Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable? a. Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence. b. Write-offs must be supported by an aging schedule showing that only receivables overdue several months have been written off. c. Write-offs must be approved by the cashier who is in a position to know whether the receivables have, in fact, been collected. d. Write-offs must be authorized by company field sales employees who are in a position to determine customers’ financial standing.
> What inventory information should auditors document?
> For each of the following independent events, indicate the (1) effect of the error or fraud on the financial statements and (2) what auditing procedures could have detected the misstatement resulting from error or fraud. a. The physical inventory count o
> Why do auditors consider inventory errors pervasive?
> What are some of the specific relevant aspects of management’s control over the estimation process? What are some inquiries auditors can make?
> All corporate capital stock transactions should ultimately be traced to the a. Minutes of the meetings of the board of directors. b. Cash receipts journal. c. Cash disbursements journal. d. Numbered stock certificates.
> An auditor reviews job cost sheets to test which transaction assertion? a. Occurrence. b. Completeness. c. Accuracy. d. Classification.
> If a company does not monitor notes payable for due dates and interest payment dates in relation to financial statement dates, what misstatements can appear in the financial statements?
> Define and give examples of off-balance-sheet information. Why should auditors be concerned with such items?
> What information about capital stock could be confirmed with outside parties? How could the auditors corroborate this information?
> How can confirmations be used in auditing (a) stockholder capital accounts and (b) notes and bonds payable?
> What are some of the important assertions found in the long-term liability accounts?
> What are some of the important assertions found in stockholders’ equity account balances and disclosures?
> ACE Corporation does not conduct a complete annual physical count of purchased parts and supplies in its principal warehouse but uses statistical sampling to estimate the year-end inventory. ACE maintains a perpetual inventory record of parts and supplie
> How can auditors gain assurance about fair value estimates in the investment cycle?
> How can confirmations be used in auditing investments in stocks?
> What are some of the typical areas of concern to auditors involving investment accounts?
> Are these specific fraud detection procedures designed to detect fraudulent financial reporting or misappropriation of assets? Explain.
> The auditors should insist that a representative of the client be present during the inspection and count of securities to a. Lend authority to the auditors’ directives. b. Detect forged securities. c. Coordinate the return of all securities to proper lo
> When a client company does not maintain its own capital stock records, the auditors should obtain written confirmation from the transfer agent and registrar concerning a. Restrictions on the payment of dividends. b. The number of shares issued and outsta
> The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense in the financial statements is to a. Evaluate internal control over securities. b. Determine the validity of prepaid i
> If the auditors discover that the carrying amount of a client’s investments is overstated because of a loss in value that is other than a temporary decline in market value, they should insist that a. The approximate market value of the investments be sho
> Which of the following is the most important audit consideration when examining the stockholders’ equity section of a client’s balance sheet? a. Changes in the capital stock account are verified by an independent stock transfer agent. b. Stock dividends
> In connection with the audit of an issue of long-term bonds payable, the audit team should a. Determine whether bondholders are persons other than owners, directors, or officers of the company issuing the bond. b. Calculate the effective interest rate to
> In the audit of investment securities, auditors develop specific audit assertions related to the investments. They then design specific substantive procedures to obtain evidence about each of these assertions. Following is a selection of investment secur
> Your client took a complete physical inventory count under your observation as of December 15 and adjusted the inventory control account (perpetual inventory method) to agree with the physical inventory. After considering the count adjustments as of Dece
> You are in charge of the audit of the financial statements of Demot Corporation for the year ended December 31. The corporation has a policy of investing its surplus funds in marketable securities. Its stock and bond certificates are kept in a safe depos
> Union Pacific Corp. opened its new 19-story, $260 million headquarters in Omaha, Nebraska. The railroad operator is the owner of the city’s largest building, the Union Pacific Center. Under an initial operating lease, Union Pacific guaranteed 89.9 percen
> Describe the purpose and give examples of specific fraud detection procedures in the acquisition and expenditure cycle.
> Describe the purpose and give examples of audit procedures in the search for unrecorded liabilities.
> How would substantive procedures for accounts payable be affected by (a) a low risk of material misstatement or (b) a high risk of material misstatement?
> List the management reports and computer files that can be used for audit evidence. What information in them can be useful to auditors?
> What population of documents would an auditor examine to determine whether (a) all authorized production was completed and placed in inventory or recorded as scrap and (b) finished goods inventory was actually produced and the costs were accounted for pr
> How does the production order record provide a control over the quantity of materials used in production?
> Describe how the functions of (a) authorization of production transactions, (b) recording of these transactions, and (c) physical custody of inventories can be separated among the production, inventory, and cost accounting departments.
> During the audit of Mason Company Inc. for the calendar year 2014, you noted that the company produces aluminum cans at the rate of about 40 million units annually. On the plant tour, you noticed a large stockpile of raw aluminum in storage. Your invento
> Which of the following questions would auditors most likely include on an internal control questionnaire for notes payable? a. Are assets that collateralize notes payable critically needed for the entity’s continued existence? b. Are two or more authoriz
> Sorenson Manufacturing Corporation was incorporated on January 3, 2016. The corporation’s financial statements for its first year’s operations were not examined by a CPA. You have been engaged to audit the financial st
> A client has a separate sales group for its largest “preferred” customers, a select group of customers who normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit pro
> To conceal a theft involving receivables, a dishonest bookkeeper might charge which of the following accounts? a. Miscellaneous income. b. Petty cash. c. Miscellaneous expense. d. Sales returns.
> Based on this information, the auditor interviewed the sales manager, who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor t
> Based on this information, the auditor is most likely concerned about a. Unrecorded costs. b. Improper credit approvals. c. Improper sales cutoff. d. Fictitious sales.
> Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities? a. Unrecorded purchases. b. Unrecorded sales. c. Merchandise purchases being c
> Why is it important to emphasize the existence assertion when auditing accounts receivable?
> What is dual-direction test of controls sampling in the revenue and collection cycle?
> What is a walkthrough of a sales transaction? How can the walkthrough work complement the use of an internal control questionnaire?
> What specific control procedures (in addition to separation of duties and responsibilities) should be in place and operating in internal controls governing revenue recognition?
> A good fraud prevention program should address employees’ motivation to steal from the company. The best method for doing this is to a. Establish employee assistance programs. b. Require a fidelity bond on all employees. c. Require reconciliations of all
> What effect do entity level controls have on the control risk assessments of an auditor?
> Embezzlement is a type of fraud that involves a. An employee’s misappropriating an employer’s money or property not entrusted to him or her. b. A manager’s falsification of financial statements for the purpose of misleading investors and creditors. c. An
> Which of the following would be the best protection for a company that wishes to prevent the “lapping” of trade accounts receivable? a. Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. b. Separate dut
> The control procedure “credit sales approved by credit department” is directed toward which assertion? a. Existence/Occurrence. b. Completeness. c. Valuation/Accuracy. d. Cutoff.
> When auditing the revenue and collection cycle, auditors normally select balances to confirm from the a. Sales journal. b. Accounts receivable listing. c. General ledger. d. Cash receipts listing.
> What are some red flags that may indicate a cover-up or concealment of a fraud?
> Sales are normally recorded on the date of the a. Customer purchase order. b. Bill of lading. c. Sales invoice. d. Payment check.
> Revenues are normally considered to have been earned when a. All possibility of return has expired. b. The company has substantially accomplished what it must to be entitled to the benefits. c. The cash is collected. d. Goods have been shipped.
> During the confirmation of accounts receivable, an auditor receives a confirmation via the client’s fax machine. Which of the following actions should the auditor take? a. Not accept the confirmation and select another customer’s balance to confirm. b. N
> An auditor is required to confirm accounts receivable if the accounts receivable balances are a. Older than the prior year. b. Material to the financial statements. c. Smaller than expected. d. Subject to valuation estimates.
> The financial records of the Movitz Company show that R. Dennis owes $4,100 on an account receivable. An independent audit is being carried out, and the auditors send a positive confirmation to R. Dennis. What is the most likely reason as to why a positi
> What is lapping? What procedures can auditors employ to detect lapping?
> Which of the following internal control activities most likely would deter 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
> 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
> 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
> When an audit team does not receive a response on a positive accounts receivable confirmation, a second request. b. Do nothing for immaterial balances. c. Examine shipping documents. d. Examine client correspondence files.
> The best way to enact a broad fraud prevention program is to a. Install airtight control systems of checks and supervision. b. Name an “ethics officer” who is responsible for receiving and acting on fraud tips. c. Place dedicated hotline telephones on wa
> Write-offs of doubtful accounts should be approved by a. The salesperson. b. The credit manager. c. The treasurer. d. The cashier.
> When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that a. Shipments to customers were invoiced. b. Shipments to customers were recorded as sales. c. Recorded sales were
> The negative request form of accounts receivable confirmation is useful particularly when the Assessed Level of Risk of Material Number of Small Balances Is Proper Consideration by the Recipient Is Misstatement Relating to Receivables Is a. Low Many
> When accounts receivable are confirmed at an interim date, auditors need not be concerned with a. Obtaining a summary of receivables transactions from the interim date to the year-end date. b. Obtaining a year-end trial balance of receivables, comparing
> In the audit of accounts receivable, the most important emphasis should be on the a. Completeness assertion. b. Existence assertion. c. Rights and obligations assertion. d. Presentation and disclosure assertion.
> When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to a. Sales invoices with shipping documents and customer sales invoices. b. Records of accounts receivable write-offs. c. Cash remittance lists and b
> Why should a list of cash remittances be made and sent to the accounting department? Wouldn’t it be easier to send the cash and checks to the accountants so they can enter the credits to customers’ accounts accurately?
> Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the a. Collectability of the balances confirmed. b. Ownership of the balances confirmed. c. Existence of the
> Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the a. Collectability of the balances confirmed. b. Ownership of the balances confirmed. c. Existence of the
> Upon receipt of customers’ checks in the mail room, a responsible employee should prepare a remittance list that is forwarded to the cashier. A copy of the list should be sent to the a. Internal auditor to investigate the list for unusual transactions. b
> When auditing with “fraud awareness,” auditors should especially notice and follow up employee activities under which of these conditions? a. The company always estimates the inventory but never takes a complete physical count. b. The petty cash box is a
> You have identified relevant controls for several assertions within the revenue cycle, and you must use IDEA to perform several tests of controls. Required: a. ELM has a policy of using prenumbered customer order forms to help control for the completene
> For this exercise, your client, Bright IDEAs Inc., has provided you with data for two related files, a listing of sales invoices, and a listing of customers with credit limits. To test whether credit authorization controls are in place, the auditor must
> The following article was published in Newsday on February 9, 2009: Call for Probe of Ticket Sales Bruce Springsteen fans were victims of a “classic bait and switch” scam by the nation’s largest concert ticket seller, Senator Charles Schumer said yester
> The following four questions are taken from an internal control questionnaire. For each question, state (a) one test of controls procedure you could use to find out whether the control technique was really functioning and (b) what error or fraud could oc
> The following narrative description of a company’s cash receipts and billing system is in the auditors’ audit files: Rural Building Supplies Inc. is a single-store retailer that sells a variety of tools, garden supplies, lumber, small appliances, and ele
> The study and evaluation of management risk mitigation control is not easy. First, auditors must determine the risks and the controls subject to audit. Then they must find a standard by which performance of the control can be evaluated. Next they must sp
> You are the director of internal auditing of a large municipal hospital. You receive monthly financial reports prepared by the accounting department, and your review of them has shown that total accounts receivable from patients has steadily and rapidly
> What is the basic sequence of activities in the cash collection process?
> Your firm has audited the Rock Island Quarry Company for several years. Rock Island’s main revenue comes from selling crushed rock to construction companies from several quarries owned by the company in Illinois and Iowa. The rock is priced by weight, qu
> You are using computer audit software to prepare accounts receivable confirmations during the annual audit of the Eastern Sunrise Services Club. The company has the following data files: Master file—debtor credit record. Master file—debtor name and addre
> What can an auditor find using net worth analysis? Expenditure analysis?
> This case is designed like the ones in the chapter. Your assignment is to write the “audit approach” portion of the case, organized around these sections: Objective. Express the objective in terms of the facts supposedly asserted in financial records, ac
> Each morning the controller gets the prior day’s list of remittances, a copy of the payment report, and a copy of the deposit slip returned from the bank. When comparing these items, the controller would be able to determine that a. No checks were return
> Which of the following might be detected by auditors’ cutoff review and examination of sales journal entries for several days prior to the balance sheet date? a. Lapping year-end accounts receivable. b. Inflating sales for the year. c. Kiting bank balanc
> L. King, CPA, is auditing the financial statements of Cycle Company, a client that has receivables from customers arising from the sale of goods in the normal course of business. King is aware that the confirmation of accounts receivable is a generally a
> Exhibit 7.64.1 contains an arrangement of examples of transaction errors (lettered a–g) and a set of client control procedures and devices (numbered 1–15). Required: For each client control procedure numbered 1–15, write a test of controls that could pro
> Exhibit 7.64.1 contains an arrangement of examples of transaction errors (lettered a–g) and a set of client control procedures and devices (numbered 1–15). Required: For each error/control objective, identify the asse
> Exhibit 7.64.1 contains an arrangement of examples of transaction errors (lettered a–g) and a set of client control procedures and devices (numbered 1–15). Make a copy of the exhibit page and complete the following requirements. Required a. Opposite the
> The case below tells the actual story of a cash embezzlement scheme. The case has two major parts: (1) problem and (2) audit approach. For the case, please consider how the auditor may have discovered the cash embezzlement scheme. Problem Albert owned a
> Take a closer look at Exhibit 6.3 given below, Is there anything wrong with the bank statement? What are some ways to tell whether any of the amounts have been altered? 27 XFirst RepublicBank FIRST REPUBLICBANK AUSTIN, N.A. ACCOUNT P.0. BOX 908 60401
> The case below tells the actual story of a cash embezzlement scheme. The case has two major parts: (1) problem and (2) audit approach. For the case, please consider how the auditor may have discovered the cash embezzlement scheme. Problem The petty cash
> Which audit procedures are usually the most useful for auditing the existence assertion?
> An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most e
> Assume you have received a message from an informant regarding the following case. Your assignment is to write the “audit approach” portion of the case. a. Write a brief explanation of desirable controls, missing controls, and especially the kinds of “de
> You can use the computer-based Electronic Workpapers on the textbook website to prepare the net worth analysis required in this problem. Net worth analysis is performed when fraud has been discovered or is strongly suspected and the information to calcul
