EXAM EASTER

Question 1

Which management policy would increase fraud risk?

Answer 1

→ Measuring performance and awarding bonuses based on short-term operating results

Question 2

An auditor has identified the controller’s review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?

Answer 2

→ Inquiry and inspection of records.

Question 3

A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows:
Clerk 1
Clerk 2
Clerk 3
Treasurer
Clerk 3

Answer 3

Clerk 1
Review vendor invoices for proper signature approval.
Clerk 2
Enters vendor invoice into the accounting system and verifies payment terms.
Clerk 3
Posts entered vendor invoices to accounts payable ledger for payment and mails checks.
Treasurer
Review the vendor invoices and signs each check.
Clerk 3 mails the checks and remittances after they have been signed.

Question 4

Control weakness example: Clerk 3 mails check after posting invoices

Answer 4

Lack of separation of duties
(One person should not both record and control assets.)

Question 5

Which of the following is ordinarily considered an “extended procedure” during the independent audit of financial statements?

Answer 5

Measure the time lag between the date of recording cash receipts in the books to the date of deposit credit in the bank.
(Used to detect fraud like lapping.)

Question 6

In the audit of cash the auditor obtains a bank cutoff statement primarily to

Answer 6

test the propriety of items appearing on the client’s year-end bank reconciliation.
(Checks timing of outstanding items.)

Question 7

Auditors ordinarily send an electronic confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balances. A purpose of this procedure is to

Answer 7

To seek info about contingent liabilities and security agreements

Question 8

An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using

Answer 8

Use a bank lockbox system
(Eliminates employee access to incoming checks.)

Question 9

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is

Answer 9

Stamped “paid” by the check signer

Question 10

An auditor would least likely initiate a discussion with a client’s audit committee concerning

Answer 10

the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.
(This is part of auditor planning, not typically shared.)

Question 11

Your client is in the process of acquiring another company. You have been requested to verify that cash for the company being acquired is properly stated. The audit technique that will yield the most persuasive evidence is

Answer 11

preparation and review of standard electronic bank confirmation.

Question 12

When counting cash on hand the auditor must exercise simultaneous control over all cash and other negotiable assets to prevent

Answer 12

replacement or substitution of stolen assets.

Question 13

As payments are received, one mailroom employee is assigned the responsibility of prelisting receipts and preparing the deposit slip prior to forwarding the receipts, deposit slip, and remittance advices to accounts receivable for posting. Accounts receivable personnel re-foot the deposit slip, stamp a restrictive endorsement on the back of each check, and then forward the receipts and deposit slip to the treasury department. Evaluate the internal control of the described process. Which of the following is a reasonable assessment of internal control in this process?

Answer 13

Inadequate internal control because of a lack of separation of duties.

Question 14

For a sample of recorded cash receipts, the auditors compared the date of receipt to the recording date.

Answer 14

Proper period

Question 15

The auditors traced a sample of daily cash reports to the cash receipts journal.

Answer 15

Completeness

Question 16

The auditors vouched a sample of recorded cash receipts to the deposits in the bank statement.

Answer 16

Existence

Question 17

The auditors recalculate the cash listed on the daily deposit for a sample of recorded cash receipts.

Answer 17

Accuracy

Question 18

The auditors traced a sample of recorded cash receipts to postings in the correct customers’ accounts.

Answer 18

Accounting and posting

Question 19

When auditing with “fraud awareness,” auditors should especially notice and follow up employee activities under which of these conditions?

Answer 19

The company always estimates the inventory but never takes a complete physical count.

Question 20

The best way to enact a broad fraud prevention program is to:

Answer 20

practice management “of the people and for the people” to help them share personal and professional problems.

Question 21

A good fraud prevention program should address employees’ motivation to steal from the company. The best method for doing this is to:

Answer 21

Establish employee assistance programs.

Question 22

A code of ethics is an important element of a fraud prevention program. Which of the following would diminish the effectiveness of a company’s code of conduct?

Answer 22

The violation of the code of ethics by senior management.

Question 23

Which of the following is least indicative of fraudulent activity?

Answer 23

Bank reconciliation has no outstanding checks or deposits older than 15 days.

Question 24

When performing confirmation of cash balances with a bank, the auditor is primarily gathering evidence related to which financial statement assertion?

Answer 24

Existence

Question 25

Which of the following is true about electronic cash confirmations obtained through Confirmation (Confirmation.com)?

Answer 25

Auditors must obtain evidence supporting the reliability of controls surrounding the Confirmation (Confirmation.com) process.

Question 26

Allison Everhart, an employee in accounts payable, believes she can run a fictitious invoice through the accounts payable system and collect the money. She knows payments are subject to an audit. Which account would be the best place to hide the fraud?

Answer 26

Consulting service expense

Question 27

Which of these arrangements of duties could most likely lead to an embezzlement or theft?

Answer 27

The inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records.

Question 28

Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances?

Answer 28

The cashier posts the receipts to the accounts receivable subsidiary ledger cards.

Question 29

Which of the following is an effective audit procedure that an auditor might use to detect kiting between intercompany banks?

Answer 29

Prepare a schedule of the bank transfers

Question 30

Immediately upon receipt of cash, a responsible employee should:

Answer 30

Prepare a remittance listing.

Question 31

Each morning the controller gets the prior day's list of remittances, a copy of the payment report, and a copy of the deposit slip returned from the bank. When comparing these items, the controller would be able to determine that:

Answer 31

The cash received and remittance advice received were maintained in a single batch.

Question 32

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

Answer 32

Accounts receivable bookkeeper to update the subsidiary accounts receivable records.

Question 33

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?

Answer 33

Understating the sales journal

Question 34

Embezzlement is a type of fraud that involves:

Answer 34

An employee misappropriating an employer’s money or property entrusted to the employee’s control in the employee’s normal job.

Question 35

Which of the following control activities would best protect against the preparation of improper or inaccurate cash disbursements?

Answer 35

All signed checks must be reviewed and compared with supporting documentation by the treasurer before mailing.

Question 36

During an audit of cash, the auditor is most concerned with the management assertion of:

Answer 36

Existence

Question 37

In preparing for the audit of cash, the auditors perform analytical procedures concerning cash balances. Which of the following would be the best source of information for use in the estimate of cash?

Answer 37

Cash budgets

Question 38

Which of the following control activities could prevent a paid disbursement voucher from being presented for payment a second time?

Answer 38

The official signing the check should compare it with the voucher and should stamp "paid" on the voucher documents.

Question 39

Fraud risk factors are events or conditions that indicate which of the following?

Answer 39

An opportunity to carry out a fraud, An attitude or rationalization that justifies a fraudulent action, An incentive or pressure to perpetrate fraud, All of the choices are correct.

Question 40

If the auditor believes that a misstatement is or might be intentional and the effect on the financial statements could be material or cannot be readily determined, the auditor should:

Answer 40

Perform procedures to obtain additional audit evidence to determine whether fraud has occurred or is likely to have occurred.

Question 41

In what way can audit procedures be modified to address assessed fraud risks?

Answer 41

Obtain more reliable information, Perform procedures close to year-end, Apply computer-assisted techniques to all items, All of the choices are valid modifications

Question 42

Incorporating elements of unpredictability in the selection of audit procedures to be performed by auditors include all of the following except:

Answer 42

Sending attorney letters to every attorney listed under the legal expense account.

Question 43

Fraud risk factors are events or conditions that indicate An incentive or pressure to perpetrate fraud. An opportunity to carry out the fraud. An attitude or rationalization that justifies the fraudulent action. Which of the following statements is true?

Answer 43

All of the choices are correct

Question 44

SEC does NOT require this for revenue recognition:

Answer 44

Cash is collected (Only collectability must be likely, not actual cash receipt.)

Question 45

"Bill and hold" refers to an arrangement where

Answer 45

Sales are recorded but are not shipped

Question 46

The document that generates recording of a sale is the

Answer 46

Invoice

Question 47

A small business owner can best offset the lack of separation of duties by

Answer 47

being actively involved in the accounting process.

Question 48

Which of the following is an example of a control activity that satisfies the accuracy control objective for sales invoices?

Answer 48

Invoice quantities are compared to shipment and customer order quantities.

Question 49

The auditor maintains control of the mailing and receipt of confirmations by typically performing all of the following except:

Answer 49

Preparing the confirmation letters *(Client may help prepare, auditor reviews and sends.)

Question 50

To determine whether sales transactions have been recorded in the proper accounting period, the auditor performs cutoff tests. Which of the following best describes the overall approach used when performing cutoff tests?

Answer 50

Analyze transactions a few days before and after year-end

Question 51

An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when

Answer 51

No reply to a positive confirmation is received

Question 52

A customer reply on a positive confirmation says "We dispute the $250 charge. We believe it is excessive." This confirmation

Answer 52

Provides evidence of existence

Question 53

Which of the following internal control activities most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger?

Answer 53

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

Question 54

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because

Answer 54

customers may not be inclined to report understatement errors in their accounts.

Question 55

Assertions for Tests of Controls A. Scan for missing invoice numbers → B. Recalculate invoices → C. Check for credit approval → D. Trace credit memos to accounts → E. Vouch A/R debits to invoices →

Answer 55

Assertions for Tests of Controls A. Scan for missing invoice numbers → Completeness (2) B. Recalculate invoices → Accuracy (1) C. Check for credit approval → Occurrence wrong (3) D. Trace credit memos to accounts → Completeness (4) E. Vouch A/R debits to invoices → Accuracy wrong (5)

Question 56

Internal Control A. Prenumbered invoices → B. Credit approval before shipment → C. Invoice vs. shipment match → D. Summary journals approved → E. Approved pricing → F. Restricted access to blanks → G. Manual includes shipment dating instructions → H. Returns documented → I. Prenumbered bills of lading → J. Sales data sent directly to G/L accounting →

Answer 56

Internal Control A. Prenumbered invoices → Completeness B. Credit approval before shipment → Occurrence wrong C. Invoice vs. shipment match → Accuracy D. Summary journals approved → Accuracy E. Approved pricing → Accuracy F. Restricted access to blanks → Occurrence G. Manual includes shipment dating instructions → Cutoff H. Returns documented → Occurrence I. Prenumbered bills of lading → Completeness J. Sales data sent directly to G/L accounting → Accuracy

Question 57

Revenues are normally considered to have been earned when:

Answer 57

The company has substantially accomplished what it must to be entitled to the benefits.

Question 58

Sales are normally recorded on the date of the:

Answer 58

sales invoice.

Question 59

When auditing the revenue and collection cycle, auditors normally select balances to confirm from the:

Answer 59

Accounts receivable listing.

Question 60

Which of the following accounts is not normally part of the revenue and collection cycle?

Answer 60

Purchases Returns and Allowances

Question 61

The control procedure "credit sales approved by credit department" is directed toward which transaction assertion?

Answer 61

Accuracy

Question 62

Which of the following would be the best protection for a company that wishes to prevent the “lapping” of trade accounts receivable?

Answer 62

Have customers send payments directly to the company’s depository bank

Question 63

Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable?

Answer 63

Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.

Question 64

Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

Answer 64

Unrecorded sales

Question 65

An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that:

Answer 65

entries in the accounts receivable subsidiary ledger were properly invoiced.

Question 66

An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor is most likely concerned about:

Answer 66

Fictitious sales.

Question 67

An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor interviewed the sales manager, who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor test the sales manager’s representation?

Answer 67

Obtain copies of all price lists in use during the year and vouch the prices to sales invoices

Question 68

To conceal a theft involving receivables, a dishonest bookkeeper might charge which of the following accounts?

Answer 68

Sales returns

Question 69

Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern?

Answer 69

“These goods were returned for credit on November 15.”

Question 70

A client has a separate sales group for its largest “preferred” customers, a select group of customers who normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform?

Answer 70

Send out positive confirmations on a large sample of these customers.

Question 71

Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily to:

Answer 71

Estimate credit losses.

Question 72

Which of the following might be detected by auditors’ cutoff review and examination of sales journal entries for several days prior to the balance sheet date?

Answer 72

Inflating sales for the year

Question 73

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the:

Answer 73

Existence of the balances confirmed

Question 74

Which of the following is the best reason for prenumbering in numerical sequence documents such as sales orders, shipping documents, and sales invoices?

Answer 74

Enables personnel to check the numerical sequence for missing documents and unrecorded transactions

Question 75

When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to:

Answer 75

Sales invoices with shipping documents and customer sales invoices.

Question 76

In the audit of accounts receivable, the most important emphasis should be on the:

Answer 76

Existence assertion

Question 77

When accounts receivable are confirmed at an interim date, auditors need not be concerned with:

Answer 77

Sending negative confirmations to all customers as of the year-end date.

Question 78

The negative request form of accounts receivable confirmation is useful particularly when the:

Answer 78

Option a. (Assessed risk is low, many small balances, recipients likely to respond)

Question 79

When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that:

Answer 79

Shipments to customers were invoiced.

Question 80

Write-offs of doubtful accounts should be approved by:

Answer 80

the treasurer.

Question 81

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except:

Answer 81

Do nothing for immaterial balances.

Question 82

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?

Answer 82

Understating the sales journal

Question 83

Which of the following internal control activities most likely would deter lapping of collections from customers?

Answer 83

Separation of duties between receiving cash and posting the accounts receivable ledger

Question 84

The financial records of the Movitz Company show that R. Dennis owes $4,100 on an account receivable. An independent audit is being carried out, and the auditors send a positive confirmation to R. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here?

Answer 84

Inherent risk was particularly high for accounts receivable.

Question 85

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 five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?

Answer 85

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.

Question 86

An auditor is required to confirm accounts receivable if the accounts receivable balances are:

Answer 86

Material to the financial statements.

Question 87

During the confirmation of accounts receivable, an auditor receives a confirmation via the client’s fax machine. Which of the following actions should the auditor take?

Answer 87

Accept the confirmation but verify the source and content through a telephone call to the respondent.

Question 88

In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these assertions. Here is a selection of accounts receivable assertions: ANSWER: a. Accounts receivable represent all amounts owed to the client company at the balance sheet date. →

Answer 88

Perform sales cutoff tests to obtain assurance that sales transactions and corresponding entries for inventories and cost of goods sold are recorded in the same and proper period.

Question 89

In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these assertions. Here is a selection of accounts receivable assertions: ANSWER: b. The client company has a legal right to all accounts receivable at the balance sheet date. →

Answer 89

Review loan agreements for indications of whether accounts receivable have been factored or pledged.

Question 90

In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these assertions. Here is a selection of accounts receivable assertions: ANSWER: c. Accounts receivable are stated at net realizable value. →

Answer 90

Review the aged trial balance for significant past due accounts.

Question 91

In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these assertions. Here is a selection of accounts receivable assertions: ANSWER: d. Accounts receivable are properly described and presented in the financial statements. →

Answer 91

Review the accounts receivable trial balance for material credits, balances from officers and employees.