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Flashcards in IC Deck (200):
1

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the

Authorization of transactions from the custody of related assets.

2

If the objective of an auditor's test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from

Shipping documents to the sales invoices.

3

In assessing the competence of a client's internal auditor, and independent auditor most likely would consider the

Internal auditor's compliance with professional internal auditing standards.

4

If the independent auditors decide that the work performed by the internal auditor may have a bearing on their own procedures, they should consider the internal auditor's

Competence and objectivity.

5

Which of the following is ordinarily considered a test of a control?

a. Examine signatures on checks.
b. Send confirmation letters to banks.
c. Count and list cash on hand.
d. Test the clerical accuracy of inventory listings as of the balance sheet date.

Examine signatures on checks.

6

Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?
a. Preparation of system flowcharts.
b. Inspection of documents and reports.
c. Inquiry of client personnel.
d. Observation of client personnel.

Preparation of system flowcharts.

7

Which of the following is not a basic rule for achieving strong internal control over cash?
a. Have bank reconciliations performed by employees independent with respect to handling cash.
b. Separate the cash handling and recordkeeping functions.
Decentralize the receiving of cash as much as possible.
Deposit each day;s cash receipts by the end of the end.

Decentralize the receiving of cash as much as possible.

8

For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by

Observation and inquiry.

9

Which of the following procedures is most like to prevent the improper disposition of equipment?

a. The use of serial numbers to identify equipment that could be sold.
b. Periodic comparison of removal work orders to authorizing documentation.
c. A separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders.
d. A periodic analysis of the scrap sales and the repairs and maintenance accounts.

A separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders.

10

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. Test the operating effectiveness of such controls in the current audit.
b. Report the reliance in the report on internal control.
c. Document that reliance and proceed with the original audit strategy.
d. Inquire of management as to the effectiveness of the controls.

Test the operating effectiveness of such controls in the current audit.

11

A material weakness that exists at year-end may result in what type of audit opinion when conducting an audit of a public company's internal control?

Adverse

12

Jackson, the purchasing agent of Judd Hardware Wholesalers, has a relative who owns a retail hardware store. Jackson arranged for hardware to be delivered by manufacturers to the retail store on a COD basis thereby enabling his relative to buy at Judd's wholesale prices. Jackson was probably able to accomplish this because of Judd's poor internal control over

Purchase orders

13

Proper authorization procedures in the revenue cycle usually provide for the approval of bad debt write-offs by an employee in which of the following departments?

a. Treasurer.
b. Billing.
c. Accounts receivable.
d. Sales.

Treasurer

14

When there are numerous property and equipment transactions during the year, an auditor planning to assess the risk of material misstatement at a low risk level must perform.

Tests of controls and limited tests of current year property and equipment transactions.

15

An auditor considers existing internal control in order to

Determine the further audit procedures which must be performed.

16

It would not be appropriate for the auditor to initiate discussion with the audit committee concerning

Details of the procedures which the auditor intends to apply.

17

Which of the following types of audit opinions are appropriate when circumstances result in a scope limitation in relation to an audit of a public company's internal control?

a. Qualified and Adverse
b. Qualified
c. Adverse
d. Neither

Qualified

18

Independent internal verification of inventory occurs when employees who

Compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory.

19

Which of the following is an inherent limitation in internal control?

a. Incompatible duties.
b. Faulty human judgment.
c. Lack of an audit committee.
d. Lack of segregation of duties.

Faulty human judgment.

20

Which of the following is the most important internal control activity over acquisitions of property, plant, and equipment?

a. Using a budget to forecast and control acquisitions and retirements.
b. Requiring acquisitions to be made by user departments.
c. Establishing a written company policy distinguishing between capital and revenue expenditures.
d. Analyzing monthly variances between authorized expenditures and actual costs.

Using a budget to forecast and control acquisitions and retirements.

21

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control in the revenue cycle?

a. Merchandise received is not promptly reconciled to the outstanding purchase order file.
b. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value.
c. Fictitious transactions are recorded that cause an understatement of revenue and an overstatement of receivables.
d. The write-off receivables by personnel who receive cash permits the misappropriation of cash.

The write-off of receivables by personnel who receive cash permits the misappropriation of cash.

22

The use of fidelity bonds protects a company from embezzlement losses and also

Minimizes the possibility of employing persons with dubious records in positions of trust.

23

Which of the following is ordinarily considered a factor indicative of increased financial reporting risk when an auditor is considering a client's risk assessment policies?

a. Materiality standards for determining whether to capitalize acquisitions of fixed assets.
b. A corporate code of conduct.
c. Rapid growth of the organization.
d. Commissioned sales personnel.

Rapid growth of the organization

24

Which of the following types of transactions generally has less risk?

a. Routine transactions.
b. Related-party transactions.
c. Nonroutine transactions.
d. Estimation transactions.

Routine transactions

25

Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud?

a. Distributing paychecks directly to department employees.
b. Approving a summary of hours each employee worked during the pay period.
c. Setting the pay rate for departmental employees.
d. Hiring employees and authorizing them to be added to the payroll.

Approving a summary of hours each employee worked during the pay period.

26

Which of the following is true regarding significant deficiencies?

a. They must be included in the financial statements.
b. Auditors must communicate them to the audit committee.
c. Auditors must search for them.
d. They must be disclosed in footnotes.

Auditors must communicate them to the audit committee.

27

Which of the following would be least likely to be included in an auditor's tests of controls?

a. Inspection.
b. Confirmation.
c. Observation.
d. Inquiry.

Confirmation

28

After testing a client's internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client's internal controls. Under these circumstances the auditor most likely would

Increase the assessment of control risk and increase the extent of substantive tests.

29

When considering internal control to determine whether the necessary procedures are designed and operating effectively, an auditor must

Perform tests of controls.

30

A CPA's report performing an examination of an entity's internal control identified several material weaknesses and will be published in the entity's annual report to shareholders. Management intends to include a statement asserting that the cost of correcting the weaknesses would exceed the benefits of reducing the risk of errors and fraud. The CPA should

Not express an opinion as to management's statement.

31

A primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with

Knowledge necessary to assess the risks of misstatement.

32

A company has additional temporary funds to invest. The board of directors decided to purchase marketable securities and assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to make periodic reviews of the investment activity should be the

The investment committee of the board of directors.

33

Which of the following best represents a key control for ensuring sales are properly authorized when assessing control risks for sales?

a. Sales orders are sent to the credit department for approval.
b. Copies of approved sales orders sent to the shipping, billing, and accounting departments.
c. The use of an approved price list to determine unit selling price.
d. The separation of duties between the billing department and the cash receipts approval department.

Sales orders are sent to the credit department for approval.

34

In comparison to the external auditor, an internal auditor is more likely to be concerned with

Operational auditing.

35

Which of the following controls will most likely prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable?

a. Write-offs must be authorized by company field sales employees who are in a position to determine the financial standing of the customers.
b. Write-offs must be approved by the cashier who is in a position to know if the receivables have, in fact, been collected.
c. Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.
d. Write-offs must be supported by an aging schedule showing that only receivable overdue several months have been written off.

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

36

A primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with

Knowledge necessary to assess the risks of misstatement.

37

A company has additional temporary funds to invest. The board of directors decided to purchase marketable securities and assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to make periodic reviews of the investment activity should be the

The investment committee of the board of directors.

38

What best represents a key control for ensuring sales are properly authorized when assessing control risks for sales?

Sales orders are sent to the credit department for approval.

39

In comparison to the external auditor, an internal auditor is more likely to be concerned with

Operational auditing.

40

In order to avoid the misappropriation of company-owned marketable securities, which of the following is the best course of action that can be taken by the management of a company with a large portfolio of marketable securities?

a. Require that one trustworthy and bonded employee be responsible for access to the safekeeping area, where securities are kept.
b. Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access.
c. Require that the safekeeping function for securities be assigned to a bank that will act as a custodial agent.
d. Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis.

Require that the safekeeping function for securities be assigned to a bank that will act as a custodial agent.

41

of the following statements about internal control, which one is not valid?

a. No one person should be responsible for the custodial responsibility and the recording responsibility for an asset.
b. Transactions must be properly authorized before such transactions are processed.
c. Controls reasonably ensure that collusion among employees cannot occur.
d. Because of the cost/benefit relationship, a client may apply controls on a test basis.

Controls reasonably ensure that collusion among employees cannot occur.

42

Which of the following factors most likely would assist an independent auditor in assessing the objectivity of the internal auditor?

a. The consistency of the internal audit reports with the results of work performed.
b. The appropriateness of internal audit conclusions in the circumstances.
c. The professional certifications of the internal audit staff.
d. The organizational status of the director of internal audit.

The organizational status of the director of internal audit.

43

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the

Collection of receivables.

44

Concerning current audit use of audit evidence about the operating effectiveness of controls obtained in prior year audits, the auditor generally may

Use such evidence, but must test related controls at least every third year.

45

When an auditor discovered that certain control activities were ineffective, the auditor most likely would increase the

Extent of tests of details.

46

Where no independent stock transfer agents are employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates should

Be defaced to prevent reissuance and attached to their corresponding stubs.

47

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?

a. Performing cutoff procedures for shipping and receiving.
b. Tracing inventory items from the tag listing back to the physical inventory quantities.
c. Examining paid vendor invoices.
d. Scanning perpetual inventory, production, and purchasing records.

Performing cutoff procedures for shipping and receiving.

48

An entity's ongoing monitoring activities often include

Reviewing the purchasing function.

49

For good internal control, which of the following functions should not be the responsibility of the treasurer's department?

a. Data processing.
b. Custody of securities.
c. Handling of cash.
d. Establishing credit policies.

Data processing

50

Green, CPA, is auditing the financial statements of Ajax Co. Ajax uses the DP Service Center to process its payroll. DP's financial statements are audited by Blue, CPA, who recently issued a report on DP's policies and procedures regarding the processing of other entities' transaction. In considering whether Blue's report is satisfactory for Green's purposes, Green should

Make inquiries concerning Blue's professional reputation.

51

The proper use of prenumbered termination forms by the payroll department should provide assurance that all

Terminated employees are removed from payroll.

52

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

a. Request that customers' payment checks be made payable to the company and addressed to the treasurer.
b. Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts.
c. Segregate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail.
d. Have customers send payments directly to the company's depository bank.

Have customers send payments directly to the company's depository bank.

53

A weakness in internal control over recording retirements of equipment may cause the auditor to

Select certain items of equipment from the accounting records and locate them in the plant.

54

The independent auditor should acquire an understanding of the internal audit function as it relates to the independent auditor's consideration of internal control because

The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor's procedures.

55

To minimize the opportunities for fraud, unclaimed cash payroll should be

Deposited in a special bank account.

56

A CPA reviews a client's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for

Distributing payroll checks to employees.

57

A client's physical count of inventories was lower than the inventory quantities shown in its perpetual records. This situation could be the result of the failure to record

Sales

58

Which of the following is necessary for an auditor to be able to issue a report on whether a previously reported material weakness disclosed in an integrated audit continues to exist?

a. The auditor must have issued the original audit report indicating the existence of the material weakness.
b. Management must adopt control criteria other than those used relating to the original reporting on internal control.
c. Management must support its written assertion that the material weakness has been eliminated with sufficient evidence.
d. Management must provide a written assertion indicating that elimination of the internal control deficiencies is its responsibility.

Management must support its written assertion that the material weakness has been eliminated with sufficient evidence.

59

The primary responsibility of a bank acting as registrar of capital stock is to

Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation.

60

Which of the following policies is an internal control weakness related to the acquisition of factory equipment?

a. Variances between authorized equipment expenditures and actual costs are to be immediately reported to management.
b. Depreciation policies are reviewed only once a year.
c. Advance executive approvals are required for equipment acquisitions.
d. Acquisitions are to be made through and approved by the department in need of the equipment.

Acquisitions are to be made through and approved by the department in need of the equipment.

61

On the basis of audit evidence related to internal control, an auditor decides to increase the assessed level of the risk of material misstatement from the originally planned. To achieve an overall audit risk level that is substantially the same as the palnned audit risk level, the auditor would.

Decrease detection risk.

62

When an auditor is to conduct an audit of a service organization, what considerations should the auditor make in the planning stages regarding internal control of the organization.

The auditor should obtain an understanding of the effect of the users organization upon the service organization

63

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

a. Mistakes in judgment
b. Management override.
c. Lack of ethical code.
d. Collusion among employees.

Lack of ethical code.

64

Which of the following control activities could best prevent direct manufacturing labor from being charged to manufacturing overhead?

a. Reconciliation of work in process inventory with cost records.
b. Examination of routing tickets from finished goods on delivery.
c. Comparison of daily journal entries with factory labor summary.
d. Recomputation of direct manufacturing labor based on inspection of time cards.

Comparison of daily journal entries with factory labor summary.

65

Which of the following is not a component of internal control?

a. Inherent risk.
b. Control environment.
c. Control activities.
d. Monitoring.

Inherent risk.

66

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

Sales billed to customers were actually shipped.

67

Proper segregation of functional responsibilities calls for separation of the

Authorization, recording, and custodial functions.

68

An auditor's tests of controls for completeness for the revenue cycle usually include determining whether

An invoice is prepared for each shipping document.

69

What is a control that would prevent a paid disbursement voucher from being presented for payment a second time?

The official signing the check should compare the check with the voucher and should deface the voucher documents.

70

An auditor would most likely be concerned with controls that provide reasonable assurance about the

Entity's ability to process and summarize financial data.

71

Which of the following is not part of the required content of management's report on internal control under the standards of the Public Company Accounting Oversight Board?

a. The criteria used for assessment.
b. The financial reporting principles used by the company.
c. Management's acknowledgement of responsibility for internal control.
d. Management's assessment of internal control.

The financial reporting principles used by the company.

72

The safeguarding of inventory most likely includes

Periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count.

73

Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control?

a. Custody of unmailed signed checks and maintenance of expense subsidiary ledgers.
b. Posting to the general ledger and approval of additions and terminations relating to the payroll.
c. Preparation of monthly statements to customers and maintenance of the accounts receivable subsidiary leger.
d. Collection of receipts on account and maintaining accounts receivable records.

Collection of receipts on account and maintaining accounts receivable records.

74

Which of the following is a control that would prevent a paid disbursement voucher from being presented for payment a second time?

a. The official signing the check should compare the check with the voucher and should deface the voucher documents.
b. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.
c. Disbursement vouchers should be approved by at least two responsible management officials.
d. Vouchers should be prepared by individuals who are responsible for signing disbursement checks.

The official signing the check should compare the check with the voucher and should deface the voucher documents.

75

During a financial statement audit an internal auditor may provide direct assistance to the independent CPA in performing

Tests of controls and substantive tests

76

Effective internal control over the payroll function would include which of the following?

a. Payroll department employees should be supervised by the management of the personnel department.
b. Total time recorded on time clock cards should be reconciled to job reports by employees responsible for those specific jobs.
c. Payroll department employees should be responsible for maintaining employee personnel records.
d. Total time spent on jobs should be compared with total time indicated on time clock punch cards.

Total time spent on jobs should be compared with total time indicated on time clock punch card.

77

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

a. Documentation must include questionnaires.
b. No documentation is necessary although it is desirable.
c. Documentation must describe all of the client's internal control.
d. No one particular form of documentation is necessary, and the extent of documentation may vary.

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

78

Well functioning internal control for the inventory/production functions would provide that finished goods are to e accepted for stock only after presentation of a completed production order and an

Inspection report.

79

At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization be of least concern to the auditor in the conduct of an audit?

Selling of goods for cash.

80

Each of the following types of controls is considered to be an entity-level control, except those

a. Pertaining to the company's risk assessment process.
b. Regarding the company's annual stockholder meeting.
c. Relating to the control environment.
d. Addressing policies over significant risk management practices.

Regarding the company's annual stockholder meeting.

81

Which of the following disagreements between the auditor and management do not have to be communicated by the auditor to those charged with governance?

a. Disagreements regarding management's judgment about accounting estimates for goodwill.
b. Disagreements about the scope of the audit.
c. Disagreement of the amount of LIFO inventory layer based on preliminary information.
d. Disagreements in the application of accounting principles relating to software development costs.

Disagreement of the amount of LIFO inventory layer based on preliminary information.

82

Should an auditor communicate "significant audit adjustments recorded by the entity" and "management's consultation with other accountants adjustments recorded about significant accounting matters" to an independent audit committee of a public entity?

Yes

83

In which of the following circumstances is the performance of tests of controls least likely?

a. The auditor's risk assessment includes an expectation of operating effectiveness of controls.
b. Performance of tests of controls appears cost effective.
c. The planned level of the risk of material misstatement is at the maximum level.
d. Substantive procedures alone do not provide sufficient audit evidence.

The planned level of the risk of material misstatement is at the maximum level.

84

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

Stamped "paid" by the check signer.

85

Tests of control are performed in order to determine whether

Controls are functioning as designed.

86

In connection with the examination of financial statements by an independent auditor, the client suggests that members of the internal audit staff be utilized to minimize audit costs. Which of the following tasks could most appropriately be delegated to the internal audit staff?

a. Selection of accounts receivable for confirmation, based upon the internal auditor's judgment as to how many accounts and which accounts will provide sufficient coverage.
b. Determination of the adequacy of the allowance for doubtful accounts.
c. Preparation of schedules for negative accounts receivable responses.
d. Evaluation of the internal control for accounts receivable and sales.

Preparation of schedules for negative accounts receivable responses.

87

In meeting the control objective of safeguarding of assets which department should be responsible for distribution of paychecks and custody of unclaimed paychecks?

Treasurer

88

Tracing bills of lading to sales invoices provides evidence that

Shipments to customers were invoiced.

89

An audit client failed to maintain copies of its procedures manuals and organization flowcharts. What should the auditor do in an audit of financial statements?

Document the auditor's understanding of internal control.

90

Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both

Record and conceal fraudulent transactions in the normal course of assigned tasks.

91

Which of the following is not a typical questions asked during a walk-through?

a. What do you do when you find an error?
b. Have you ever been asked to override the process or controls?
c. What kind of errors have you found?
d. What is the largest fraudulent transaction you ever processed?

What is the largest fraudulent transaction you have ever processed?

92

Apex Manufacturing Corporation mass produces eight different products. The controller who is interested in strengthening controls over the accounting for materials used in production would be most likely to implement

A perpetual inventory system.

93

Which of the following situations most likely could lead to an embezzlement scheme?

a. Vouchers and supporting documentation are examined and then canceled by the treasurer who personally mails the checks to the vendors.
b. The accounts receivable bookkeeper receives a list of payments prepared by the cashier and personally makes entries in the customers' accounts receivable subsidiary ledger.
c. Each vendor invoice is matched with the related purchase order and receiving report by the vouchers payable bookkeeper who personally approves the voucher for payment.
d. Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statements.

Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statements.

94

Which of the following is a step in an auditor's decision to assess the risk of material misstatement at a low level by relying on controls?

a. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing.
b. Identify specific controls that are likely to detect or prevent material misstatements.
c. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls.
d. Perform tests of details of transactions and account balances to identify potential errors and irregularities.

Identify specific controls that are likely to detect or prevent material misstatements.

95

Which of the following factors would least likely affect the extent of the auditor's consideration of the client's internal control?

a. The auditor's prior experience with client operations.
b. The nature of specific relevant controls.
c. The amount of time budgeted to complete the engagement.
d. The size and complexity of the client.

The amount of time budgeted to complete the engagement.

96

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that

Material misstatements may exist in the financial statements.

97

An auditor uses the knowledge provided by the understanding of internal control and the assessed level of the risks of material misstatements primarily to

Determine the nature, timing, and further audit procedures.

98

Which of the following describes a weakness in accounts payable procedures?

a. The accounts payable clerk files invoices and supporting documentation after payment.
b. The accounts payable manager issues purchase orders.
c. The accounts payable clerk manually verifies arithmetic on the vendor invoice.
d. The accounts payable system compares the receiving report to the vendor invoice.

The accounts payable manager issues purchase orders.

99

A retailing entity uses the Internet to execute and record its purchase transactions. The entity's auditor recognizes that the documentation of details of transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would

Perform tests several times during the year, rather than only at year-end,

100

When an auditor increases the risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase the

Extent of tests of details.

101

The auditor should perform tests on controls on

Those controls that the auditor plans to use to support a conclusion that controls operate effectively.

102

Which of the following factors would most likely be considered an inherent limitation to an entity's internal control?

a. The complexity of the information processing system.
b. The lack of management incentives to improve the control environment.
c. The ineffectiveness of the board of directors.
d. Human judgment in the decision-making process.

Human judgment in the decision-making process.

103

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

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

104

During the audit the independent auditor identified the existence of a significant deficiency in the client's internal control and communicated this finding in writing to the client's management and to those charged with governance. The auditor should

Document the matter in the working papers and consider the effects of the condition on the audit.

105

The company being audited has an internal auditor that is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may

Allow the internal auditor to perform tests of internal control.

106

When assessing the competence of the internal auditors, an independent CPA should obtain information about the

Quality of the internal auditors' working paper documentation.

107

Which of the following should an auditor do when control risk is assessed at the maximum level?

a. Perform more test of controls.
b. Document the control structure more extensively.
c. Perform fewer substantive tests of details.
d. Document the assessment.

Document the assessment.

108

One important reason why a CPA, during the course of an audit engagement, prepares internal control flowcharts is to

Assemble the internal control findings into a comprehensible format suitable for analysis.

109

One of the auditor's objectives in observing the actual distribution of payroll checks is to determine that every name on the payroll is that of a bona fide employee. The payroll observation is an auditing procedure that is generally performed for which of the following reasons.

a. The various phases of payroll work are not sufficiently segregated to afford effective internal control.
b. The standards that are generally accepted by the profession are interpreted to mean that payroll observation is expected on an audit unless circumstances dictate otherwise.
c. The professional standards that are generally accepted require the auditor to perform the payroll observation.
d. The independent auditor uses personal judgment and decides to observe the payroll distribution on a particular audit.

The various phases of payroll work are not sufficiently segregated to afford effective internal control.

110

Which of the following procedures represents a weakness in internal control for payroll?

a. The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department.
b. The accounting department wires transfer funds to the payroll bank account. The transfer is based on totals from the payroll department summary.
c. The payroll department prepares checks using a signature plate. The treasurer supervises the process before payroll checks are distributed.
d. The payroll department prepares checks. The chief financial officer signs the payroll checks.

The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department.

111

Which of the following is a standard control for cash disbursements?

a. Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement.
b. Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation.
c. Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.
d. Checks should be signed by the controller and at lease one other employee of the company.

Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.

112

As generally conceived, the "audit committee" of a publicly held company should be made up of

Members of the board of directors who are not officers or employees.

113

When assessing internal auditors; objectivity, an independent auditor should

Consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.

114

Which of the following would not typically be a control relied upon during an audit?

a. Competent personnel.
b. A comparison-shopping staff.
c. Use of the double-entry system.
d. an internal audit staff.

A comparison-shopping staff.

115

An auditor's tests of controls over the issuance of raw materials to production would most likely include

Examining material requisitions and reperforming client controls designed to process and record issuances.

116

Which of the following is not an example of a company-level control?

a. Management's risk assessment process.
b. Controls to monitor the results of operations.
c. Controls over the drafting of financial statements.
d. Segregation of duties.

Segregation of duties.

117

To improve accountability for fixed asset retirements, management most likely would implement control that includes

Continuous utilization of serially numbered retirement work orders.

118

In auditing the internal control of a public company under PCAOB standards, an auditor must issue an adverse opinion if

A material weakness exists at the as of date.

119

To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the

Shipping document file.

120

A client erroneously recorded a large purchase twice. Which of the following controls would be most likely to detect this error in a timely and efficient manner?

a. Tracing totals from the purchases journal to the ledger accounts.
b. Footing the purchases journal.
c. Sending written quarterly confirmations to all vendors.
d. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

121

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

Receiving clerk.

122

Tracing copies of sales invoices to shipping documents will provide evidence that all

Billed sales were shipped.

123

A client's materials-purchasing cycle begins with requisitions from user departments and ends with the receipt of materials and the recognition of a liability. An auditor's primary objective in reviewing this cycle is to

Evaluate the reliability of information generated as a result of the purchasing process.

124

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

A bank lockbox system.

125

Which of the following is the most effective control to detect vouchers that were prepared for the payment of goods that were not received?

a. Verify vouchers for accuracy and approval in internal audit department.
b. Compare goods received with goods requisitioned in receiving department.
c. Count goods upon receipt in storeroom.
d. Match purchase order, receiving report, and vendor's invoice for each voucher in accounts payable department.

Match purchase order, receiving report, and vendor's invoice for each voucher in accounts payable department.

126

An auditor uses the assessed level of the risk of material misstatement to

Determine the acceptable level of detection risk for financial statement assertions.

127

In an audit of which of the following types of profit-oriented enterprises would the auditor be most likely to place special emphasis on testing the controls over proper classification of payroll transactions?

a. A service organization.
b. A retailing organization.
c. A manufacturing organization.
d. A wholesaling organization

A manufacturing organization.

128

Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls?

a. The degree to which information technology is used in the accounting function.
b. The industry and the business and regulatory environments in which the client operates.
c. The relationship between management, the board of directors, and external stakeholders.
d. The degree to which the auditor intends to use internal audit personnel to perform substantive tests.

The degree to which information technology is used in the accounting function.

129

A material weakness involves a reasonably possibility that what size misstatement will not be prevented or detected?

Material

130

The authority to accept incoming goods in receiving should be based on an

Approved purchase order.

131

When an auditor issues an unqualified opinion on an entity's internal control, it is implied that the

Financial records are sufficiently reliable to permit the preparation of financial statements.

132

With well-designed internal control, the same employee may be permitted to

a. Mail signed checks, and also cancel supporting documents.
b. Mail signed checks, and also prepare bank reconciliations.
c. Approve vouchers for payment, and also have access to unused purchase orders.
d. Prepare receiving reports, and also approve purchase orders.

Mail signed checks, and also cancel supporting documents.

133

To verify that all sales transactions for which shipment has occurred have been recorded, a test of transactions should be completed on a representative sample drawn from

The shipping clerk's file of duplicate copies of bills of lading.

134

An independent auditor has concluded that the client's records, procedures, and representation can be relied upon based on tests made during the year when internal control was found to be effective. The auditor should test the records, procedures, and representations again at year-end if

Inquiries and observations lead the auditor to believe that conditions have changed significantly.

135

Which of the following payroll control activities most effectively ensure that payment is made only for work performed?

a. Require all employees to sign their time cards.
b. Require employees to have their direct supervisors approve their time cards.
c. Require all employees to record arrival and departure by using the time clock.
d. Have a payroll clerk recalculate all time cards.

Require employees to have their direct supervisors approve their time cards.

136

Miller Retailing, Inc. maintains a staff of three full-time internal auditors who report directly to the controller. In planning to use the internal auditors to provide assistance in performing the audit, the independent auditor most likely will

Place limited reliance on the work performed by the internal auditors.

137

For effective internal control purposes, the vouchers payable department generally should

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

138

In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition, and receiving report are verified. The next step in the system is to

Approve the voucher for payment.

139

In an audit of financial statements, an auditor's primary consideration regarding a control is whether the control

Affects management's financial statement assertions.

140

After obtaining an understanding of internal control and assessing control risk of an entity, an auditor decided not to perform tests of controls. The auditor most likely decided that

It would be inefficient to perform test of controls that would result in a reduction in planned substantive tests.

141

Which of the following procedures would best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?

a. Have an independent CPA firm prepare a report on the effectiveness of internal control over inventory.
b. Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the validity of the perpetual inventory record.
c. Have separate warehouse space for the more valuable items with sequentially numbered tags.
d. Require an authorized officer's signature on all requisitions for the more valuable items.

Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the validity of the perpetual inventory record.

142

Effective internal control over the purchasing of raw materials should usually include all of the following procedures except

a. Obtaining financial approval prior to making a commitment.
b. Systematic reporting of product changes which will affect raw materials.
c. Determining the need of the raw materials prior to preparing the purchase order.
d. Obtaining third-party written quality and quantity reports prior to payment for the raw materials.

Obtaining third-party written quality and quantity reports prior to payment for the raw materials.

143

An auditor is auditing a mutual fund company that uses a transfer agent to handle accounting for shareholders. Which of the following actions by the auditor would be most efficient for obtaining information about the transfer agent's internal control?

a. Perform an audit on the internal control function of the agent.
b. Review prior year workpapers to determine whether the number of transactions processed by the agent has materially increased.
c. Use reports on internal control suitability of design and operating effectiveness produced by the agent's own auditor.
d. Perform tests of controls on a sample of the audited firm's transactions through the agent.

Use reports on internal control suitability of design and operating effectiveness produced by the agent's own auditor.

144

The reliance place on substantive tests in relation to the reliance place on internal control varies in a relationship that is ordinarily

Inverse.

145

In the consideration of internal control, the auditor is basically concerned that internal control provides reasonable assurance that

Misstatements have been prevented or detected.

146

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

a. The cashier endorses the checks.
b. The cashier prepares the daily deposit.
c. The cashier makes the daily deposit at a local bank.
d. The cashier posts the receipts to the accounts receivable subsidiary ledger cards.

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

147

Which of the following is an inherent limitation of internal control?

a. Segregation of duties.
b. Employee peer review.
c. Judgmental sampling.
d. Collusion

Collusion.

148

For effective internal control, the billing function should be performed by the

Accounting department.

149

In a consideration of the internal control, the completion of a questionnaire is most closely associated with which of the following?

a. Documentation.
b. Tests of controls.
c. Flowchart accuracy.
d. Separation of duties.

Documentation.

150

An auditor is determining if internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices. The auditor most likely would selet a sample of transactions from the population represented by the

Shipping document file.

151

Evidence concerning the proper segregation of duties for receiving and depositing cash receipts ordinarily is obtained by

Observing the employees who are performing the control activities.

152

When an auditor considers a client's internal control, control activities ordinarily relate to performance reviews, information processing, segregation of duties and

Physical controls.

153

While obtaining an understanding of a client's risk assessment policies, an auditor ordinarily considers how management

Identifies risks.

154

Sanbor Corporation has an inventory of parts consisting of thousands of different items of small value individually, but significant in total. Sanbor could establish effective internal control over the parts requiring

Segregation of the storekeeping function from the production and inventory recordkeeping functions.

155

A large retail enterprise has established a policy which requires that the paymaster deliver all unclaimed payroll checks to the internal auditing department at the end of each payroll distribution day. This policy was most likely adopted in order to

Detect any fictitious employee who may have been placed on the payroll.

156

For effective internal control purposes, which of the following individuals should be responsible for mailing signed checks?

a. Receptionist.
b. Payroll clerk.
c. Treasurer.
d. Accounts payable clerk

Treasurer.

157

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control enviroment when

Management is dominated by one individual who is also a shareholder.

158

Which of the following are correct concerning the likelihood of loss and the potential amount involved with a material weakness?
Likelihood of loss Potential amount involved
a. Probable More than inconsequential
b. Probable Material
c. Reasonable possibility More than inconsequential
d. Reasonable possibility Material

Likelihood of loss - Reasonable possibility
Potential amount involved - Material

159

Propex uses a voucher register and does not record invoices in a subsidiary ledger. Propex will probably benefit most from the additional cost of maintaining an accounts payable subsidiary ledger if

Partial payments to vendors are continuously made in the ordinary course of business.

160

A client maintains a large data center where access is limited to authorized employees. How may an auditor best determine the effectiveness of this control activity?

Observe whether the data center is monitored.

161

In assessing the competence of internal auditors, an independent CPA most likely would obtain information about the

Quality of the internal auditors' working paper documentation.

162

The integrated audit of a public company resulted in the CPA's issuance of an adverse opinion on internal control. Which of the following statements is correct when management believes that the material weakness is eliminated and the auditors, after performing appropriate procedures, agree?

a. No action can be taken until the next year's audit, at which time an unqualified report may be issued if appropriate.
b. The adverse opinion may be recalled, and an unqualified report issued.
c. The auditors may issue another report, this one indicating that the material weakness no longer exists.
d. The adverse opinion may not be reissued as unqualified, but a footnote to that report may be added indicating that the material weakness was subsequently eliminated.

The auditors may issue another report, this one indicating that the material weakness no longer exists.

163

An auditor's communication with the audit committee is required to include the

Discussion of disagreements with management and matters that significantly impact the entity's financial statements.

164

If the independent auditor decides that the work performed by internal auditors may have a bearing on the independent auditor's own procedures, the independent auditor should consider the objectivity of the internal auditors. One method of judging objectivity is to

Review the recommendations made in the reports of internal auditors.

165

Which of the following statements is correct regarding internal control?

a. A well-designed internal control environment ensures the achievement of an entity's control objectives.
b. An inherent limitation to internal control is the fact that controls can be circumvented by management override.
c. Internal control is a necessary business function and should be designed and operated to detect all errors and fraud.
d. A well-designed and operated internal control environment should detect collusion perpetrated by two people.

An inherent limitation to internal control is the fact that controls can be circumvented by management override.

166

For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective.

a. Materiality of misstatements.
b. Evaluation of accounting estimates.
c. Neither
d. Both

Neither

167

When a customer fails to include a remittance advice with a payment, it is a 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. Accounts receivable clerk.
b. Sales manager.
c. Credit manager.
d. Receptionist

Receptionist.

168

The auditor would be least likely to be concerned about internal control as it relates to

Shareholder meetings.

169

Which of the following computer documentation would an auditor most likely utilize in obtaining an understanding of internal control?

a. Record counts.
b. Program listings.
c. Record layouts.
d. System flowcharts

System flowcharts.

170

Which of the following represents an inherent limitation of internal control?

a. Shipping documents are not matched to sales invoice.
b. Bank reconciliations are not performed on a timely basis.
c. The CEO can request a check with no purchase order.
d. Customer credit checks are not performed.

The CEO can request a check with no purchase order.

171

For several years a client's physical inventory count has been lower than what was shown on the books at the time of the count so that downward adjustments to the inventory account were required. Contributing to the inventory problem could be conditions in internal control that led to the failure to record some

a. Sales discounts allowed.
b. Sales returns received.
c. Cash purchases.
d. Purchases returned to vendors.

Purchases returned to vendors.

172

Elimination of a material weakness several months prior to year-end is most likely to result in what form of audit opinion?

Unqualified.

173

The auditor is examining copies of sales invoices only for the initials of the person responsible for checking the extensions. This is an example of a

Test of control.

174

Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received?

a. Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports.
b. Vouchers are prepared by accounts payable department personnel only after they match item counts on the receiving report with the purchase order.
c. Receiving department personnel are expected to match and reconcile the receiving report with the purchase order.
d. Quantities ordered are excluded from the receiving department copy of the purchase order.

Quantities ordered are excluded from the receiving department copy of the purchase order.

175

In order to safeguard the assets through proper internal control, accounts receivable that are written off are transferred to a

Separate ledger.

176

Operating control over the check signature plate normally should be the responsibility of the

Treasurer.

177

A primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with

Knowledge necessary to assess the risks of material misstatements.

178

Which of the following most likely would be an internal procedure designed to detect errors and fraud concerning the custody of inventory?

a. Segregation of functions between general accounting and cost accounting.
b. Approval of inventory journal entries by the storekeeper.
c. Periodic reconciliation of work in process with job cost sheets.
d. Independent comparisons of finished goods records with counts of goods on hand.

Independent comparisons of finished goods records with counts of goods on hand.

179

Which of the following is not a step in an auditor's decision to conclude that controls operate effectively?

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

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

180

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control leaves no audit trail of documentary evidence, the auditor most likely will test the control by

Observation and inquiry.

181

Which of the following procedures is considered a test of controls?

a. An auditor interviews and observes appropriate personnel to determine segregation of duties.
b. An auditor reviews the audit workpapers to ensure proper sign-off.
c. An auditor evaluates whether a general journal entry was recorded at the proper amount.
d. An auditor reviews the entity's check register for unrecorded liabilities.

An auditor interviews and observes appropriate personnel to determine segregation of duties.

182

Which of the following is most likely to be considered a control objective over accounts receivable?

a. Ensure completeness and accuracy of accounts receivable.
b. Use standard shipping or contract terms.
c. Improper cutoff of shipment at the end of a period.
d. Review correspondence authorizing returns and allowances.

Ensure completeness and accuracy of accounts receivable.

183

Which of the following statements is correct concerning an auditor's communication on internal control related matters noted in an audit?

a. The auditor may issue a written report to the audit committee representing that no significant deficiencies were noted during the audit.
b. Significant deficiencies should not be recommunicated each year if the audit committee has acknowledged its understanding of such deficiencies.
c. Significant deficiencies may not be communicated in a document that contains suggestions regarding activities that concern other topics such as business strategies or administrative efficiencies.
d. The auditor may choose to communicate significant control-related matters either during the course of the audit or up to 60 days after the audit is concluded.

The auditor may choose to communicate significant control-related matters either during the course of the audit or up to 60 days after the audit is concluded.

184

According to PCAOB standards which of the following is a control deficiency that is at least a significant deficiency?

a. Weak controls over authorization of payroll.
b. Weak controls over safeguarding of inventories.
c. Weak controls over bank reconciliations.
d. Weak controls over the selection and application of accounting principles.

Weak controls over the selection and application of accounting principles.

185

The accounts payable department receives the purchase order form to accomplish all of the following except

a. Compare quantity ordered to quantity purchased.
b. Ensure the goods had been received by the party requesting the goods.
c. Ensure the purchase had been properly authorized.
d. Compare invoice price to purchase order price.

Ensure the goods had been received by the party requesting the goods.

186

Which of the following statements is correct concerning a service auditor's report on a service organization?

a. The report may include a conclusion on whether controls have been suitably designed or on compliance effectiveness.
b. The report must include a summary assessment of control risk.
c. The report may include a conclusion on whether controls have been suitably designed or on whether they have been suitably designed and operate effectively.
d. The report is ordinarily distributed to all shareholders of the service organization.

The report may include a conclusion on whether controls have been suitably designed or on whether they have been suitably designed and operate effectively.

187

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?

a. Are tow or more authorized signatures required on checks that repay notes payable?
b. Are the proceeds from notes payable used for the purchase of noncurrent assets?
c. Are direct borrowings on notes payable authorized by the board of directors?
d. Are assets that collateralize notes payable critically needed for the entity's continued existence?

Are direct borrowings on notes payable authorized by the board of directors?

188

The overall attitude and awareness of an entity's board of directors concerning the importance of internal control usually is reflected in its

Control environment.

189

As a result of tests of controls, an auditor assesses control risk too high. The incorrect assessment most likely occurred because

Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity.

190

The auditor who becomes aware of a material weakness related to internal control is required to communicate this to the

Management and those charged with governance.

191

The Foreign Corrupt Practices Act requires that

Publicly held companies devise and maintain adequate internal control.

192

To avoid potential errors and fraud a well-designed internal control in the accounts payable area should include a separation of which of the following functions?

a. Cash disbursements and invoice verification.
b. Physical handling of merchandise received and preparation of receiving reports.
c. check signing and cancellation of payment documentation.
d. Invoice verification and merchandise ordering.

Cash disbursements and invoice verification.

193

When tests of controls reveal that controls are not operating as anticipated, it is most likely that the assessed level of the risk of material misstatement will

Be greater than the planned level.

194

Effective internal control requires organizational independence of departments. Organizational independence would be impaired in which of the following situations?

a. The cashier reports to the treasurer.
b. The payroll accounting department reports to the chief accountant.
c. The controller reports to the vice president of production.
d. The internal auditors report to the audit committee of the board of directors.

The controller reports to the vice president of production.

195

When preparing a record of a client's internal control, the independent auditor sometimes uses a flowchart, which can best be described as a

a. Pictorial presentation of the flow of instruction in a client's internal computer system.
b. Diagram which clearly indicates an organization's internal reporting structure.
c. Symbolic representation of a system or series of sequential processes.
d. Graphic illustration of the flow of operations which is used to replace the auditor's internal control questionnaire.

Symbolic representation of a system or series of sequential processes.

196

An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?

a. Select and examine vouchers and ascertain that the related canceled checks are dated no earlier than the vouchers.
b. Select and examine vouchers and ascertain that the related canceled checks are dated no later than the vouchers.
c. Select and examine canceled checks and ascertain that the related vouchers are dated no earlier than the checks.
d. Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks.

Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks.

197

An effective control that protects against the preparation of improper or inaccurate disbursements would be to require that all checks be

Signed by an officer after necessary supporting evidence has been examined.

198

Which of the following factors is most relevant when an auditor considers the client's organizational structure in the context of control risk?

a. The organization's recruiting and hiring practices.
b. Physical proximity of the accounting function to upper management.
c. The suitability of the client's lines of reporting.
d. Management's attitude toward information processing and accounting departments.

The suitability of the client's lines of reproting.

199

Computer Services Company (CSC) processes payroll transactions for schools. Drake, CPA, is engaged to report on CSC's description of its internal control system and the suitability of the design of its controls. These policies and procedures are relevant to the schools' internal control, so Drake's report will be useful in providing the schools' independent auditors with information necessary to plan their audits. Drake's report expressing an opinion on CSC's policies and procedures should contain a

Description of the scope and nature of Drake's procedures.

200

Which of the following would be least likely to suggest to an auditor that the client's management may have overridden internal control?

a. There have been two new controllers this year.
b. Differences are always disclosed on a computer exception report.
c. There are numerous delays in preparing timely internal financial reports.
d. Management does not correct internal control weaknesses that it knows about.

Differences are always disclosed on a computer exception report.