2.3.19

Question 1

Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that

Answer 1

Sales billed to customers were actually shipped.

Sales invoices are billing documents sent to customers. Tracing sales invoices to shipping documents tests for failure to ship.

Question 2

To test for unsupported entries in the ledger, the direction of audit testing should be from the

Answer 2

Ledger entries.

To discover unsupported entries in the ledger, a sample of entries should be selected to determine whether any entry lacks proper support. The direction of testing is from the ledger entries to the books of original entry, then to the source documents.

Question 3

Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular audit objective?

Answer 3

Analytical procedures have revealed no unusual or unexpected results.

Analytical procedures performed as risk assessment procedures provide a basis for assessing the risks of material misstatement. When those procedures do not identify unusual transactions or events or amounts, ratios, and trends with audit significance, the assessment of the RMMs is lower. The lower assessment may justify reducing tests of details.

Question 4

The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to

Answer 4

Material requisitions.

Vouching is the examination of documents to obtain audit evidence about recorded amounts or transactions. Thus, the direction of testing is from records to documents. Testing in the opposite direction (documents to records) is tracing. Materials requisitions are authorization documents used to release materials for use in production. The auditor vouches quantities recorded in work-in-process by examining the documents for materials requisitions.

Question 5

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?

Answer 5

Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

The completeness assertion concerns whether all transactions and accounts that should be presented are so included. Thus, management asserts that all purchases are recorded and included in the accounts. A standard control related to the completeness assertion for purchases is the use of prenumbered documents. Items missing from the numerical sequence may represent unrecorded transactions and accounts.

Question 6

For which one of the following purposes does an internal auditor not evaluate the risks and the adequacy and effectiveness of controls?

Answer 6

The opinion expressed on the financial statements.

The independent external auditor’s basic purpose is to express an opinion on (attest to) the fairness of the entity’s general use financial statements. Consequently, the external auditor, not the internal auditor, evaluates the entity’s external financial reporting. Individual internal auditors cannot perform this function because they are employees who cannot be independent in fact and appearance. Independence is only an organizational (not individual) attribute of the internal audit activity.

Question 7

Which of the following factors are included in an entity’s control environment?

Audit committee participation:
Integrity & ethical values:
Organizational structure:

Answer 7

Yes
Yes
Yes

The control environment is the foundation for all other control components. It provides discipline and structure, sets the tone of the organization, and influences the control consciousness of employees. Its components include (1) participation of those charged with governance, (2) integrity and ethical values, (3) organizational structure, (4) management’s philosophy and operating style, (5) assignment of authority and responsibility, (6) human resource policies and practices, and (7) commitment to competence.

Question 8

An auditor would most likely verify the interest earned on bond investments by

Answer 8

Recomputing the interest earned on the basis of face amount, interest rate, and period held.

The audit plan for investments includes making an independent computation of revenue (such as dividends and interest). For example, the auditor may use information from bond certificates (interest rates, payment dates, issue date, and face amount) to recalculate bond interest earned. This amount includes uncollected accruals.

Question 9

In auditing payroll when control risk is assessed as low, an auditor most likely will

Answer 9

Compare payroll costs with entity standards or budgets.

Comparing payroll costs with budgeted amounts is a standard analytical procedure that is performed in most audits of payroll.

Question 10

The major purpose of the auditor’s study and evaluation of the company’s computer processing operations is to

Answer 10

Evaluate the reliability and integrity of financial information.

Information systems provide data for decision making, control, and compliance with external requirements. Thus, auditors should examine information systems and, as appropriate, determine (1) whether financial records and reports contain accurate, reliable, timely, complete, and useful information and (2) controls over recordkeeping and reporting are adequate and effective.

Question 11

Which of the following is not a principal objective of the auditor in the audit of revenues?

Answer 11

To verify cash deposited during the year.

The verification of cash deposits during the year is not part of the audit of revenues. Verification of cash and marketable securities is undertaken as a separate part of the audit program.

Question 12

For control purposes, which of the following should be organizationally separated from the computer operations function?

Answer 12

Systems development.

Systems analysts survey the existing system, analyze the organization’s information requirements, and design new computer systems to meet those needs. These design specifications guide the preparation of specific programs by computer programmers. The console operator should not be assigned programming duties, much less responsibility for systems design, and should not have the opportunity to make changes in programs and systems as (s)he operates the equipment.

Question 13

The auditor is concerned with establishing that dividends are paid to client corporation shareholders who hold stock as of the

Answer 13

Record date.

Persons who hold stock in the corporation as of the record date are entitled to payment of the dividend. The auditor should test the dividend payment list to gather evidence that dividends were paid to the appropriate shareholders. The integrity of the dividend payment process is enhanced when an independent agent (usually a financial institution) is used to pay dividends.

Question 14

Which of the following statements is true about significant deficiencies identified in an audit?

Answer 14

The auditor should identify those significant deficiencies considered to be material weaknesses.

In a financial statement audit, the auditor is not required to perform procedures specifically to identify deficiencies in internal control or to express an opinion on internal control. But the auditor should report significant deficiencies or material weaknesses in internal control of which (s)he becomes aware. In such cases, they must be communicated in writing to management and those charged with governance (AU-C 265).

Question 15

The auditor observes the count of marketable securities on December 31. (S)he records the serial number of each security and checks the serial number and number of shares (or principal amount) against company records. Which error or bad practice has the best chance of being detected by this procedure?

Answer 15

The CFO misappropriated and sold securities on April 4. (S)he speculated successfully with the proceeds and replaced the misappropriated securities on December 29.

The auditor is most likely to detect a misappropriation and replacement of securities by comparing information for the securities counted with the entity’s records. The records would indicate that the recorded serial numbers differ from those of securities counted by the auditor.

Question 16

In an audit engagement, should an auditor communicate the following matters to those charged with governance?

Auditor’s judgement about the client’s accounting principles:
Issues discussed with management prior to auditor’s retention:

Answer 16

Yes
Yes

The matters to be discussed with those charged with governance include the quality of the accounting principles used by management. Management is normally a participant in the discussion. Matters covered may include the auditor’s views on the entity’s significant accounting practices, e.g., policies, estimates, and disclosures. Furthermore, in any audit engagement, the auditor and those charged with governance should discuss any major issues discussed with management in connection with the initial or recurring retention of the auditors, for example, issues concerning the application of accounting principles and auditing standards.

Question 17

When assessing the internal auditors’ competence, the auditor should obtain information about the

Answer 17

Educational background and professional certification of the internal auditors.

If the external auditor plans to use the work of the internal auditors to obtain audit evidence or to provide direct assistance, the competence and objectivity of the internal auditors should be assessed. The factors in assessing the competence of internal auditors include (1) educational level and experience; (2) professional certification and continuing education; (3) audit policies, programs, and procedures; (4) practices regarding assignment of internal auditors; (5) supervision and review; (6) quality of working paper documentation, reports, and recommendations; and (7) performance evaluation.

Question 18

In a manufacturing company, which one of the following audit procedures provides the least assurance of the existence of the general ledger balance of investment in stocks and bonds at the audit date?

Answer 18

Examination of paid checks issued in payment of securities purchased.

Paid checks issued in payment for securities do not provide assurance that the investments are in existence and still owned by the client at the balance sheet date.

Question 19

In confirming a client’s accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year’s audit, the auditor most likely would choose

Answer 19

Individual invoices.

The sampling unit is an individual item included in a population. It may be a physical thing or a monetary unit. When testing accounts receivable, it is important to determine that the transactions have been recorded appropriately. Thus, the auditor should compare the transactions recorded in accounts receivable with the individual invoices.