Auditing Exam #2 Prep

Study Guide

An auditor’s flowchart of an entity’s accounting system is a diagrammatic representation that depicts the auditor’s:

understanding of the system

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?

General controls.

Internal control is a process designed to provide reasonable assurance regarding the achievement of which objective?

• Effectiveness and efficiency of operations.

• Reliability of financial reporting.

• Compliance with applicable laws and regulations.

• All of these are correct

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?

Inquiry of entity personnel

An auditor’s primary consideration regarding an entity’s internal controls is whether they:

affect the financial statement assertions

Assessing control risk below high involves all of the following except:

concluding that controls are ineffective

After obtaining an understanding of an entity’s internal control system, an auditor may set control risk at high for some assertions because the auditor:

believes the internal controls are unlikely to be effective

The highest-quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by:

observation by the auditor of the employees performing control activities

Assessing control risk at a lower level involves all of the following except:

concluding that controls are ineffective.

A limit test is a:

test to ensure that a numerical value does not exceed some predetermined value.

An auditor performing an audit of internal control over financial reporting would be required to:

form an opinion on the effectiveness of internal control

Which of the following is not a primary objective of internal control as established by COSO?

Effective purchasing systems

The advantages of generalized audit software include all of the following except

it involves auditing while the data are being processed (real-time)

Which of the following audit procedures would an auditor be least likely to perform using a generalized audit software?

Investigating inventory for possible damaged goods

Which of the following is false?

The absence of misstatements in financial statements is considered convincing evidence that existing controls are effective.

An "integrated audit" as stated in Section 404 of the Sarbanes-Oxley Act means:

the auditor must conduct two audits, one on the effectiveness of internal control and one on the financial statements, in an integrated way.

When testing a computerized accounting system, which of the following is false regarding the test data approach?

The test data must consist of all possible valid and invalid conditions.

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods:

provide an objective basis for quantitatively evaluating sample risks.

For which of the following audit tests would an auditor most likely use attributes sampling?

Inspecting employee time cards for proper approval by supervisors.

To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the desired confidence level, and the:

expected population deviation rate.

An auditor is testing internal control procedures that are evidenced on an entity's vouchers. To select the vouchers for testing, the auditor obtains random numbers between the first and last voucher number in the period. If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the voucher:

has been properly voided.

For attributes sampling, of the three factors that enter into sample size determination, which two factors can the auditor adjust to reflect the importance of the control?

Tolerable deviation rate and confidence level.

Statistical sampling provides a technique for:

measuring the sufficiency of evidential matter.

The computed upper deviation rate is:

the sum of the sample deviation rate and an appropriate allowance for sampling risk.

Audit sampling is commonly used for which type of audit evidence?

Reperformance

As a result of tests of controls, an auditor over relied on internal control and decreased substantive testing. This overreliance occurred because the true deviation rate in the population was:

more than the deviation rate in the auditor's sample.

Which of the following procedures would ordinarily be expected to best reveal improper cutoff of sales at the balance sheet date?

Compare shipping documents with sales records.

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to assess the assertion of:

completeness.

To achieve good internal control, which department should perform the activities of matching shipping documents with sales orders?

Billing.

Which of the following internal control activities most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger?

Daily sales summaries are compared to daily postings to the accounts receivable ledger.

Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?

Employees involved in the credit-granting function are separated from the sales function.

Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?

Examine shipping documents for matching sales invoices.

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:

accuracy, valuation and allocation.

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be shipped that are not invoiced. The inadequate control activities could cause an:

understatement of revenues and receivables and an overstatement of inventory.

Audit documents often include an aged trial balance of accounts receivable as of the balance sheet date. This aging is used by the auditor to:

evaluate the allowance for doubtful accounts.

Immediately upon receipt of cash, a responsible employee should:

prepare a control listing.

If completeness is a concern for accounts payable, auditors will send accounts payable confirmations to:

primarily vendors with small or zero accounts payable balances

Budd, the purchasing agent for Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a C.O.D. basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over:

purchase orders.

For effective internal control over accuracy of transactions, the accounts payable department should compare the information on each vendor's invoice with the:

receiving report and the purchase order.

Substantive procedures to examine the cutoff assertion for accounts payable include:

selecting a sample of receiving reports around year-end and comparing dates on related vouchers to dates in the purchases journal.

Which of the following accounts is not affected by cash disbursement transactions?

Purchase returns.

Which of the following describes a temporary difference?

A timing difference between the recognition of revenue or expense under GAAP and tax purposes.

With respect to a small company's system of purchasing supplies, an auditor's primary concern should be to obtain satisfaction that supplies ordered and paid for have been:

received, counted, and checked to quantities and amounts on purchase orders and invoices.

A procedure that would most likely be used by an auditor in performing tests of control activities that involve segregation of functions but which leave no transaction trail is:

Observation.

To obtain evidential matter about control risk, an auditor selects tests from a variety of techniques including:

Inquiry

Audit evidence concerning proper segregation of duties ordinarily is best obtained by:

direct personal observation of the employees who apply the control activities.

Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of:

authorization, recording, and custody.

In evaluating internal control, the auditor is basically concerned that the system provides reasonable assurance that:

material misstatements have been prevented, or detected and corrected.

An entity’s internal controls are most relevant to the auditor when the policies and procedures:

affect the financial statement assertions.

It is important for the CPA to consider the competence of the entity's employees because their competence bears directly and importantly upon the:

achievement of the objectives of the system of internal control.

An "integrated audit":

is comprised of audits of internal control over financial reporting and of financial statements.

Management documentation of the ICFR assessment should include all of the following except:

documentation regarding every control in a process.

A modification of the standard report is required for all of the following conditions except:

management has concluded that internal controls are effective.

Which of the following is least likely to represent a material weakness in internal control for Flynt Corporation?

Flynt Corporation's computer systems were not working properly for two days; consequently, employees needed to do all reconciliations manually.

In nonstatistical sampling for tests of controls, increasing the desired confidence level results in a:

larger sample size.

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods:

provide an objective basis for quantitatively evaluating sample risks.

An auditor is testing internal control procedures that are evidenced on an entity's vouchers. To select the vouchers for testing, the auditor obtains random numbers between the first and last voucher number in the period. If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the voucher:

has been properly voided.

Jones, CPA, believes the industry-wide deviation rate of client billing errors is 3% and has established a tolerable deviation rate of 5%. In the review of client invoices, Jones should use

attributes sampling.

Which of the following most likely would give the most assurance concerning the valuation assertion for accounts receivable?

Assessing the allowance for uncollectible accounts for reasonableness.

In the confirmation of accounts receivable, the auditor would most likely:

require that confirmation requests be sent as soon as possible after fiscal year-end.

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be shipped that are not invoiced. The inadequate control activities could cause an:

understatement of revenues and receivables and an overstatement of inventory.

During a review of a small business entity's internal control system, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness?

The owner reviews credit memos before they are recorded.

When tracing a sample of shipping documents from throughout the year to the details of the sales invoices and to the sales journal and customers' accounts receivable subsidiary ledger, the auditor is testing the _____________ assertion.

completeness

In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of:

completeness.

In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?

Occurrence

As an in-charge auditor, you are reviewing a summary of control weaknesses in cash disbursement procedures. Which one of the following weaknesses, standing alone, should cause you the least concern?

Checks are signed by only one person.

The existence assertion for accounts payable includes:

determining whether all accounts payable actually are liabilities.

Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the entity's employees?

Prepare a schedule/listing of accounts payable.

Budd, the purchasing agent for Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a C.O.D. basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over:

purchase orders.