Question: Which of the following is a reason

> The Runge Controls Corporation manufactures and markets electrical control systems: temperature controls, machine controls, burglar alarms, and the like. The company acquires electrical and semiconductor parts from outside vendors and assembles systems i

> Fraud risk factors are events or conditions that indicate I. An incentive or pressure to perpetrate fraud. II. An opportunity to carry out the fraud. III. An attitude or rationalization that justifies the fraudulent action. Which of the following stateme

> How can a proof of cash reveal unrecorded cash deposit and cash payment transactions?

> Is there anything odd about these two situations? (a) A check to Larson Electric Supply was endorsed with “Larson Electric” above the signature of “Eloise Garfunkle.” (b) Numerous checks were issued and dated December 25, January 1, and July 4.

> Incorporating elements of unpredictability in the selection of audit procedures to be performed by auditors include all of the following except a. Varying the timing of the audit procedures. b. Selecting items for testing that have lower amounts or are o

> In what way can audit procedures be modified to address assessed fraud risks? a. Obtain more reliable information. b. Perform procedures close to year-end. c. Apply computer-assisted techniques to all items. d. All of these are valid modifications.

> If the auditor believes that a misstatement is or might be intentional and the effect on the financial statements could be material or cannot be readily determined, the auditor should do which of the following? a. Inquire of management as to the possibil

> Which of these arrangements of duties could most likely lead to an embezzlement or theft? a. The inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records

> Allison Everhart, an employee in accounts payable, believes she can run a fictitious invoice through the accounts payable system and collect the money. She knows payments are subject to an audit. Which account would be the best place to hide the fraud? a

> Which of the following combinations is a good way to conceal employee fraud but an ineffective means of perpetrating management (financial reporting) fraud? a. Overstating sales revenue and overstating customer accounts receivable balances. b. Overstatin

> Fraud risk factors are events or conditions that indicate which of the following? a. An opportunity to carry out a fraud. b. An attitude or rationalization that justifies a fraudulent action. c. An incentive or pressure to perpetrate fraud. d. All of the

> Which of the following is least indicative of fraudulent activity? a. Numerous cash refunds have been made to different people at the same post office box address. b. Internal auditors cannot locate several credit memos to support reductions of customers

> A code of ethics is an important element of a fraud prevention program. Which of the following would diminish the effectiveness of a company’s code of conduct? a. The establishment of a chief ethics officer. b. The establishment of a hotline for reportin

> How does a schedule of interbank transfers show improper cash transfer transactions?

> Is capability required to commit a fraud? Is capability part of opportunity, or should it be considered a separate element of fraud?

> Give some examples of rationalizations that people have used to excuse fraud. Can you imagine using them?

> Which of the following control activities could prevent a paid disbursement voucher from being presented for payment a second time? a. Vouchers should be prepared by individuals who are responsible for signing disbursement checks. b. Disbursement voucher

> What conditions provide opportunities for employee fraud?

> What are some pressures that can cause honest people to contemplate fraud? List some egocentric and ideological pressures as well as economic ones.

> What does a fraud perpetrator look like? How does one act?

> What are the defining characteristics of employee fraud? Embezzlement?

> Which three events should generally have occurred prior to the recognition of sales revenue?

> Why do you think companies use revenue recognition as a primary means for inflating profits?

> Why is inherent risk for the existence assertion for accounts receivable often set higher than inherent risk for the completeness assertion?

> Why do auditors focus on revenue as a significant account and the occurrence of revenue as a relevant assertion in the revenue cycle?

> During an audit of cash, the auditor is most concerned with the management assertion of a. Existence. b. Rights and obligations. c. Valuation or allocation. d. Occurrence.

> Suppose that you selected a sample of customers’ accounts receivable and wanted to find supporting evidence for the entries in the accounts. Where would you go to vouch the debit entries? What would you expect to find? Where would you go to vouch the cre

> What is check kiting? How might auditors detect kiting?

> What is the basic sequence of activities and accounting in a revenue and collection cycle?

> In the case of Bill Often, Bill Early, what information might have been obtained from inquiries? From tests of controls? From observations? From confirmations?

> In the case of The Canny Cashier, name one control that could have revealed signs of the embezzlement

> What are the goals of dual-direction testing regarding an audit of the accounts receivable and cash collection system?

> What procedures should be performed to determine the adequacy of the allowance for doubtful accounts?

> What special care should be taken with regard to examining the sources (e.g., faxed copy) of accounts receivable confirmation responses?

> What are some justifications for not using confirmations of accounts receivable on a particular audit?

> Distinguish between positive and negative confirmations. Under what conditions would you expect each type of confirmation to be appropriate?

> What analytical procedures might be informative regarding the existence assertion?

> Which of the following control activities would best protect against the preparation of improper or inaccurate cash disbursements? a. All checks must be signed by an officer designated by the board of directors. b. All signed checks must be reviewed and

> What is a cutoff bank statement? How do auditors use it?

> In preparing for the audit of cash, the auditors perform analytical procedures concerning cash balances. Which of the following would be the best source of information for use in the estimate of cash? a. Prior-years’ balances. b. Management inquiry. c. C

> Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances? a. The cashier prepares the daily deposit. b. The cashier makes the daily deposit at a local bank. c. The cashier posts the receipts to

> Why is the Auditing Standards Board’s set of management assertions important to auditors? Do these assertions differ from those included in PCAOB standards? If so, how are they different?

> Which of the following would be considered an assurance engagement? a. Giving an opinion on a prize promoter’s claims about the amount of sweepstakes prizes awarded in the past. b. Giving an opinion on the conformity of the financial statements of a univ

> What is the concept of reasonable assurance? What are the key limitations of an internal control system?

> An auditor’s purpose in auditing the information contained in the pension footnote most likely is to obtain evidence concerning management’s assertion about a. Rights and obligations. b. Existence. c. Presentation and disclosure. d. Valuation.

> Simon Blank Construction Company has two divisions. The president (Chris Simon) manages the roofing division. Simon delegated authority and responsibility for management of the modular manufacturing division to John Gault. The company has a competent acc

> When auditing the accounts receivable account on the balance sheet, an auditor’s procedures most likely would focus primarily on management’s assertion of a. Existence. b. Completeness. c. Presentation and disclosure. d. Rights and obligations.

> During an audit of an entity’s stockholders’ equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management’s a

> An auditor selected items for test counts from the client’s warehouse during the physical inventory observation. The auditor then traced these test counts into the detailed inventory listing that agreed to the financial statements. This procedure most li

> Which of the following best describes the focus of the following engagements? Consulting Services Engagement Attestation Assurance Auditing Engagement Engagement Engagement a. Any information Financial statements Advice and decision Financial inform

> Which of the following topics is not addressed in the auditors’ report for a public entity? a. Responsibilities of the auditor and management in the financial reporting process. b. Absolute assurance regarding the fairness of the entity’s financial state

> What is meant by (a) vouching, (b) tracing, and (c) scanning? What is the difference between vouching and tracing?

> In auditing the accrued liabilities account on the Balance Sheet, an auditor’s procedures most likely would focus primarily on management’s assertion of a. Existence or occurrence. b. Completeness. c. Presentation and disclosure. d. Valuation or allocati

> Which of the following audit procedures probably would provide the most reliable evidence related to the entity’s assertion of rights and obligations for the inventory account? a. Trace test counts noted during physical count to the summarization of quan

> Substantial equivalency refers to a. An auditor’s tendency not to believe management’s assertions without sufficient corroboration. b. Providing consulting work for another firm’s audit client in exchange for the other firm’s providing consulting service

> When planning the audit of internal controls for an issuer, the audit team should a. Identify significant accounts, locations, and assertions. b. Conduct a walkthrough of the internal control process. c. Make inquiries of employees regarding the existenc

> The Sarbanes–Oxley Act of 2002 generally prohibits public accounting firms from a. Acting in a managerial decision-making role for an audit client. b. Auditing the firm’s own work on an audit client. c. Providing tax consulting to an audit client without

> Must the overall understanding of internal control always be followed by assessment and testing phases? Explain.

> The chairman of the board of Hughes Corporation proposed that the board hire as controller a CPA who had been the manager of the team that conducted Hughes Corporation’s audit engagement. The chairman thought that hiring this person would make the annual

> The 12 partners of a regional public accounting firm met in special session to discuss audit engagement efficiency. Jones spoke up, saying, “We all certainly appreciate the firm wide policies set up by Martin and Smith, especially in connection with the

> When an auditor reviews additions to the equipment (fixed asset) account to make sure that fixed assets are not overstated, she wants to obtain evidence as to management’s assertion regarding a. Completeness. b. Existence. c. Valuation and allocation. d.

> When auditing merchandise inventory at year-end, the auditor performs audit procedures to obtain evidence that no goods held on consignment are included in the client’s ending inventory balance. This audit procedure provides assurance about which managem

> When auditing merchandise inventory at year-end, the auditor performs audit procedures to ensure that all goods purchased before year-end are received before the physical inventory count. This audit procedure provides assurance about which management ass

> The risk to investors that a company’s financial statements may be materially misleading is called a. Client acceptance risk. b. Information risk. c. Moral hazard. d. Business risk.

> Identify the four cycles featured in Dunder-Mifflin’s accounting system featured in Exhibit 3.3A. Next, list the financial statement accounts that can be identified within each of the cycles identified as featured in Exhibit 3.3B.

> Jones, CPA, is planning the audit of Rhonda’s Company. Rhonda verbally asserts to Jones that all expenses for the year have been recorded in the accounts. Rhonda’s representation in this regard a. Is sufficient evidence for Jones to conclude that the com

> Kramer, CPA, consulted an independent appraiser regarding the valuation of fine art for a not-for-profit museum. Consultation with the appraiser in this case would a. Be considered as exercising proper due care. b. Be considered a failure to follow gener

> Identify three different categories of fraud risk factors. Next, for each category, what are some of the conditions that can help contribute to a higher likelihood of financial statement fraud?

> The objective in an auditor’s review of credit ratings of a client’s customers is to obtain evidence related to management’s assertion about a. Completeness. b. Existence. c. Valuation and allocation. d. Rights and obligations. e. Occurrence.

> Which of the following is most closely related to the responsibilities principle? a. The auditors’ responsibility to issue a report as a result of their examination. b. The requirement that auditors gather sufficient, appropriate evidence upon which to b

> Performance audits usually include [two answers] a. Financial audits. b. Economy and efficiency audits. c. Compliance audits. d. Program audits.

> The organization primarily responsible for ensuring that public officials are using public funds efficiently, economically, and effectively is the a. Governmental Internal Audit Agency (GIAA). b. Central Internal Auditors (CIA). c. Securities and Exchang

> What requirements are usually necessary to become licensed as a certified public accountant? a. Successful completion of the Uniform CPA Examination. b. Experience in the accounting field. c. Education. d. All of the above.

> Breaux & Co. CPAs require that all audit documentation indicate the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following? a. Independence. b. Adequate competence and capabilities. c. Adequate plan

> The primary objective of compliance auditing is to a. Give an opinion on financial statements. b. Develop a basis for a report on internal control. c. Perform a study of effective and efficient use of resources. d. Determine whether client personnel are

> What is meant by a “top-down” approach to evaluation of internal controls?

> Independent auditors of financial statements perform audits that reduce a. Business risks faced by investors. b. Information risk faced by investors. c. Complexity of financial statements. d. Timeliness of financial statements

> A challenge facing auditors is the wide array of professional guidance available to them in the audits of different types of entities. Required: Describe Statements on Auditing Standards and Auditing Standards. In your description, identify which profes

> The Sarbanes–Oxley Act of 2002 prohibits public accounting firms from providing which of the following services to an audit client? a. Bookkeeping services. b. Internal auditing services. c. Valuation services. d. All of the above.

> What are the five types of general analytical procedures? List five sources of information for analytical procedures.

> Visit the website of the Institute of Internal Auditors (www.theiia.org), the Institute of Management Accountants (www.imanet.org), the Association of Certified Fraud Examiners (www.acfe.com), or the Information Systems Audit and Control Association (www

> Bankers who are processing loan applications from companies seeking large loans will probably ask for financial statements audited by an independent CPA because a. Financial statements are too complex for the bankers to analyze themselves. b. They are to

> According to the AICPA, the purpose of an audit of financial statements is to a. Enhance the degree of confidence that intended users can place in the financial statements. b. Express an opinion on the fairness with which they present financial position,

> What steps do audit teams follow in examining internal control over financial reporting?

> The primary difference between operational auditing and financial auditing is that in operational auditing a. The operational auditor is not concerned with whether the audited activity is generating information in compliance with financial accounting sta

> A determination of cost savings obtained by outsourcing cafeteria services is most likely to be an objective of a. Environmental auditing. b. Financial auditing. c. Compliance auditing. d. Operational auditing.

> In an attestation engagement, a CPA practitioner is engaged to a. Compile a company’s financial forecast based on management’s assumptions without expressing any form of assurance. b. Prepare a written report containing a conclusion about the reliability

> Internal Control Questionnaire Items: Assertions, Tests of Controls, and Possible Errors or Frauds. Following is a selection of items from the payroll processing internal control questionnaire in Exhibit 5.15. 1. Are names of terminated employees reporte

> It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that a. A potential conflict of interest always exists between the auditor and the management of the enterprise under audit. b. In au

> Cutoff tests designed to detect valid sales that occurred before the end of the year but have been recorded in the subsequent year would provide assurance about management’s assertion of a. Presentation and disclosure. b. Completeness. c. Rights and obli

> What type of opinion(s) would the audit team issue on the effectiveness of internal control over financial reporting if a material weakness in internal control exists? How would the standard report be modified?

> Each state has unique rules for certification concerning education, work experience, and residency. Visit the website for your state board of accountancy and download a list of the requirements for becoming a CPA in your state. Although not all of the st

> What is an audit committee? What are its duties?

> You are engaged to examine the financial statements of Spillane Company for the year ended December 31. Assume that on November 1, Spillane borrowed $500,000 from Second National Bank to finance plant expansion. The long-term note agreement provided for

> List and briefly explain each of the Auditing Standards Board’s management assertions. List at least one key question that auditors must answer with evidence related to each management assertion.

> What are the two primary ways to conduct substantive tests? Explain how the tests are different.

> Audits may be characterized as (a) financial statement audits, (b) compliance audits, (c) economy and efficiency audits, and (d) program results audits. The work can be done by independent (external) auditors, internal auditors, or governmental auditors

> Your neighbor, Loot Starkin, invited you to lunch yesterday. Sure enough, it was no “free lunch” because Loot wanted to discuss the annual report of Dodge Corporation. He owns Dodge stock and just received the annual report. Loot says, “Our auditors prep

> Bigdeal Corporation manufactures paper and paper products and is trying to decide whether to purchase Smalltek Company. Smalltek has developed a process for manufacturing boxes that can replace containers that use fluorocarbons for expelling a liquid pro

> Your audit manager has asked you to explain the PCAOB assertions by using an account on the balance sheet at your audit client. For the accounts receivable account, please define each of the PCAOB assertions, using the accounts receivable account as a wa