Auditing- exam final Flashcards

In the sales and collection cycle when is, generally, the earliest point at which revenue can be recognized?

A) Shipment of goods

B) credit approval

C) cash collection

D) sales approval

In designing audit procedures for the sales returns and allowances account, the auditor would primarily rely on the following accounts, except for:

A) cash receipts journal.

B) accounts receivable master file.

C) sales returns and allowances transaction file.

D)sales returns and allowances will be recorded in all of the above.

The auditor's objectives for the sales and cash collections activities when the client is primarily an e-commerce business as compared to a "bricks and mortar" business are:

A) unchanged.

B) expanded.

C) decreased.

D) mitigated.

In determining the level of audit efficiency, once the auditor has identified the key internal controls and identified any deficiencies in order to determine the level of control risk appropriate for a private company client, it is appropriate to decide whether:

A) tests of control can be increased sufficiently to justify the costs of performing substantive tests.

B)tests of control can be reduced sufficiently to justify cost of performing the substantive tests.
C) substantive tests can be increased sufficiently to justify costs of performing tests of controls.
D) substantive tests can be reduced sufficiently to justify the costs of performing tests of controls.

In many audits of sales transactions, substantive tests of transactions can be reduced in determining the completeness objective because:

A)overstatements of assets and income are a greater concern than understands.

B) the unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two financial statements will not be misleading.
C) understatements of assets and income are a greater concern than overstatements.
D) it doesn't matter if income is understated because the savings on income tax offsets the reduced revenue and net income is correct.

Transaction-related audit objectives are essentially the same for processing credit memos as for sales with a certain difference. Which of the following are two key differences?

A)Risk and emphasis on the classification objective.

B) Materiality and emphasis on the occurrence objective.

C) materiality and emphasis on the accuracy objective.
D) Risk and emphasis on the completeness objective.

Which of the following would least concern an audit regarding the lack of a specific authorization to conduct the sales transaction?

A) determination of discounts
B) selling of goods for cash

C) granting of credit
D) shipment of goods

BLANK tests are for omitted transactions, while BLANK tests are for nonexistent transactions:

A) Tracing, vouching
B) Tracking, verifying
C) Bouching, tracing
D) Verifying, tracking

Which of the following audit procedures would normally be best expected to test the completeness objective (assertion) for sales?

A) Trace payments received subsequent to the balance sheet date.
B) Send accounts receivable confirmation requests.
C) Apply gross profit rates to inventory disposed of during the period.
D) Compare shipping documents with sales records.

An audit procedure that compares the name, amount, and dates shown on remittance advice, either paper of electronic via direct deposit, with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting:

A)lapping.
B) sales without proper credit authorization.
C) illicit write-offs of customers as uncollectible accounts.
D) kiting.

Which one 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 posts the receipts to the accounts receivable subsidiary ledger cards.
C)The cashier prepares the daily deposit.
D) The cashier makes the daily deposit at a local bank.

Which of the following is not a risk in an IT system?

A)hardware and data vulnerability
B) need for IT experienced staff
C) separation of IT duties from accounting functions
D) improved audit trail

The auditor would expect that an account receivable from a customer would be written off by the client when which of the following occurs:

A) the account is at least six months old.
B) the customer files for bankruptcy.
C) a collection agency cannot inspire customer to pay the debt.
D) the client company concludes that an amount is no longer collectible.

One of the ways to eliminate nonsampling risk is through:

A) controls which ensure that the sample drawn is random and representative.
B) the use of attributes sampling rather than variable sampling.
C) proper supervision and instruction of the client's employees.
D) proper supervision and instruction of the audit team.

Which of the following is the risk that an auditor will reach an incorrect conclusion because a sample is not representative of the population?

A) nonsampling risk
B) sampling risk
C) audit risk
D) detection risk

When auditors evaluate sales returns and allowances, a primary emphasis is on the objective of occurrence:

A) True
B) False

The relationship of acceptable risk of overreliance (ARO) to sample size is:

A)inverse (larger ARO=smaller sample).
B)variable (sometimes larger, sometimes smaller).
C) direct (larger ARO= larger sample).
D) nonexistent.

The process which requires the calculation of an interval and then selects the items based on the size of the interval is:

A) random sample selection.
B) systematic sample selection.
C) computerized sample selection.
D) statistical sampling.

Which of the following statements is not correct regarding probabilistic and non-probabilistic sample selection?

A) It is not acceptable to make non-probablistic evaluations using probabilistic selection.
B)In probabilistic selection, every population item has a known chance of being selected.
C) Probabilistic selection is required for all statistical sampling methods.
D) Both methods are acceptable and commonly used.

An auditor plans to examine a sample of 40 canceled checks for a countersignature which is prescribed in the client's control procedures manual. Two of the checks in sample cannot be located by the company or the auditor. The auditor would most likely:

A)treat the missing checks as a deviation when evaluating the results of the sample.
B) draw a conclusion on a sample size of 38.
C) recalculate the sample excluding the original 40 checks.
D) substitute two more checks to get to a sample size of 40.

In performing a review of a client's cash disbursements, an auditor uses a systematic sample selection with a random start. The primary disadvantage of this technique is population items:

A) must be replaced in the population after sampling to permit valid statistical influence.
B) may occur twice in the sample.
C) may occur in a systematic patter, thus negating the randomness of the sample.
D) must be reordered in a systematic pattern before the sample can be drawn.

In testing controls, an overreliance on internal controls that reduces substantive tests and increases the likelihood of not detecting a material misstatement occurs because:

A) true deviation in the population was greater than the sample.
B) it is inherent in the audit risk model.
C) true deviation in the population was less than the sample.
D)auditor judgement was flawed.

Auditor who prefer statistical to nonstatistical sampling believe that the principal advantage of statistical sampling flows from its ability to:

A) establish conclusive audit evidence with decreased audit effort.
B) quantify sampling risk.
C) promote a more legally defesible procedural approach.
D) define the precesion required to provide audit satisfaction.

For which of the following audit procedures would audit sampling not be appropriate?

A) Examine a sample of duplicate sales invoices for credit approval.
B) Audit sampling is appropriate for each of the above procedures.
C) Compare the quantity on duplicate sales invoices with the quantity on related shipping documents.
D) Review the sales transactions for large and unusual amounts.

In the evaluation of the results of an attributes sample, the fact that the exception rate in the sample was 2% rather than the estimated population exception rate of 4% would cause the computed upper exception rate to:

A) equal the tolerable exception rate.
B) cannot be determined from the information given.
C) be less than the tolerable exception rate.
D) exceed the tolerable exception rate.

In nonstatistical sampling, the calculated sampling error is the difference between the tolerable exception rate and the sample exception rate:

A) True
B) False

Smaller privately held companies may not maintain an accounts payable master file by vendor. These companies pay on the basis of:

A) vendors' monthly statements.
B) dunning letters.
C) the accounts payable account in the general ledger.
D) individual vendors' invoices.

The internal control that requires that "checks are prenumbered and accounted for" satisfies the objective of:
A) posting and summarization.

B) accuracy.
C) completeness.
D) existence.

A vendor's statement is unreliable and auditors rarely use it:

A) True
B) False

The computer-generated file which records acquisitions, disbursements and allowances for each vendor is the:

A) Cash disbursements file.
B) Accounts payable master file.
C) Purchase approval file.
D) Acquistions transaction file.

An auditor has been assigned to perform tests of controls for a client's cash disburesement system. Client files are kept electronically with no paper audit trail. In this case the auditor would need to rely on which of the following audit procedures?

A) Analytical procedures and inquiry
B) Observation and inquiry
C) reperformance and inquiry
D) confirmations and inquiry

The extent of a search for unrecorded liabilities largely depends on:

A) materiality and inherent risk.
B) materiality only.
C) materiality and control risk.
D) inherent risk only.

A company failed to record an acquisition of merchandise and its related liability, but the merchandise was included in ending inventory. The effect on the financial statements was to:

A) understate both assets and liabilities.
B) understate liabilities, and overstate both net income and owners' equity.
C) understate net income and owners' equity.
D) understate assets and owners' equity.

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

A) Count goods upon receipt in storeroom.
B) compare goods received with goods requisitioned in receiving departments.
C) Verify vouchers for accuracy and approval in internal audit department.
D) Match purchase order, receiving report, and vendor's invoice for each voucher in accounts payable department.

A CPA learns that his client has paid a vendor twice for the same shipment, once based upon the original invoice and once based upon the monthly statement. A contorl procedure that should have prevented this duplicate payment is:

A) prenumbering of receiving reports.
B) use of a limit or reasonableness test.
C) prenumbering of disbursement vouchers.
D) attachment of the receiving report to the disbursement reports.

The internal control "Vouchers are prenumbered and accounted for" relates most closely to the occurrence objective for acquisitions:

A)True
B) False

An inventory acquisition is received late in the afternoon of December 31 after the physical inventory is completed. If the acquisition is included in accounts payable and purchases, but excluded from inventory, the result:

A) is an overstatement of net earnings.
B) is an overstatement of owner's equity.
C) is an understatement of net earnings.
D) is an overstatement of working capital.

If tests of controls and substantive tests of transactions related to perpetual inventory records reveal controls over perpetuals are effective, the auditor is justified in reducing the extent of tests of details of inventory:

A)True
B)False

By tracing receiving reports issued at and before year-end to vendors' invoices and making sure they are included in accounts payable, the auditor is testing for:

A) lapping.
B)kiting.
C) theft of merchandise by employees.
D) unrecorded obligations.

An auditor needs to determine whether all customers of an electric utility company are being billed. The auditor should test from the:

A) sales register to the meter department records.

B) sales register to the accounts receivable ledger.

C) accounts receivable ledger to the sale register.

D)meter department records to the sales register.

An advantage of using statistical sampling techniques is that such techniques:

A)have been established in the courts to be superior to judgmental sampling.

B) eliminate the need for judgmental decisions.

C) define the values of precision and reliability required to provide audit satisfaction.

D) quantify sampling risk.

Which of the following audit procedures would most likely assist an audit in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern?

A) review compliance with the terms of debt agreements.

B) reconciliation of interest expense with debt outstanding

C) confirmation of accounts receivable from principal customers

D) confirmation of bank balances

While there is no professional requirement to do so on audit engagements, CPAs frequently issue a formal "management" letter to clients. The primary purpose of this letter is to provide:

A) evidence indicating whether the auditor is reasonably certain that internal accounting control is operating as prescribed.

B) a summary of the auditor's observations that resulted from the auditor's special study of internal control.

C) the client with the CPA's recommendations for improving any part of the client's business.

D) a permanent record of the internal accounting control work performed by the auditor during the course of the engagement.

When a client will not permit inquiry of outside legal counsel, the audit report will ordinarily contain a(n):

A) unqualified opinion with a separate explanatory paragraph.

B) disclaimer of opinion.
C) standard unqualified opinion.
D) qualified opinion.

Contingent liability disclose in the footnotes of the financial statements would normally be made when:

A) the outcome of the accounting event as well as a reasonable estimation of the loss cannot be made.

B) the outcome of the accounting event is deemed probable, and a reasonable estimation as to the amount can be made.
C) a reasonable estimation of the loss can be made, but the outcome is not probable.
D) the outcome of the accounting event is deemed probable, but a reasonable estimation as to the amount cannot be made by the client or auditor.

... accounting for subsequent events that have a direct effect on the financial statements is to:

A) duly note in the audit workpaper that next year's financial statement needs to be adjusted.

B) make no adjustment of the financial statements for the year under audit.
C) adjust the financial statements for the year under audit.
D) disclose in the notes to financial statement the amount of the adjustment.

An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to:

A) permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor's report.

B) accept responsibility for subsequent events.
C) assume responsbilities for events subsequent to the issuance of the auditor's report.
D) extend auditing procedures and assume responsibility for a greater period of time.

which of the following would be a subsequent discovery of facts which would not require a response by the auditor?

A)discovery of the failure to write off material obsolete inventory

B) discovery of the omission of a material footnote
C) discovery of the inclusion of material nonexistent sales.
D) decrease in the value of investments.

Which of the following statements is most correct about an auditor's required communication with management and those charged with corporate governance?

A) Auditor does not have any requirement to communicate with anyone other than the company's senior management.

B) The auditor is required to inform those charged with governance about significant errors discovered and subsequently corrected by management.
C) Communication is required before the audit report is issued.
D) Any significant matter reported to those charged with governance must also be communicated to managment.

Which of the following would the auditor expect to find in the client's management representation letter?

A) management's plan for improving product quality

B) manamgent's compliance with contractual arrangements that impact the financial statements.
C) Management's goals for improving earnings per share
D) management's recommendation for internal control effectiveness improvements.

Auditing standards require the auditor to communicate all management frauds and illegal acts to the audit committee:

A) only if the act is highly material.

B) regardless of materiality.
C) only if the act is immaterial.
D) only if the act is material.

Auditing standards requires the auditor to evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least:
A) one year beyond the date of the auditor's report.

B)One year beyond the balance sheet date.

C) one quarter beyond the balance sheet date.

D) One quarter beyond the date of the auditor's report.

Subsequent events affecting the realization of assets ordinarily will require adjustments of the financial statements under exmaination because such events typically represent the:

A) culmination of conditions that existed at the balance sheet date.

B) final estimates of losses relating to casualties occurring in the subsequent event period.

C)preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.

D) discovery of new conditions occurring in the subsequent events period.

A company guarantees the debt of an affiliate. Which of the following best describes the audit procedure that would make the auditor aware of the guarantee?

A) review the possibility of such guarantees with the chief accountant.

B)Review the legal letter returned by the company's outside legal counsel.

C) review minutes and resolutions of the board of directors.

D) review prior year's audit files with respect to such guarantees.

Subsequent discoveries of facts requiring the reissuance of financial statements arise from events occurring after the date of the auditor's report:

A) True

B) False

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

A) The cashier makes the daily deposit at a local bank.

B) The cashier prepares the daily deposit.

C) The cashier posts the receipts to the accounts receivabel subsidiary ledger cards.

D) The cashier endorses the checks.

When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger purposefully enters cash received into the wrong customer's account that employee may be suspected of:
A) shorting.

B)lapping

C) Floating
D) kiting

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

A) overstating the accounts receivable control account by intentionally misstating price charged for goods sold.

B) overstating the accounts receivable subsidiary ledger by not recording payments made by customers.
C) understating the cash receipts journal by purposely recording incorrect amounts.
D) understanding the sales journal by not recording cash sales.

Whenever auditors use sampling, they risk making incorrect conclusions about the population. The risk that the auditor concludes that controls are more effective than they actually are is known as the:
A) risk of overreliance.
B) risk that the sample is not representative of the population.
C) risk of under reliance.
D) risk that the sample conclusions cannot be useful because of nonprobability sampling.

There is a(n) BLANK relationship between acceptable riks of overreliance and planned sample size.

A) direct

B)exponential

C) proportional

D) inverse

For which of the following audit procedures would audit sampling not be appropriate?

A) Compare the quantity on duplicate sales invoices with the quantity on related shipping documents.

B) Review sales transactions for large and unusual amounts.
C) Examine a sample of duplicate sales invoices for credit approval.
D)Audit sampling is appropriate for each of the above procedures.

In using sampling distribution for attributes, which one of the following must be known to evaluate the sample results?

A) standard exception of the values in the population
B) Sample size
C) actual exception rate of the attribute in the population
D)estimated dollar value of the population

For effective internal control purposes, the accounts payable department generally should:
A) establish the agreement of the vendor's invoice with the receiving report and purchase order.
B) approve the purchase order.
C) supervise the preparation of the receiving report.
D) have the authority to sign the checks.

You are performing the audit of Jenkins and Company. Your tests of controls and tests of transactions for accounts payable demonstrate that the controls are operating effectively. this would normally allow you to:
A) increase the need for substantive testing of balances for accounts payable.
B)reduce the need for substantive testing of balances for accounts payable.
C)reduce control tests in other transaction cycles.
D) eliminate the need for substantive testing of balances for accounts payable.

An inventory acquisition is received late in the afternoon of December 31 after the physical inventory is completed. If the acquisition is included in accounts payable and purchases, but excluded from inventory, the result:

A) is an understatement of net earnings.

B) is an overstatement of working capital.
C) is an overstatement of net earnings.
D) is an overstatement of owner's equity.

Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?

A) major purchase of a business that is expected to double the sales volume
B) settlement of litigation in excess of the recorded liability
C) loss of a plant as a result of a flood
D) sale of long-term debt or capital stock

The test of transactions which requires one to "reconcile recorded cash disbursements with the cash disbursements on the bank statement" satisfies the objective of:
A) Completeness.

B) Accuracy.

C) posting and summarization.

D) Occurrence.

The auditor's primary concern is performing audit procedures of the write-off of uncollectible accounts relates to the risk that the client writes off customer accounts that have already been collected. The primary control for preventing this fraud is:
A) examining the uncollectible account authorization form.
B) examining debit memos.
C) examining the vouchers payable register.
D) examiing authorized credit memos.

An auditor needs to determine whether all customers of an electric utility company are being billed. The auditor should test from the:

A) sales register to the meter department records.
B) sales register to the accounts receivable ledger.

C) accounts receivable ledger to the sales register.
D) meter department records to the sales register.

1) recorded sales exist.

2) all existing sales are recorded (no omission).

3) sales transactions are recorded accurately in the Sales journal.

For each of the above three objectives, give on specific test of transaction.

1) recorded sales exist.

2) all existing sales are recorded.

For each of the above two objectives, give one specific test of control. (2 total)

Briefly describe (explain) the meaning of the following three terms used in attribute sampling: CUER, ARO, and TER.

The CUER for a test of control (accuracy objective) is 16.2 percent. The TER is 9 percent. Describe at least three courses of action an auditor can take now.

Describe 3 audit procedures an auditor would perform to locate possible unrecorded (out of period) liabilities.

If understatement errors are expected, what types/kinds of Accounts Payable vendor accounts will likely be confirmed? Describe at least three.

List three specific (substantive) items that are included in a client representation letter.

Give two specific examples of "subsequent events" that require adjustment of account balances and two specific examples of "contingent liabilities" that require disclosure.