MINI EXAM #2 A3-A4 Flashcards
MCQ-10304
Which of the following constitutes a weakness in control related to the revenue cycle?
A. The billing clerk prepares a sales invoice.
B. The shipping clerk prepares a bill of lading.
C. The accounts receivable clerk prepares an aging schedule.
D. The cash receipts clerk prepares a credit memo.
Choice “D” is correct. Allowing the cash receipts clerk to prepare a credit memo constitutes an inadequate segregation of duties, because the clerk can misappropriate cash and cover the theft by issuing a credit memo.
VIOLATES THE SEG OF DUTIES
Choice “A” is incorrect. The billing clerk should prepare a sales invoice.
Choice “B” is incorrect. The shipping clerk should prepare a bill of lading.
Choice “C” is incorrect. The accounts receivable clerk should prepare an aging
schedule
MCQ-09907
Information gathered in the course of an independent audit is the property of the
auditor. This information is not generally disclosed to outside parties. However, after discussion with legal counsel, the auditor may wish to disclose information about irregularities or noncompliance with laws and regulations to outside parties in which of the following circumstances?
A. Change of auditor, predecessor/successor communications, and court order.
B. Change of auditor, court order, and accounting changes.
C. Predecessor/successor communications, court order, and accounting changes.
D. Change of auditor, predecessor/successor communications, and accounting changes.
Choice “A” is correct. A duty to disclose such information outside the entity may exist
when there is a change of auditor (reported to the SEC on Form 8-K), in response to a court order, and (with client permission) in response to a successor auditor’s inquiries.
Choices “D”, “C”, or “B” are incorrect. Accounting changes do not require disclosure to
outside parties
Which risk, when assessed at a high level, is most likely to result in an inappropriate
opinion on financial statements which are not fairly stated?
A. The risk of incorrect acceptance.
B. The risk of assessing control risk too low.
C. The risk of incorrect rejection.
D. The risk of assessing control risk too high.
Choice “A” is correct. If there is a high risk of incorrect acceptance, this means that it is quite possible that the auditor will incorrectly accept a balance as fairly stated, when in fact it is not fairly stated.
Choice “B” is incorrect. If control risk is assessed too low, the auditor will rely on controls to a greater extent than he/she should. The fact that controls are not functioning as effectively as believed does make it more likely that a misstatement could occur and
not be identified, but not quite as likely as is the case with a high risk of incorrect acceptance. Remember that a lack of controls does not imply that there is a
misstatement in the financial statements, only that it is more likely. An incorrect acceptance situation does imply that there is an error in the financial statements.
Choice “C” is incorrect. If there is a high risk of incorrect rejection, this means that the auditor will do more work than is necessary, which ultimately should lead to a proper opinion on the financial statements.
Choice “D” is incorrect. If control risk is assessed too high, the auditor will rely less on controls than he/she otherwise might have, and will perform an increased level of substantive testing. The auditor will do more work than is necessary, which ultimately
should lead to a proper opinion on the financial statements.
Which is true about accounts receivable confirmations?
A. Confirmations may be based on single transactions rather than entire customer balances.
B. The client may mail the confirmations, but they should be returned directly to the auditor.
C. Confirmations provide evidence about existence, rights, and valuation.
D. Blank confirmations provide improved response rates but may be less reliable.
Choice “A” is correct. The auditor should consider the types of information respondents will be readily able to confirm. For example, it may be easier for certain respondents to confirm individual transactions rather than entire balances. In such cases, the auditor may choose to confirm based on invoice number (i.e., single transactions).
Choice “B” is incorrect. The auditor should maintain control over the confirmation
requests and responses, which means the auditor should be the one to mail the
confirmations, not the client.
Choice “C” is incorrect. Accounts receivable confirmations do not provide reliable
evidence about valuation. Just because a respondent confirms that he/she owes a
certain amount does not mean that he/she has the intent or the ability to pay it.
Choice “D” is incorrect. Blank confirmations are those in which the recipient is
requested to fill in the balance. They provide improved reliability since the respondent
cannot simply sign off without actually verifying the balance. However, since more work
is required, response rates are often decreased.
MCQ-10239
Which of the following is not true about those charged with governance of an organization?
A. Those charged with governance bear responsibility for financial reporting.
B. Those charged with governance typically include the board of directors.
C. Those charged with governance bear responsibility for overseeing the strategic direction of the organization.
D. Those charged with governance typically include management of the organization.
Choice “D” is correct. Management is not typically included in the term “those charged with governance.”
Choice “A” is incorrect. The term “those charged with governance” refers to those who
bear responsibility to oversee the obligations, financial reporting process, and strategic
direction of an entity.
Choice “B” is incorrect. The term “those charged with governance” is broadly
interpreted to encompass the terms “board of directors” and “audit committee.”
Choice “C” is incorrect. The term “those charged with governance” refers to those who
bear responsibility to oversee the obligations, financial reporting process, and strategic
direction of an entity.
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the:
A. Administrative function from the hiring function.
B. Authorization of transactions from the custody of related assets.
C. Human resources functions from the accounting functions.
D. Application controls from the general controls.
Choice “B” is correct. The hiring function provides authorization for payment. Distributing payroll is a custodial function.
Choice “A” is incorrect. Hiring is an administrative function.
Choice “C” is incorrect. Segregation of duties generally refers to the separation of authorization, recordkeeping and custody, not the separation of various functional units.
Choice “D” is incorrect. Hiring and payroll distribution are not types of application controls or general controls
Which of the following most likely would be an internal control procedure designed to detect errors and irregularities concerning the custody of inventory?
A. Independent comparisons of finished goods records with counts of goods on hand.
B. Segregation of functions between general accounting and cost accounting.
C. Periodic reconciliation of work in process with job cost sheets.
D. Approval of inventory journal entries by the storekeeper.
Choice “A” is correct. Independently comparing inventory records with physical inventory counts may detect discrepancies concerning the custody of inventory.
Choice “B” is incorrect. Segregation of duties between general accounting and cost accounting relates to the recordkeeping aspects of inventory and not to its physical custody.
Choice “C” is incorrect. Periodic reconciliation of work in process with job cost sheets relates to the recordkeeping aspects of inventory and not to its physical custody.
Choice “D” is incorrect. Requiring approval of journal entries relates to the recordkeeping aspects of inventory and not to its physical custody.
MCQ-10301***
With respect to an auditor’s consideration of fraud risk, which of the following is not required?
A. Implementation of controls to detect fraud.
B. An assumption that that there is a risk of management override of controls.
C. A discussion among engagement personnel regarding fraud.
D. Incorporation of an element of unpredictability into the audit.
Choice “A” is correct. It is management’s responsibility (not the auditor’s) to design and
implement programs and controls to prevent, deter, and detect fraud.
Choice “B” is incorrect. There is a presumption in every audit that risk of management
override of controls exists.
Choice “C” is incorrect. During planning, engagement personnel are required to discuss
the potential for material misstatement due to fraud.
Choice “D” is incorrect. The auditor should incorporate an element of unpredictability
into every audit.
MCQ-10311
Which of the following should be included in a management representation letter?
A. The auditor’s belief that the financial statements are fairly presented in conformity with GAAP.
B. The auditor’s belief that the effects of any uncorrected misstatements are immaterial to the financial statements taken as a whole.
C. A disclaimer indicating that management is not responsible for unrecorded transactions of which it is unaware.
D. Acknowledgment of management’s responsibility for the design, implementation, and maintenance of internal control.
Choice “D” is correct. Specific representations should be obtained regarding management’s responsibility for the design, implementation, and maintenance of
internal control.
Choice “A” is incorrect. Specific representations should be obtained regarding
management’s (and not the auditor’s) belief that the financial statements are fairly
presented in conformity with GAAP. Remember that the letter is coming from
management to the auditor, and so should reflect management’s beliefs.
Choice “B” is incorrect. Specific representations should be obtained regarding
management’s (and not the auditor’s) belief that the effects of any uncorrected
misstatements are immaterial to the financial statements taken as a whole. Remember
that the letter is coming from management to the auditor, and so should reflect
management’s beliefs.
Choice “C” is incorrect. Specific representations should be obtained regarding the
absence of unrecorded transactions. A disclaimer stating that management is not
responsible for unrecorded transactions would not be acceptable.
MCQ-10285
Which should be the auditor’s primary focus when considering related party transactions?
A. The adequacy of the client’s disclosure of such transactions.
B. The need to disclose payments made to top members of management under compensation arrangements and for expense allowances.
C. The legality of such transactions.
D. The determination as to whether such transactions were consummated under
arm’s-length terms.
Choice “A” is correct. The auditor’s primary concern with related party transactions is that they are properly disclosed in accordance with GAAP.
Choice “B” is incorrect. GAAP requires disclosure of material related party transactions except compensation arrangements, expense allowances, and other similar items in the ordinary course of business.
Choice “C” is incorrect. The auditor generally would not be expected to evaluate the legality of related party transactions, although appropriate response would be necessary if the auditor became aware of a possible illegality.
Choice “D” is incorrect. Generally it will not be possible for an auditor to determine whether or not a transaction would have taken place in exactly the same manner if the parties were not related. For this reason, related-party transactions are not considered
to be arm’s-length transactions.
MCQ-09913
Which of the following types of audit evidence is the least reliable?
A. Bank statement obtained from the client.
B. Canceled check.
C. Purchase order.
D. Vendor’s invoice.
Choice “C” is correct. A purchase order is internal documentation and as such, it is more easily manipulated by the client.
Choices “D”, “B”, or “A” are incorrect. A vendor’s invoice, a canceled check, and a bank statement obtained from the client are all considered external evidence, which is less likely to be manipulated than is internal evidence.
MCQ-10283
Which of the following procedures is an auditor most likely to use to test the completeness assertion for fixed assets?
A. Recalculation of depreciation on fixed assets.
B. Comparison of items listed in the fixed asset ledger to actual assets observed by the auditor.
C. Comparison of assets acquired during the year to the approved capital budget.
D. Review of large items charged to repairs and maintenance.
Choice “D” is correct. When the auditor reviews large items charged to repairs and maintenance, he/she is looking for items that may have been erroneously expensed instead of capitalized. The completeness assertion focuses on just that – items that
should have been included in fixed assets but were not.
Choice “A” is incorrect. Recalculation of depreciation addresses the valuation/allocation assertion, not the completeness assertion.
Choice “B” is incorrect. Tracing from recorded assets to actual assets tests existence, not completeness. The completeness assertion focuses on assets that are not recorded, so starting with recorded assets will not identify this problem.
Choice “C” is incorrect. Verifying that acquisitions were properly approved does not address the completeness assertion, since it does not help the auditor identify items that should have been capitalized but were not.
MCQ-09883
In testing controls over cash disbursements, an auditor most likely would determine that
the person who signs the check also:
A. Is denied access to the supporting documents.
B. Approves the voucher for payment.
C. Returns the checks to accounts payable.
D. Stamps, perforates or otherwise cancels supporting documents.
Choice “D” is correct. This prevents duplicate payments of vendor invoices since cancellation occurs immediately after the check is signed.
Choice “A” is incorrect. The person who signs the check should have access to the supporting documents, as they must be cancelled after payment.
Choice “B” is incorrect. The responsibility for authorization and custody should be
separated.
Choice “C” is incorrect. Accounts payable should not get the signed checks, since this
would allow one group to have both recordkeeping and custodial duties. The check
signer should mail the check.
MCQ-10281
An auditor concerned with the completeness of dividend income would most likely:
A. Review the minutes of board of directors meetings for approval of dividends.
B. Review dividend record books produced by outside service companies.
C. Trace recorded dividend receipts to inclusion in the cash receipts journal.
D. Send confirmations to a sample of companies in which the client owns stock.
Choice “B” is correct. The auditor would likely choose a sample of companies in which the client owns stock, and review dividend record books (such as Moody’s) to determine whether such companies declared dividends during the year under audit.
Choice “A” is incorrect. The board of directors does not approve dividends coming from other companies, only dividends being declared by their own company.
Choice “C” is incorrect. An auditor concerned with the completeness assertion would be searching for unrecorded dividends. Starting an audit test with recorded dividend receipts would not provide any evidence about those items which may have been
unrecorded.
Choice “D” is incorrect. Confirmations are not generally used to audit dividend income, nor would this be particularly efficient. Reference to dividend record books produced by investment advisory services such as Moody’s is a much faster way to audit dividend income.
MCQ-09892
A report issued on significant deficiencies in internal control noted during a financial statement audit of a nonissuer should contain all of the following except:
A. A statement of compliance with laws and regulations.
B. A restriction on the use of the report.
C. The definition of material weaknesses.
D. An indication that the purpose of the audit was to report on the financial statements.
Choice “A” is correct. No statement of compliance with laws and regulations is required
in the report.
Choices “C”, “B”, and “D” are incorrect. The definition of material weaknesses, a restriction on the use of the report, and an indication that the purpose of the audit was to report on the financial statements all should be part of the report.
