Exam 2 Flashcards
(75 cards)
1
Q
***1. What is the definition of fraud in an audit of the financial statements?
A
***Answer: A. An intentional act that results in a material misstatement in financial statements that are the subject of an audit. (Chapter 3.6)
2
Q
- Which of the following is a true statement about an auditor’s responsibility regarding consideration of fraud in financial statement audit
A
Answer: D. The auditor should assess the risks of material misstatement due to fraud. (3.6)
3
Q
- Which of the following statements reflects an auditor’s responsibility for detecting fraud and errors?
A
Answer: D. An auditor should design the audit to provide reasonable assurance of detecting fraud and errors that are material to the financial statement (Chapter 3.6)
4
Q
- Certain individual that makes operating and financing decisions
A
Answer: A. Consists of many individuals that make operating and financing decisions
5
Q
- Which of the following procedures will an auditor most likely perform when evaluating audit evidence at the completion of the audit.
A
Answer: D. Consider whether the results of audit procedures affect the assessment of the identified material misstatement due to fraud. (Chapter 3.6)
6
Q
- Which of the following auditor concerns most likely could be so serious that the auditor concluded that a financial statement audit cannot be performed.
A
Answer: D. There is a substantial risk of intentional misapplication of accounting principles. (Chapter 3.6)
7
Q
- Which of the following circumstances most likely will cause an auditor to suspect that material misstatements exist in a client’s financial statements
A
Answer: B. Differences between reconciliations of control accounts and subsidiary records are not investigated. (Chapter 3.6)
8
Q
- An auditor has withdrawn from an audit engagement of an issuer after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in correspondence with the
A
Answer: D. Board of directors.
9
Q
- Which of the following statements concerning noncompliance with laws and regulations by clients is correct?
A
Answer: A. An auditor has a responsibility to detect noncompliance with laws and regulations that has a direct effect on the financial statement. (Chapter 3.7)
10
Q
***10. An audit in accordance with GAAS is most likely to include comprehensive audit procedures designed to detect material noncompliance by the client relating to
A
***Answer: B. Tax laws. (Chapter 3.7)
11
Q
- During the audit of a new client, the auditor determined that management had given illegal bribes to municipal officials during the year under audit for several prior years. The auditor notified the client’s board of directors, but the board decided to take no action because the amounts involved were immaterial to the financial statements. Under these circumstances, the auditor should
A
Answer: C. Consider withdrawing from the audit engagement and disassociating from future relationships with the client. (Chapter 3.7)
12
Q
- The ultimate purpose of understanding internal control is to contribute to the auditor’s evaluation of the risk that
A
Answer: B. Material misstatements may exist in the financial statements. (Chapter 8.1)
13
Q
- Which of the following is a step in an auditor’s decision to rely on internal controls?
A
Answer: C. Identify specific controls that are likely to prevent, or detect and correct material misstatements and perform tests of controls. (Chapter 8.1)
14
Q
- Which of the following statements about the auditor’s response to assessed risks of material misstatements in a financial statement audit is true?
A
Answer: A. Risk assessment procedures performed to obtain an understanding of an entity’s internal control also may serve as tests of control. (Chapter 8.2)
15
Q
- Regardless of the assessed risks of material misstatement, the auditor should perform some
A
Answer: C. Substantive procedures to restrict detection risk for significant transaction classes. (Chapter 8.2)
16
Q
- The auditor should perform tests of controls when the auditor’s risk assessment includes an expectation
A
Answer: B. Of the operating effectiveness of internal control. (Chapter 8.2)
17
Q
- 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
A
Answer: B. Observation and inquiry (Chapter 8.2)
18
Q
- When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate.
A
Answer: A. Test the operating effectiveness of such controls in the current audit. (Chapter 8.2)
19
Q
- The PCAOB’s AS-2201 states that internal controls may be preventive or detective. Which of the following controls is preventive.
A
Answer: D. Requiring two persons to open mail. (Chapter 5.1)
20
Q
- The organization chart is a graphic representation of the
A
Answer: D. Formal authority structure. (Chapter 5.1)
21
Q
- Directors, management, external auditors, and internal auditors all play important roles in creating proper control processes. Senior management is primarily responsible for.
A
Answer: A. Establishing risk management and control processes. (Chapter 5.1)
22
Q
- In an audit of financial statement, an auditor’s primary consideration regarding an internal control is whether the control
A
Answer: B. Affects management’s financial statement assertions. (Chapter 5.1)
23
Q
- Which of the following statements about internal control is true?
A
Answer: D. A limitation of internal control is that management makes judgements about the extent of controls it implements. (Chapter 5.1)
24
Q
- Internal controls are designed to provide reasonable assurance that
A
Answer: A. Material errors or fraud will be prevented, or detected and corrected, within a timely period by employees in the course of performing their assigned duties. (Chapter 5.1)
25
***25. Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control?
***Answer: A. Incompatible duties. (Chapter 5.1)
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26. Internal control can provide only reasonable assurance of achieving an entity's control objective. The likelihood of achieving those objectives is affected by limitations inherent to internal control?
Answer: C. The cost of internal control should not exceed its benefits. (Chapter 5.1)
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***27. Which of the following best describe the interrelated components of internal control?
***Answer: B. Control environment; risk assessment process; control activities; the information system, including related business processes; and monitoring of controls. (Chapter 5.2)
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28. 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.
Answer: B. Achievement of the objective of the system of internal control.
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29. A proper segregation of duties requires that an individual.
Answer: D. Recording a transaction not compare the accounting record of the asset with the asset itself. (Chapter 5.2)
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30. A small private entity may use less formal means to ensure that internal control objectives are achieved. For example, extensive accounting procedures, sophisticated accounting records, or formal controls are least likely to be needed if
Answer: A. Management is closely involved in operations. (Chapter 5.2)
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***31. If internal control is properly designed, the same employee may be permitted to
***Answer: B. Mail signed checks and also cancel supporting documents. (Chapter 5.2.16, 7.1.6)
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32. The primary purpose of obtaining an understanding of the entity of its environment, including its internal control, is to provide an auditor with
Answer: B. A frame of reference within which to plan the audit. (Chapter 5.3)
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33. As part of understanding internal control relevant to the audit of a non issuer, an auditor does not need to.
Answer: D. Obtain knowledge about the operating effectiveness of internal control. (Chapter 5.3)
34
34. After obtaining an understanding of the entity and its environment, including its internal control, the auditor assesses.
Answer: D. Control risk and inherent risk to determine the acceptable level of detection risk. (Chapter 5.3)
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***35. In obtaining an understanding of an issuer's internal control, an auditor does all the following except.
***Answer: D. Send confirmation to customers. (Chapter 5.3)
36
36. A financial statement auditor is considering internal control for a client with an information system that makes extensive use of information technology. Which of the following statements related to the understanding of internal control for this client is false?
Answer: C. The auditor must possess all the information technology skills necessary to complete the engagement. (Chapter 5.3)
37
***37. When obtaining an understanding of an entity's internal control, the auditor should concentrate on their substance rather than their form because.
***Answer: B. Management may establish appropriate controls but not enforce compliance with them. (Chapter 5.3)
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38. An auditor should obtain an understanding of an entity's info system, including.
Answer: B. Process used to prepare significant accounting estimates. (Chapter 5.3)
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39. According to AU-C 315 Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement, not all controls are relevant to a financial statement audit. Which one of the following would most likely be considered in an audit?
Answer: B. Maintenance of control over unused checks. (Chapter 5.3)
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40. Which of the following statements regarding auditor documentation of the understanding of the client's internal control components obtained to plan the audit is correct?
Answer: D. No one particular form of documentation is necessary, and the extent of documentation may vary. (Chapter 5.3)
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41. An issuer who is an accelerated filer subject to the SAC of 1934 is required to include in its annual report the auditor’s opinion on whether internal control over financial reporting was
Answer: B. Properly designed and operated effectively (Chapter 9.3)
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42. The Sarbanes-Oxley Act of 2002 (SOX) requires management of issuers to do all of the following except.
Answer: D. Provide a statement that the board approves changes in internal control procedures. (Chapter 9.3)
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43. Issuers are required by the PCAOB to obtain an auditor's report attesting to the effectiveness of internal control over Financial reporting (AS 2201). Likewise, non-issuers may retain an auditor to issue a report on internal control in accordance with the AICPA’s auditing standards (AU-C 940). Which of the following statements best characterizes the relation between these two standards?
Answer: D. Both the AICPA standards and the PCAOB standards require management to provide a written assessment or assertion concerning the effectiveness of controls. (9.3)
44
44. During the audit of internal controls integrated with the audit of the financial statements, the auditor discovered a material weakness in internal control. The auditor most likely will express a(n)
Answer: A. Adverse opinion on internal control. (Chapter 9.3)
45
45. Which of the following is required for accepting an attestation engagement to report on the controls at a service organization.
Answer: B. The service auditor has the competence and capability to perform the engagement (9.4)
46
46. An inappropriate audit procedure relative to accounts rec is to determine the.
Answer: C. Accounts are collected by the balance sheet date. (Chapter 11.1)
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47. When evaluating internal control of an entity that processes sales transaction on the internet, an auditor would be most concerned about.
Answer: B. Potential for computer disruptions in recording sales. (Chapter 6.4)
48
48. Which of the following is not a financial statement assertion about cash?
Answer: C. Compensating cash balances are classified as other current assets. (Chapter 11.2)
49
49. Normally, the financial statement assertion about valuation is of minimum concern during the audit of cash. However, the auditor’s concern about the valuation assertion will most likely increase when
Answer: D. The client has foreign currency accounts. (Chapter 11.2)
50
50. An auditor ordinarily sends a standard confirmation request to all banks with which of the client has done business during the year under audit, regardless of the year-end balance. The purpose of this procedure is to
Answer: D. Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation. (Chapter 11.2)
51
51. Bank teller supervisor might manipulate accounts using their privileged computer access codes. They could withdraw money for their own use and move money among accounts when depositors complain to the bank about errors. The audit procedure most likely to detect this is
Answer: A. Reviewing transactions on privileged access codes. (Chapter 11.2)
52
***52. Which of the following characteristics is most likely indicative of check kiting?
***Answer: A. Low average balance compared with high level of deposits. (Chapter 11.2)
53
53. On receiving a client's bank cutoff statement, an auditor most likely will trace
Answer: D. Prior-year checks listed in the cutoff statement to the year-end outstanding checklist. (Chapter 11.2)
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54. A proof of cash used by an auditor
Answer: A. Determines whether any unauthorized disbursements or unrecorded deposits were made for the given time period. (Chapter 11.2)
55
55. Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?
Answer: A. Reconcile the amounts included in the statements of cash flows to the financial statement amounts.
56
56. Which of the following is true statement concerning an engagement to examine the effectiveness of an entity's internal control over financial reporting.
Answer: A. The management evaluates the effectiveness of internal control. (Chapter 9.3)
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***57. The internal control objectives of the revenue cycle include all of the following except
***Answer: A. Appropriate goods are ordered so that sales can be made.
58
58. Which of the following employee should report to the CFO
Answer: D. Credit manager (Chapter 6.1)
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59. Which of the following most likely would be the result of ineffective internal controls in the revenue cycle.
Answer: C. Final authorization of credit memos by personnel in the sales department could permit an employee defalcation scheme.
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60. Alpha company 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
Answer: D. Understatement of revenues receivables and an overstatement of inventory. (6.1)
61
61. Which type of fraud is considered worse to an external auditor
Answer: (I think it was something like: “Financial Statement misstatements”)
62
62. Upon receipts of costumer's checks in the mail room, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy should be sent to the
Answer: B. Accounts receivable bookkeeper to update the subsidiary accounts receivable records. (Chapter 6.1)
63
63. Cash receipts should be deposited on the day of receipt or the following business day. What is the most appropriate audit procedure to determine that cash is promptly deposited
Answer: C. Compare the daily cash receipts totals with the bank deposits. (Chapter 6.1)
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***64. In a retail cash sales environment, which of the following controls is often absent?
***Answer: Segregation of functions.
65
***65. Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of employing dishonest individuals and
***Answer: B. Deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts. (Chapter 6.2)
66
***66. To conceal defalcations involving receivables, the auditor would expect an experienced bookkeeper to charge which of the following accounts?
***Answer: B. Sales returns (Chapter 6.3)
67
67. Sound internal control activities dictate that defective merch returned by customers be presented initially to the?
Answer: D. Receiving clerk (Chapter 6.3)
68
68. Which of the following is NOT the principal objective of the auditor in the audit of revenue?
Answer: D. To verify cash deposited during the year. (Chapter 11.1)
69
***69. Auditors are often concerned with the possibility of overstatement of sales and receivables. However, management may also have reasons for understating these balances. Which of the following would explain understatement of sales and receivables?
***Answer: To avoid paying taxes.
70
70. Material misstatements due to fraudulent financial reporting often results from an overstatement of revenue (for example ...) or an understatement of revenues (for example …) to address the risk of improper revenue recognition, the auditor most likely should
Answer: D. Assume the existence of risk of material misstatement due to fraud relating to revenue recognition. (11.1.7)
71
71. An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past 5 years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?
Answer: B. The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period. (11.1)
72
72. One of two office clerks in a small company prepares a sales invoice for $4,300; however, the invoice is incorrectly entered by the bookkeeper is the general ledger and the accounts receivable subsidiary ledger as $3,400. The customer subsequently remits $3,400, the amount of the monthly statement. Assuming there are only three employees in the department, the most effective control to prevent this type of error is
Answer: C. Using predetermined totals to control posting routines. (Chapter 6.1)
73
***73. A large university has relatively ineffective internal control. The university's auditor seeks assurance that all tuition revenue has been recorded. The auditor could best obtain the desired assurance by
***Answer: D. Comparing business office revenue records with registrar's office records of students enrolled. (Chapter 11.1)
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74. A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA's best direction of test is from the
Answer: B. Meter department records to the billing (sales) register. (Chapter 11.1)
75
75. Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmation when the auditor did not receive replies to second requests?
Answer: D. Inspect the shipping records documenting the merchandise sold to the debtors. (Chapter 11.1)
