Purchase cutoff procedures should be designed to test whether all inventory a. Purchased and received before the end of the year was paid for. b. Ordered before the end of the year was received. c. Purchased and received before the end of the year was recorded. d. Owned by the entity is in the possession of the entity at the end of the year.
> List the tools that can document the understanding of internal control.
> While net income before taxes is frequently used for calculating overall materiality, discuss circumstances when total assets or revenues might be better bases for calculating overall materiality.
> Why does the “audit testing hierarchy” begin with tests of controls and substantive analytical procedures?
> The AICPA performs a number of functions that directly bear on independent auditors of nonpublic entities, including promulgation of rules and standards. List four types of rules or standards issued by the AICPA.
> Auditors use various audit techniques to gather evidence when an entity’s accounting information is processed using IT. Select the audit procedure from the following list and enter it in the appropriate place on the grid. Audit procedu
> Mead, CPA, was engaged to audit Jiffy Company’s financial statements for the year ended August 31. Mead is applying sampling procedures. During the prior years’ audits Mead used classical variables sampling in performing tests of controls on Jiffy’s acco
> You are an audit manager for Lipske & Griffin, CPAs, who is completing the audit of Gold City Regional Bank’s ICFR for the year ended December 31, 2018. The report will be submitted to the engagement partner who reviews matters thoroughly and agreed with
> Assume that scenario (a) in Problem 7-36 is a material weakness. Prepare a draft of the auditor’s report for an audit of ICFR. Assume that Lorenz’s auditor is issuing a separate report on internal control. Data from Problem 7-36: Following are examples
> In obtaining evidential matter in support of financial statement assertions, the auditor develops specific audit procedures to address those assertions. Required: Hillmart is a retail department store that purchases all goods directly from wholesalers o
> Management makes assertions about components of the financial statements. Match the management assertions shown in the left-hand column with the proper description of the assertion shown in the right-hand column. Management Assertion Description a.
> In obtaining evidence in support of financial statement assertions, the auditor develops specific audit procedures to access those assertions. Required: All’s Fair Appliance Company is an appliance wholesaler. Select the most appropria
> Following are audit procedures that are normally conducted in the purchasing process and related accounts. 1. Test a sample of purchase requisitions for proper authorization. 2. Test transactions around year-end to determine if they are recorded in the p
> Assertions are expressed or implied representations by management that are reflected in the financial statement components. The auditor performs audit procedures to gather evidence to test those assertions. Required: Your client is All’
> Match the term to the definition. a. Attribute sampling b. Desired confidence level 1. The possibility that the sample drawn is not representative of the population and leads to an incorrect conclusion 2. Relies on the auditor's judgment to determin
> Which of the following types of audit evidence is the least reliable? a. Pre numbered purchase order forms prepared by the entity. b. Bank statements obtained from the entity. c. Test counts of inventory performed by the auditor. d. Correspondence from t
> Which of the following presumptions is least likely to relate to the reliability of audit evidence? a. The more effective internal control, the more assurance it provides about the accounting data and financial statements. b. An auditor’s opinion is form
> Bentley Bros. Book Company publishes more than 250 fiction and nonfiction titles. Most of the company’s books are written by southern authors and typically focus on subjects popular in the region. The company sells most of its books to major retail store
> A written understanding between the auditor and the entity concerning the auditor’s responsibility for fraud is usually set forth in a(n) a. Internal control letter. b. Letter of audit inquiry. c. Management letter. d. Engagement letter.
> Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s a. Awareness of the consistency in the application of generally accepted accounting principles between periods
> Which of the following best describes the general character of the section of the “Principles Underlying an Audit of Financial Statements,” titled “Performance”? a. Description of the competence, independence, and professional care of persons performing
> Which of the following statements best describes management’s and the external auditor’s respective levels of responsibility for a public company’s financial statements? a. Management and the external auditor share equal responsibility for the fairness o
> Which of the following audit procedures would probably provide the most reliable evidence concerning the entity’s assertion of rights and obligations related to inventory? a. Tracing of test counts noted during the entity’s physical count to the entity’s
> An auditor would probably be least interested in which of the following fields in an electronic perpetual inventory file? a. Economic reorder quantity. b. Warehouse location. c. Date of last purchase. d. Quantity sold.
> Periodic or cycle counts of selected inventory items are made at various times during the year rather than via a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventory at interim dates? a. Comple
> Inquiries of warehouse personnel concerning possibly obsolete or slow-moving inventory items provide assurance about management’s assertion of a. Completeness. b. Existence. c. Presentation. d. Valuation.
> When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that a. All goods purchased before year-end are received before the physical inventory count. b. No goods held on consignment for customers ar
> After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items a. Included in the listing have been counted. b. Represented by inventory tags are included in the l
> The auditors for Weston University are conducting their audit for the fiscal year ended December 31, 2018. Specifically, the audit firm is now focusing on the audit of revenue from this season’s home football games. While planning the audit of sales of f
> An entity maintains perpetual inventory records in both quantities and dollars. If the level of control risk were set at high, an auditor would probably a. Insist that the entity perform physical counts of inventory items several times during the year. b
> Which of the following internal control activities is most likely to address the completeness assertion for inventory? a. The work-in-process account is periodically reconciled with subsidiary records. b. Employees responsible for custody of finished goo
> An auditor’s tests of controls over the issuance of raw materials to production would most likely include a. Reconciliation of raw materials and work-in-process perpetual inventory records to general ledger balances. b. Inquiry of the custodian about the
> Independent internal verification of inventory (i.e., proper segregation of duties) occurs when employees who a. Issue raw materials obtain materials requisitions for each issue and prepare daily totals of materials issued. b. Compare records of goods on
> Which of the following would most likely be an internal control activity designed to detect errors and fraud concerning the custody of inventory? a. Periodic reconciliation of work in process with job cost sheets. b. Segregation of functions between gene
> Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions? a. Inventory manager does not have ability to record inventory transactions. b. Summary of the rece
> The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and that a. Independent internal verification of activity reports is established. b. Transfers to the f
> An auditor is most likely to perform substantive tests of details on payroll transactions and balances when a. Cutoff tests indicate a substantial amount of accrued payroll expense. b. The level of control risk relative to payroll transactions is set at
> Effective control activities over the payroll function may include a. Reconciliation of totals on job time sheets with job reports by employees responsible for those specific jobs. b. Verification of agreement of job time sheets with employee recorded ho
> Which of the following audit tests would most likely be used to test the occurrence assertion for payroll transactions? a. Trace a sample of time sheets to the payroll register. b. Re compute the mathematical accuracy of a sample of payroll checks. c. Tr
> Part I. Lernout & Hauspie (L&H) was the world’s leading provider of speech and language technology products, solutions, and services to businesses and individuals worldwide. Both Microsoft and Intel invested millions in L&H. However, accounting scandals
> Why is independence such an important requirement for auditors? How does independence relate to the agency relationship between owners and managers?
> It would be appropriate for the payroll department to be responsible for which of the following functions? a. Approval of employee time records. b. Preparation of periodic governmental reports as to employees’ earnings and withholding taxes. c. Maintenan
> An auditor who is testing IT controls in a payroll system would most likely use test data (discussed in Advanced Module 2 in Chapter 7) that contain conditions such as a. Deductions not authorized by employees. b. Overtime not approved by supervisors. c.
> The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the a. Human resource function from the controllership function. b. Administrative controls from the internal accounting controls. c. Authorization o
> For an appropriate segregation of duties, journalizing and posting summary payroll transactions should be assigned to a. The treasurer’s department. b. General accounting. c. Payroll accounting. d. The timekeeping department.
> In meeting the control objective of safeguarding of assets, which department should be responsible for the following? Distribution of Paychecks Custody of Unclaimed Paychecks a. Treasurer Treasurer b. Рayroll Treasurer C. Treasurer Payroll d. Payrol
> Which of the following procedures would most likely be considered a weakness in an entity’s internal controls over payroll? a. A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department’s payr
> During the year being audited, the Matthews Corporation changed from a system of recording time worked on time sheets to an IT payroll system in which employees record time in and out with magnetic cards. The IT system automatically updates all payroll r
> When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be a. Vendors with whom the entity has previously done business. b. Amounts recorded in the accounts payable
> Which of the following procedures is least likely to be performed before the balance sheet date? a. Test of internal control over cash. b. Confirmation of receivables. c. Search for unrecorded liabilities. d. Observation of inventory.
> Ando Company, a diversified manufacturer, has six divisions that operate throughout the United States and Puerto Rico. Ando has historically allowed its divisions to operate autonomously. Ando does not have an internal audit department and corporate inte
> Which of the following audit procedures is best for identifying unrecorded trade accounts payable? a. Examination of unusual relationships between monthly accounts payable balances and recorded cash payments. b. Reconciliation of vendors’ statements to t
> To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all a. Vendor invoices. b. Purchase orders. c. Receiving reports. d.
> For effective internal control purposes, which of the following individuals should be responsible for mailing signed checks? a. Receptionist. b. Treasurer. c. Accounts payable clerk. d. Payroll clerk.
> In a properly designed purchasing process, the same employee most likely would match vendors’ invoices with receiving reports and a. Post the detailed accounts payable records. b. Re compute the calculations on vendors’ invoices. c. Reconcile the account
> Which of the following control activities is not usually performed in the accounts payable department? a. Matching the vendor’s invoice with the related receiving report. b. Approving vouchers for payment by having an authorized employee sign the voucher
> Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the a. Department that initiated the requisition. b. Receiving department. c. Purchasing agent. d. Accounts payable departmen
> When goods are received, the receiving clerk should match the goods with a. The purchase order and the requisition form. b. The vendor invoice and the purchase order. c. The vendor shipping document and the purchase order. d. The vendor invoice and the v
> 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 a. Cancelation of the supporting documents. b. Entry of the check amou
> In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity’s aging of receivables to support management’s financial statement assertion of a. Existence. b. Valuation and allocation. c. Completeness. d. Ri
> An auditor should perform alternative procedures to substantiate the existence of accounts receivable when a. No reply to a positive confirmation request is received. b. No reply to a negative confirmation request is received. c. The collectibility of th
> On February 14, 2013, former city comptroller and treasurer of Dixon, IL, Rita Crundwell was sentenced to 191̸2 years in prison for diverting $53 million from city funds for her own benefit. It appears that the fraud began in 1990 at a relatively small a
> The negative request form of accounts receivable confirmation is useful particularly when The Number of Consideration by the Recipient Is The Assessed Level of Control Risk Relating to Receivables Is Small Balances Is Low High Likely Unlikely Likely
> Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because a. A majority of recipients usually lack the willingness to respond objectively. b. Some recipients may report incorrect balances tha
> Which of the following is most likely to be detected by an auditor’s review of an entity’s sales cutoff? a. Unrecorded sales for the year. b. Lapping of year-end accounts receivable. c. Excessive sales discounts. d. Unauthorized goods returned for credit
> If the number of days’ sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated? a. Existence or occurrence. b. Completeness. c. Rights and obl
> If accounts receivable turnover (credit sales/receivables) was 7.1 times last year compared to only 5.6 times in the current year, it is possible that there were a. Unrecorded credit sales in the current year. b. Unrecorded cash receipts last year. c. Mo
> Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor? a. Understating the sales journal. b. Overstating the accounts receivable control
> Smith Corporation has numerous customers. A customer file is maintained and includes a customer record with a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exce
> Which of the following internal controls would be most likely to deter the lapping of collections from customers? a. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries. b. Authorization of
> Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? a. The billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the cu
> For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve a. Employee overtime wages. b. Credit granted to customers. c. Write-offs of customer accounts. d. Cash disbursements.
> Koss Corporation is a publicly traded company that designs and sells stereo headphones. The Koss family controls a majority of the Company’s stock. On November 17, 2010, Sujata “Sue” Sachdeva, the former Vice-President of Finance was sentenced to 11 year
> Which of the following would most likely be an advantage in using classical variables sampling rather than monetary-unit sampling? a. An estimate of the standard deviation of the population’s recorded amounts is not required. b. The auditor rarely needs
> In classical variables sampling, which of the following must be known in order to estimate the appropriate sample size required to meet the auditor’s needs in a given situation? a. The qualitative aspects of misstatements. b. The total dollar amount of t
> Which of the following statements concerning the auditor’s use of statistical sampling is correct? a. An auditor needs to estimate the dollar amount of the standard deviation of the population in order to use classical variables sampling. b. An assumptio
> An auditor is performing substantive procedures of pricing and extensions of perpetual inventory balances consisting of a large number of items. Past experience indicates that there may be numerous pricing and extension errors. Which of the following sta
> How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details? Increase in Tolerable Misstatement Increase in Assessed Level of Control Risk Decrease sample size Decrease sam
> Which of the following statements concerning monetary-unit sampling is correct? a. The sampling distribution should approximate the normal distribution. b. Overstated units have a lower probability of sample selection than units that are understated. c.
> The risk of incorrect acceptance relates to the a. Effectiveness of the audit. b. Efficiency of the audit. c. Planning materiality. d. Allowable risk of tolerable misstatement.
> Considering each independently, a change in which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? Expected Misstatement Tolerable Misstatement a. No No b. Yes Yes C.
> A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? a. Greater reliance on internal controls. b. Greater reliance
> Which of the following sampling methods would be used to estimate a numeric measurement of a population, such as a dollar value? a. Random sampling. b. Numeric sampling. c. Attribute sampling. d. Variable sampling.
> On September 2, 2010, the Securities & Exchange Commission brought an action against Sujata Sachdeva, vice president of finance, and Koss senior accountant and subordinate, Julie Mulvaney, who allegedly helped her cover up the fraudulent scheme. The SEC
> As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this situation is that a. The deviation rates of both the auditor’s sample and the popul
> Assume an auditor is evaluating a statistical attribute sample of 50 items that resulted in three deviations. What should the auditor conclude if the tolerable deviation rate is 7 percent, the expected population deviation rate is 5 percent, and the allo
> Which of the following statements is correct concerning statistical sampling in tests of controls? a. Deviations from controls at a given rate usually result in misstatements at a higher rate. b. As the population size doubles, the sample size should als
> The following table depicts the possible outcomes for the auditor’s estimated computed upper deviation rate based on a sample relative to the auditor’s tolerable deviation rate (i.e., the computed upper deviation rate
> Based on the information above, the planned allowance for sampling risk was a. 5½ percent. b. 4½ percent. c. 3½ percent. d. 1 percent.
> In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the a. Tolerable deviation rate (7 percent) was less than the computed upper deviation rate (8 percent). b. Expected populat
> Which of the following combinations results in the greatest decrease in sample size in an attribute sample for a test of controls? An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a sta
> When assessing the tolerable deviation rate, the auditor should consider that, while deviations from control procedures increase the risk of material misstatements, such deviations do not necessarily result in misstatements. This explains why a. A record
> Samples to test internal controls are intended to provide a basis for an auditor to conclude whether a. The controls are operating effectively. b. The financial statements are materially misstated. c. The risk of incorrect acceptance is too high. d. Mate
> An auditor’s flowchart of an entity’s accounting system is a diagrammatic representation that depicts the auditor’s a. Program for tests of controls. b. Understanding of the system. c. Understanding of the types of fraud that are probable, given the pres
> Mincin, CPA, is the auditor of the Raleigh Corporation. Mincin is considering the audit work to be performed in the accounts payable area for the current year’s engagement. The prior year’s working papers show that confirmation requests were mailed to 10
> An auditor anticipates assessing control risk at a low level in an IT environment. Under these circumstances, on which of the following controls would the auditor initially focus? a. Data capture controls. b. Application controls. c. Output controls. d.
> Significant deficiencies are matters that come to an auditor’s attention that should be communicated to an entity’s audit committee because they represent a. Disclosures of information that significantly contradict the auditor’s going concern assumption.
> SOC 1, Type 2 reports issued by the service organization’s auditor typically a. Provide reasonable assurance that their financial statements are free of material misstatements. b. Ensure that the entity will not have any misstatements in areas related to
> The highest-quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by a. Inspection of documents prepared by a third party but which contain the initials of those applying entity controls. b. Observation b
> Which of the following audit techniques would most likely provide an auditor with the least assurance about the effectiveness of the operation of a control? a. Inquiry of entity personnel. b. Re performance of the control by the auditor. c. Observation o
> Assessing control risk below high involves all of the following except a. Identifying specific controls to rely on. b. Concluding that controls are ineffective. c. Performing tests of controls. d. Analyzing the achieved level of control risk after perfor
