Auditing test #2 chapter 10 and up hmwk

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1. 
?Which of the following is a responsibility that should not be assigned to only one person?
A. Access to securities in the company's safety deposit box

B. Custodianship of the cash working fund

C. Reconciliation of bank statements

D. Custodianship of tools and small equipment
 
A: Access to the securities in the company's safety deposit box (should be 2 people)
 
2. 
? A company holds bearer bonds (with little coupons) as a short-term investment. Custody of these bonds and submission of coupons for interest payments is normally the responsibility of the?
A. Treasury function

B. Legal counsel

C. General accounting function

D. Internal audit function
 
A: Treasury function (custody of assets-to maintain the asset)

-answer choice C would be co-mingling custody and recording (the worst thing that can happen)

-mixing authorization with data entry is not as bad as mixing custody and recording because here they can cover their tracks.
 
3. 
?Operating control of the check signing machine normally should be the responsibility of the?
A. General accounting function
B. Treasury function
C. Legal counsel
D. Internal audit function
 
A: Treasury function (custody of assets)

-answer choice A would be co-mingling signing checks with data entry

-In theory, when check is written and not signed is worthless, but the banks often will cash them. The check does not become an asset until is signed – so the act of signing the check creates an asset – so it is custody of asset function.
 
4. 
?Matching the supplier's invoice, the purchase order, and the receiving report should normally be the responsibility of the?
A. Warehouse -receiving function
B. Purchasing function
C. General accounting function
D. Treasury function
 
A: General accounting function (function of recording data entry)
 
5. 
?One of the newest SASs?
 
A: Significant deficiencies and material weakness are things that auditors are not necessarily looking for but are required to report to management and those charged with governance (Both)
-It should be communicated theoretically as of report release date but in practice it is done 60 days after the report release date.
 
6. 
?When considering internal control, an auditor must be aware of the concept of reasonable assurance, which recognizes that the?
1. Employment of competent personnel provides assurance that management's control objectives will be achieved.

2. Establishment and maintenance of internal control is an important responsibility of the management and not of the auditor.

3. Cost of internal control should not exceed the benefits expected to be derived there from

4. Separation of incompatible functions is necessary to ascertain that the internal control is effective
 
A: Cost of internal control should not exceed the benefits expected to be derived there from
 
7. 
?When an auditor issues an unqualified opinion about internal control over financial reporting for a public company, the auditor has obtained reasonable assurance that?
1. The likelihood of fraud is minimal

2. There are no control deficiencies

3. Internal control over financial reporting is operating effectively

4. Controls related to the reliability of financial reporting objective in addition to those controls related to operations and compliance with laws and regulations objectives that could materially affect financial reporting
 
A: Internal control over financial reporting is operating effectively
 
8. 
?Which of the following most accurately describe the auditor's responsibilities for reporting on internal control required required by PCAOB, the auditor tested?
1. All controls related to the objectives of reliable financial reporting, efficiency and effectiveness of operations, and compliance with laws and regulations

2. Controls solely related to the reliability of financial reporting objective

3. Controls related to the compliance with laws and regulations objective

4. Controls related to the reliability of financial reporting objective in addition to those controls related to operations and compliance with laws and regulations objectives that could materially affect financial reporting
 
A: controls related to the reliability of financial reporting objective in addition to those controls related to operations and compliance with laws and regulations objectives that could materially affect financial reporting
 
9. 
?What is the independent auditor's principal purpose for obtaining an understanding of internal control and assessing control risk in a FS audit?
1. To comply with GAAP

2. To obtain a measure of assurance of management's efficiency

3. To maintain a state of independence in mental attitude during the audit

4. To determine the nature, timing, and extent of subsequent audit work
 
A: To determine the nature, timing, and extent of subsequent audit work
 
10. 
?In general, an internal control deficiency may be defined as a condition under which misstatements would ordinarily not be detected within a timely period by?
1. An auditor during the typical obtaining of an understanding of internal control and assessment of control risk

2. A controller when reconciling accounts in the general ledger

3. Employees in the normal course of performing their assigned functions. We would prefer that employees in performing controls tasks would discover these rather than that the audit tests did so. Controls are the first line of defense in catching misstatements

4. The chief financial officer when reviewing interim financial statements
 
A: Employees in the normal course of performing their assigned functions. We would prefer that employees in performing controls tasks would discover these rather than that the audit tests did so. Controls are the first line of defense in catching misstatements
 
11. 
?A material weakness in internal control represents a control deficiency that?
1. More than remotely adversely affects a company's ability to initiate, authorize, record, process, or report external financial statements reliably

2. Results in more than a remote likelihood that internal control will not prevent, detect material FS misstatements

3. Exists because a necessary control is missing or not properly designed

4. Reduces the efficiency and effectiveness of the entity's operations
 
A: Results in more than a remote likelihood that internal control will not prevent, detect material FS statements
 
12. 
?An auditor of a public company identifies a material weakness in internal control. The auditor?
1. Will be unable to issue an unqualified opinion on the FS

2. Must issue a qualified or disclaimer of opinion on internal control over financial reporting

3. May still be able to issue an unqualified opinion on internal control over financial reporting

4. Must issue an adverse opinion on internal control over financial reporting
 
A: Must issue an adverse opinion on internal control over financial reporting
 
13. 
?The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the?
1. Factors that arise doubts about the auditability of the FS

2. Operating effectiveness of internal controls

3. Risk that material misstatements exist in the FS

4. Possibility that the nature and extent of substantive tests may be reduced
 
A: Risk that material misstatements exist in the FS
 
14. 
?An auditor uses assessed control risk to?
1. Evaluate the effectiveness of the entity's internal controls

2. Identify transactions and account balances where inherent risk is at the maximum

3. Indicate whether materiality threshold for planning and evaluation purposes are sufficiently high

4. Determine the acceptable level detection risk for financial statement assertions
 
A: Determine the acceptable level of detection risk for financial statement assertions
 
15. 
?On the basis of audit evidence gathered and evaluated, an auditor decides to increase assessed control risk from that originally planned. To achieve an audit risk level that is substantially the same as the planned audit risk level, the auditor will?
1. Increase inherent risk

2. Increase materiality levels

3. Decrease substantive testing

4. Decrease planned detection risk
 
A: Decrease planned detection risk
 
16. 
?Which of the following statements about testing of controls is incorrect, test of controls?
1. Must be done in every audit of a public company's FS

2. Provide persuasive evidence that a material misstatement exists when the auditor determines that the control is not being consistently applied

3. Are often based on the same types of audit techniques used to gain an understanding of internal controls, except the extent of testing is generally greater when testing controls

4. Allow a reduction in the extent of substantive testing, as long as the results of the test controls are equal to or better than what the auditor expects
 
A: Provide persuasive evidence that a material misstatement exists when the auditor determines that the control is not being consistently applied
 
17. 
1. Assemble supporting documents for general and payroll cash disbursements?

2. Sign general cash disbursement checks?

3.Input information to prepare checks for signature, record checks in the cash disbursements journal, and update the appropriate master files?

4. Mail checks to suppliers and deliver checks to employees?
 
1. Recording
2. Custody (sign a check creates asset)
3. Recording
4. Custody- Mailing must always be done by the check signer or someone directly under him
 
18. 
5. Cancel (checks) supporting documents to prevent their reuse?

6. Approve credit for customers included in the customer credit master file?

7. Input shipping and billing information to bill customers, record invoices in the sales journal, and update the accounts receivable master file?

8. Open the mail and prepare a remittance pre-listing of cash receipts?

9. Enter cash receipts data to prepare the cash receipt journal and update the accounts receivable master file?
 
5. Custody- always should be done by check signer or someone directly under him- never shred voided documents-always retain them

6. Custody- should be authorization

7. Recording

8. Custody- should be the manager

9. Recording
 
19. 
10. Prepare daily cash deposits?

11. Deliver daily cash deposits to the bank?

12. Assemble the payroll time cards and input the data to prepare payroll checks and update the journal and payroll master files?

13. Sign payroll checks?

14. Update the general ledger at the end of each month and review all accounts for unexpected balances?
 
10. It is okay for Recording to do it, because we already have the pre-listing done by custody

11. Custody

12. Recording

13. Custody (an asset)

14. Recording
 
20. 
15. Reconcile the accounts receivable master file with the control account and review accounts outstanding more than 90 days?

16. Prepare monthly statements for customer by printing the A/R master file; then mail the statements to customers?

17. Reconcile the monthly statements from vendors with the A/P master file?

18. Reconcile the bank account?
 
15. Owner

16. Recording -custody cannot do it, because he has checks, so he cannot prepare statements

17. Custody

18. Owner
 
21. 
Ch.13
?The auditor looks for an indication on duplicate sales invoices to see whether the invoices have been verified. This is an example of?
1. A test of details of balances

2. A test of control

3. A substantive test of transactions

4. Both a test of control and substantive test of transactions
 
A: A test of control
 
22. 
Ch. 13
?Analytical procedures may be classified as being primarily?
1. Tests of controls

2. Substantive tests

3. Tests of ratios

4. Tests of details of balances
 
A: Substantive Tests
 
23. 
Ch. 13
?To support the auditor's initial assessment of control risk below maximum, the auditor performs procedures to determine that internal controls are operating effectively. Which of the following audit procedures is the auditor performing?
1. Tests of details of balances

2. Substantive tests of transactions

3. Tests of controls

4. Tests of trends and ratios
 
A: Tests of controls
 
24. 
Ch. 13
?The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process. To minimize the risk, the auditor relies primarily on?
1. Substantive tests

2. Tests of controls

3. Internal control

4. Statistical analysis
 
A: Substantive tests
 
25. 
Ch. 13
?Which of the following statements about tests of controls is most accurate?
1. Auditing procedures cannot concurrently provide both evidence and effectiveness of internal control procedures and evidence required for substantive tests

2. Tests of controls include observations of the proper segregation of duties

3. Tests of controls provide direct evidence about monetary misstatements in transactions

4. Tests of controls ordinarily should be performed as of the balance sheet date or during the period subsequent to that date
 
A: Tests of controls include observations of proper segregation of duties
 
26. 
Ch. 13
?Which of the following will be least likely to be included in an auditor's tests of controls?
1. Documentation

2. Observation

3. Inquiry

4. Confirmation
 
A: Confirmation
 
27. 
Ch. 13
?The primary objective of performing tests of controls is to obtain?
1. A reasonable degree of assurance that the client's internal controls are operating effectively on a consistent basis throughout the year

2. Sufficient, appropriate audit evidence to afford a reasonable basis for the auditor's opinion, without the need for additional evidence

3. Assurances that informative disclosures in the FS are reasonably adequate

4. Knowledge and understanding of the client's prescribed procedures and methods
 
A: A reasonable degree of assurance that the client's internal controls are operating effectively on a consistent basis throughout the year
 
28. 
Ch. 13
?Which of the following is ordinarily considered a test of control audit procedure?
1. Sending confirmation letters to banks

2. Counting and listing cash on hand

3. Examining signature on checks

4. Preparing reconciliations of bank accounts as of the balance sheet date
 
A: Examining signatures of checks
 
29. 
Ch.13
?A conceptually logical approach to the auditor's evaluation of internal control consists of the following?
I: Determining the internal controls that should prevent or detect errors and fraud

II: ID control deficiencies to determine their effect on the nature, timing, or extent of auditing procedures to be applied and suggestions to be made to the client

III: Determining whether the necessary procedures are prescribed and are being followed satisfactorily

IV: Considering the types of errors and fraud that can occur

What should be the order in which these four steps are performed?
1. I, II, III, IV
2. I, III, IV, II
3. III, IV, I, II
4. IV, I, III, II
 
A: the last one IV, I, III, II
 
30. 
Ch. 13
?These sequence of steps in gathering evidence as the basis of the auditor's opinion is?
1. Substantive tests, initial assessment of control risk, and tests of controls

2. Initial assessment of control risk, substantive tests, and tests of controls

3. initial assessment of control risk, tests of controls, and substantive tests

4. Tests of control, initial assessment of control risk, and substantive tests
 
A: Initial assessment of control risk, test of controls, and substantive tests
 
31. 
Ch. 13 Procedures and evidence
?Foot the accounts payable trial balance and compare the total with the general ledger?
 
A: Test of details of balances - Reperformance
 
32. 
Ch. 13 Procedures and evidence
?Examine vendors' invoices to verify the ending balance in A/P?
 
A: Test of details of balances - Documentation
 
33. 
Ch. 13 Procedures and evidence
?Compare the balance in payroll tax expense with previous years. The comparison takes the increase in payroll tax rates into account?
 
A: Analytical procedure - Analytical Procedures
 
34. 
Ch. 13 Procedures and evidence
?Examine the internal auditor's initials on monthly bank reconciliations as an indication of whether they have been reviewed?
 
A: Tests of controls - Documentation
 
35. 
Ch. 13 Procedures and evidence
?Examine vendors invoices and other documentation in support of recorded transactions in the acquisition journal?
 
A: Substantive tests of transactions - Documentation
 
36. 
Ch. 13 Procedures and evidence
?Multiply the commission rate by total sales and compare the result in commission expense?
 
A: Analytical procedure - Analytical procedures
 
37. 
Ch. 13 Procedures and evidence
?Examine vendors' invoices and other supporting documents to determine whether large amounts in repair and maintenance account should be capitalized?
 
A: Tests of details of balances - Documentation
 
38. 
Ch. 13 Procedures and evidence
?Discuss the duties of the cash disbursement clerk with him and observe whether he has responsibility for handling cash or preparing the bank reconciliation?
 
A: Tests of controls - inquiry and observation
 
39. 
Ch. 13 Procedures and evidence
?Confirm accounts payable balances directly with vendors?
 
A: Test of details of balances - Confirmation
 
40. 
Ch. 13 Procedures and evidence
?Account for a sequence of checks in the cash disbursements journal to determine whether any have been omitted?
 
A: Tests of controls - documentation d
 
41. 
Ch. 13 Procedures and evidence
?Inquire about the A/P supervisor's monthly review of a computer-generated exception report of receiving reports and purchases orders that have not been matched with a vendor invoice?
 
A: Tests of controls - Inquiry
 
42. 
ch. 14
?When a customer fails to include a remittance advice with a payment, it is common for the person opening the mail to prepare one. Consequently, mail should be opened by which of the following four employees?
1. Credit manager
2. Sales manager
3. Accounts receivable clerk
4. Receptionist
 
A: Receptionist (the mail opener should perform this function. The credit manager (1) should not because this co-mingles authorization with custody. The accounts receivable clerk (3) would be the worst possible situation because this co-mingles custody with recording
 
43. 
ch. 14
?A key internal control in the sales and collection cycle is the separation of duties between cash handling and record keeping. The objective most directly associated with this control is to verify that?
1. Cash receipt recorded in the cash receipts journal are reasonable
2. Cash receipts are correctly classified
3. Recorded cash receipts result from legitimate transactions
4. Existing cash receipts are recorded
 
A: Existing cash receipts are recorded
 
44. 
ch. 14
?Which of the following internal controls will most likely reduce write-offs of uncollectible accounts receivable?
1. Employees responsible for authorizing sales and write-offs of uncollectible accounts receivable are denied access to cash
2. shipping documents and sales invoices are matched by an employee who does not have authority to write off uncollectible A/R
3. Employees involved in the credit-granting function are separated from the sales function
4. Accounts receivable master file records are reconciled to the control account by an employee who is not involved in the credit-granting function
 
A: Employees involved in the credit-granting function are separated from the sales function (all answers are important internal controls however (3) is the only one which addresses the question of trying to reduce charge-offs)
 
45. 
ch. 14: control that would prevent the misstatement
?Manufacturing company received a substantial sales return in the last month of the year, but the credit memorandum for the return was not prepared until after the auditors had completed their filed work. The return merchandise was included in the physical inventory

1. Aged trial balance of accounts receivable is prepared
2. Credit memoranda are pre-numbered and all numbers are accounted for
3. A reconciliation of the trial balance of customers' accounts with the general ledger control is prepared periodically
4. Receiving reports are prepared for all materials received and such reports are accounted for on a regular basis
 
A: Receiving reports are prepared for all materials received and such reports are accounted for on a regular basis
 
46. 
ch. 14: control that would prevent the misstatement
?A sales invoice for 5,200 was computed correctly but, by mistake, was key-entered as 2,500 to the sales journal and to the A/R master file. The customer remitted only 2,500; the amount on his monthly statement.

1. Pre-listing and predetermined totals are used to control postings
2. Sales invoice numbers, prices, discounts, extensions, and footings are independently checked
3. The customers' monthly statements are verified and mailed by a responsible person other than the bookkeeper who prepared them
4. Unauthorized remittance deductions made by customers or other matters in dispute are investigated promptly by a person independent of the A/R function
 
A: Pre-listings and predetermined totals are used to control postings
 
47. 
ch. 14: control that would prevent the misstatement
?Copies of sales invoices show different unit prices for apparently identical items?

1. All sales invoices are checked as to all details after their preparation
2. Differences reported by customers are satisfactorily investigated
3. Statistical sales data are compiled and reconciled with recorded sales
4. All sales invoices are compared with customer's purchase orders
 
A: All sales invoices are checked as to all details after their preparation
 
48. 
ch.14
?Auditors sometimes use comparison of rations as audit evidence. For example an unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

1. Unrecorded acquisitions
2. Unrecorded sales
3. Merchandise acquisitions being charged to selling and general expense
4. Fictitious sales
 
A: Unrecorded sales
 
49. 
ch. 14
?An auditor is performing substantive tests of transactions for sales. One step is to trace a sample of debit entries from the accounts receivable master file back to the supporting duplicate sales invoices. What will the auditor intend to establish by this step?

1. Sales invoices represent existing sales
2. All sales have been recorded
3. All sales invoices have been correctly posted to customer accounts
4. Debit entries in the accounts receivable master file are correctly supported by sales invoices
 
A: Debit entries in the accounts receivable master file are correctly supported by sales invoices
 
50. 
ch. 14
?To verify that all sales transactions have been recorded, a substantive test of transactions should be completed on a representative sample drawn from?

1. Entries on the sales journal
2. The billing clerk's file of sales orders
3. A file of duplicate copies of sales invoices for which all pre-numbered forms in the series have been accounted
4. The shipping clerk's file of duplicate copies of bills of lading
 
A: The shipping clerk's file of duplicate copies of bills of lading