reserve?

a. Substantive transaction.
b. Routine transaction.
c. Nonroutine transaction.
d. Estimation transaction.

d. Estimation transaction.

For purposes of an audit of internal control performed under Public Company Accounting Oversight Board standards, the "as of date" is ordinarily

a. The first day of the year.
b. The last day of the fiscal period.
c. The last day of the auditor’s fieldwork.
d. The average date for the entire fiscal period.

b. The last day of the fiscal period.

Consider an issuer (public) company whose purchases are made through the Internet and by telephone. Which of the following is correct?

a. These types of purchases represent control objectives for the audit of internet control.
b. These purchases are the assertions related to the purchase class of transactions.
c. These types of purchases represent two major classes of transactions within the purchases process.
d. These two types of transactions represent routine transactions that must always be investigated in extreme detail.

a. Have you ever been asked to override the process?

Which of the following is most likely to be considered a material weakness in internal control for purposes of an internal control audit of an issuer (public) company.

a. An ineffective internal audit function.
b. Restatement of previously issued financial statements due to a change in accounting principles.
c. Inadequate segregation of recordkeeping from accounting.
d. Weaknesses in control activities.

a. An ineffective internal audit function.

40. Which of the following is most likely to indicate a significant deficiency relating to a client’s antifraud program?

a. A broad scope of internal audit activities.
b. A "whistle-blower" program that encourages anonymous submissions.
c. Audit committee passivity when conducting oversight functions.
d. Lack of performance of criminal background investigations for likely customers.

c. Audit committee passivity when conducting oversight functions.

In which manner are significant deficiencies communicated by the auditors to the audit committee under Public Company Accounting Oversight Board Standard 5?

a. The communication may either be orally or in written form.
b. The communication must be oral, and not in written form.
c. The communication must be in written form.
d. No such communication is required as only material weaknesses must be communicated.

c. The communication must be in written form.

Which is correct concerning the external auditor’s use of the work of others in an audit of internal control performed for a public company?

a. It is not allowed.
b. The work of internal auditors may be used, but only when those internal auditors report directly to the audit committee.
c. Ordinarily the work of internal auditors and others is used primarily in low-risk areas.
d. There is no limitation and is likely to reduce auditor liability since the auditors will then share legal responsibility with those who have performed the service.

c. Ordinarily the work of internal auditors and others is used primarily in low-risk areas.

Which of the following is correct when applying a top-down approach to identify controls to test in an integrated audit?

a. For certain assertions, strong entity-level controls may allow the auditor to omit additional testing beyond those controls.
b. Starting at the top–controls over specific assertions–the author should link to major accounts and reporting items.
c. The goal is to focus on details of accounting controls, while avoiding consideration of overall entity-level controls.
d. The goal is to focus on all controls related to assertions, omitting consideration of controls related to the financial statements.

a. For certain assertions, strong entity-level controls may allow the auditor to omit additional testing beyond those controls.

Which of the following is not included in a standard unqualified opinion on internal control over financial reporting performed under PCAOB requirements?

a. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
b. In our opinion, [company name] maintained, in all material respects, effective internal control over financial reporting.
c. Our audit included obtaining an understanding of internal control over financial reporting.
d. The [company name] management and audit committee are responsible for maintaining effective internal control over financial reporting.

d. The [company name] management and audit committee are responsible for maintaining effective internal control over financial reporting.

Which of the following procedures would an auditor most likely perform to test controls relating to management’s assertion about the completeness of cash receipts for cash sales at a retail outlet?

a. Observe the consistency of the employee’s use of cash registers and tapes.
b. Inquire about employee’s access to recorded but undeposited cash.
c. Trace deposits in the cash receipts journal to the cash balance in the general ledger.
d. Compare the cash balance in the general ledger with the bank confirmation request.

a. Observe the consistency of the employee’s use of cash registers and tapes.

Sound internal control dictates that immediately upon receiving checks from customers by mail, a responsible employee should

a. Add the checks to the daily cash summary.
b. Verify that each check is supported by a prenumbered sales invoice.
c. Prepare a duplicate listing of checks received.
d. Record the checks in the cash receipts journal.

c. Prepare a duplicate listing of checks received.

Which of the following controls most likely would reduce the risk of diversion of customer receipts by an entity’s employees?

a. A bank lockbox system
b. Prenumbered remittance advices.
c. Monthly bank reconciliations.
d. Daily deposit of cash receipts.

a. A bank lockbox system

An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the

a. Dates checks are deposited per bank statements with the dates remittance credits are recorded.
b. Daily cash summaries with the sums of the cash receipts journal entries.
c. Individual bank deposit slips with the details of the monthly bank statements.
d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded.

a. Dates checks are deposited per bank statements with the dates remittance credits are recorded.

Upon receipt of customers’ checks in the mailroom, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the

a. Internal auditor to investigate the listing for unusual transactions.
b. Treasurer to compare the listing with the monthly bank statement.
c. Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
d. Entity’s bank to compare the listing with the cashier’s deposit slip.

c. Accounts receivable bookkeeper to update the subsidiary accounts receivable records.

Which of the following controls most likely would assure that all billed sales are correctly posted to the accounts receivable ledger?

a. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
b. Each sales invoice is supported by a prenumbered shipping document.
c. The accounts receivable ledger is reconciled daily to the control account in the general ledger.
d. Each shipment on credit is supported by a prenumbered sales invoice.

a. Daily sales summaries are compared to daily postings to the accounts receivable ledger.

Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?

a. The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances.
b. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly.
c. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.
d. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

d. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

55. Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?

a. Accounts receivable.
b. Credit.
c. Accounts payable.
d. Treasurer.

d. Treasurer.

Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of employing dishonest individuals and

a. Protect employees who make unintentional misstatements from possible monetary damages resulting from their misstatements.
b. Deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts.
c. Facilitate an independent monitoring of the receiving and depositing of cash receipts.
d. Force employees in positions of trust to take periodic vacations and rotate their assigned duties.

b. Deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts.

During the consideration of a small business client’s internal control, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness?

a. The owner reviews errors in billing to customers and posting to the subsidiary ledger.
b. The controller receives the monthly bank statement directly and reconciles the checking accounts.
c. The owner reviews credit memos after they are recorded.
d. The controller reconciles the total of the detail accounts receivable accounts to the amount shown in the ledger.

c. The owner reviews credit memos after they are recorded.

When a customer fails to include a remittance advice with a payment, it is common practice for the person opening the mail to prepare one. Consequently, mail should be opened by which of the following four company employees?

a. Credit manager.
b. Receptionist.
c. Sales manager.
d. Accounts receivable check.

b. Receptionist.

In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also

a. Reviews the monthly bank reconciliation.
b. Returns the checks to accounts payable.
c. Is denied access to the supporting documents.
d. Is responsible for mailing the checks.

d. Is responsible for mailing the checks.

Which of the following controls is not usually performed in the vouchers payable department?

a. Matching the vendor’s invoice with the related receiving report.
b. Approving vouchers for payment by having an authorized employee sign the vouchers.
c. Indicating the asset and expense accounts to be debited.
d. Accounting for unused prenumbered purchase orders and receiving reports.

d. Accounting for unused prenumbered purchase orders and receiving reports.

With properly designed internal control, the same employee most likely would match vendor’s invoices with receiving reports and also

a. Post the detailed accounts payable records.
b. Recompute the calculation on vendors’ invoices.
c. Reconcile the accounts payable ledger.
d. Cancel vendors’ invoices after payment.

b. Recompute the calculation on vendors’ invoices.

For effective internal control, the accounts payable department generally should

a. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.
b. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized employee.
c. Obliterate the quantity ordered on the receiving department copy of the purchase order.
d. Establish the agreement of the vendor’s invoice with the receiving report and purchase order.

d. Establish the agreement of the vendor’s invoice with the receiving report and purchase order.

Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the

a. Department that initiated the requisition.
b. Receiving department.
c. Purchasing agent.
d. Accounts payable department.

b. Receiving department.

With well-designed internal control, employees in the same department most likely would approve purchase orders, and also

a. Reconcile the open invoice file.
b. Inspect goods upon receipt.
c. Authorize requisitions of goods.
d. Negotiate terms with vendors.

d. Negotiate terms with vendors.

In obtaining an understanding of a manufacturing entity’s internal control over inventory balances, an auditor most likely would

a. Analyze the liquidity and turnover ratios of the inventory.
b. Perform analytical procedures designed to identify cost variances.
c. Review the entity’s descriptions of inventory policies and procedures.
d. Perform test counts of inventory during the entity’s physical count.

c. Review the entity’s descriptions of inventory policies and procedures.

Which of the following controls most likely would be used to maintain accurate inventory records?

a. Perpetual inventory records are periodically compared with the current cost of individual inventory items.
b. A just-in-time inventory ordering system keeps inventory levels to a desirable minimum.
c. Requisitions, receiving reports, and purchase orders are independently matched before payment is approved.
d. Periodic inventory counts are used to adjust the perpetual inventory records.

d. Periodic inventory counts are used to adjust the perpetual inventory records.

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably

a. Insist that the client perform physical counts of inventory items several times during the year.
b. Apply gross profit tests to ascertain the reasonableness of the physical counts.
c. Increase the extent of tests of controls of the inventory cycle.
d. Request the client to schedule the physical inventory count at the end of the year.

d. Request the client to schedule the physical inventory count at the end of the year.

Which of the following controls most likely addresses the completeness assertion for inventory?

a. Work in process account is periodically reconciled with subsidiary records.
b. Employees responsible for custody of finished goods do not perform the receiving function.
c. Receiving reports are prenumbered and periodically reconciled.
d. There is a separation of duties between payroll department and inventory accounting personnel.

c. Receiving reports are prenumbered and periodically reconciled.

Sound internal control dictates that defective merchandise returned by customers should be presented initially to the

a. Sales clerk.
b. Purchasing clerk.
c. Receiving clerk.
d. Inventory control clerk.

c. Receiving clerk.

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate controls over the invoicing function allow goods to be shipped that are not invoiced. The inadequate controls could cause an

a. Understatement of revenues, receivables, and inventory.
b. Overstatement of revenues and receivables, and an understatement of inventory.
c. Understatement of revenues and receivables, and an overstatement of inventory.
d. Overstatement of revenues, receivables, and inventory.

c. Understatement of revenues and receivables, and an overstatement of inventory.

Which of the following is a question that the auditor would expect to find on the production cycle section of an internal control questionnaire?

a. Are vendors’ invoices for raw materials approved for payment by an employee who is independent of the cash disbursements function?
b. Are signed checks for the purchase of raw materials mailed directly after signing without being returned to the person who authorized the invoice processing?
c. Are all releases by storekeepers of raw materials from storage based on approved requisition documents?
d. Are details of individual disbursements for raw materials balanced with the total to be posted to the appropriate general ledger account?

c. Are all releases by storekeepers of raw materials from storage based on approved requisition documents?

The objectives of internal control for a production cycle are to provide assurance that transactions are properly executed and recorded, and that

a. Production orders are prenumbered and signed by a supervisor.
b. Custody of work in process and of finished goods is properly maintained.
c. Independent internal verification of activity reports is established.
d. Transfers to finished goods are documented by a completed production report and a quality control report.

b. Custody of work in process and of finished goods is properly maintained.