1. A set of characteristics that helps to define a seriousness about employees' attitudes about the control activities in a company is referred to as
A. Management assertions.
B. Control environment.
C. Control risk assessment.
D. Functional responsibilities.
2. Sound internal control can be described as separating all of the following duties and responsibilities except for
A. Transaction authorization.
C. Custody of, or direct access to, assets.
D. Hiring of employees.
3. The "obtaining an understanding" work phase (phase 1) of internal control evaluation would not give auditors an overall acquaintance with the client's
A. Control environment.
B. Information and communication system.
C. Control activity effectiveness.
D. Monitoring activities.
4. The internal control in small business is highly dependent on the
A. Separation of functional responsibilities.
B. Complexity of the client's internal controls.
C. Owner-manager's competence as well as ethics and integrity.
D. Bonding of employees.
5. Which of the following is the least important audit reason for the auditor's obtaining an understanding of a company's internal control?
A. To serve as a basis for constructive suggestions.
B. To plan subsequent substantive tests.
C. To identify types of possible misstatements that may occur.
D. To consider factors that may affect the risk of material misstatement.
6. If auditors assess control risk at the maximum level, they will tend to
A. Perform a great deal of additional tests of controls.
B. Perform a great deal of substantive testing during the audit.
C. Perform substantive tests at an interim date.
D. Perform more audit procedures using internal evidence.
7. If a control total were to be computed on each of the following data items, which would best be identified as a hash total for a payroll IT application?
A. Hours worked.
B. Total debits and total credits.
C. Net pay.
D. Department numbers.
8. Generally accepted auditing standards (GAAS) give auditors considerable discretion to decide the amount of work required to satisfy auditing standards guiding internal control evaluation and related audit planning. Which of the following descriptions best expresses the minimum amount of work permitted by GAAS for nonpublic companies?
A. Do not obtain an understanding of client environment, accounting, or control activities. Do not document the decision to assess control risk at maximum. Perform 100% substantive audit on all financial statement transactions and balances.
B. Obtain an understanding of client environment, accounting, and control activities. Document the decision to assess control risk at maximum. Perform an extensive but not 100% substantive audit on financial statement transactions and balances.
C. Obtain an understanding of client environment, accounting, and control activities, and perform detail tests of controls. Document the decision to assess control risk below the maximum. Perform restricted substantive audit on financial statement transactions and balances, considering the control risk assessment.
D. Obtain an understanding of client environment, accounting, and control activities, and perform detail tests of controls. Document the decision to assess control risk at zero. Perform no substantive audit on financial statement transactions and balances because zero control risk means that no errors or fraud can affect the accounts.
9. Which of the following is not an objective of internal controls over financial reporting as defined by the Sarbanes-Oxley Act?
A. Policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant.
B. Policies and procedures that provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant.
C. Policies and procedures that provide reasonable assurance regarding the compliance with applicable laws and regulations.
D. Policies and procedures that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the registrant's assets that could have a material effect on the financial statements.
10. Assessing control risk at below the maximum level most likely would involve
A Performing more extensive substantive tests with larger sample sizes than originally planned.
B. Reducing inherent risk for most of the assertions relevant to significant account balances.
C. Changing the timing of substantive tests by omitting interim-date testing and performing the tests at year-end.
D. Identifying specific internal control activities that are relevant to specific financial statement assertions.
11. According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to
A. Determine whether the company's controls are processing company data effectively.
B. Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed.
C. Determine that the company's employees are processing the controls according to the policy and procedure manuals at the company.
D. None of the above.
12. Tests of controls in a GAAS audit are required for
A. Obtaining evidence about the financial statement assertions.
B. Accomplishing control over the occurrence of recorded transactions.
C. Applying analytical procedures to financial statement balances.
D. Obtaining evidence about the operating effectiveness of client control activities.
13. Which of the following does not accurately summarize auditors' requirements regarding internal control?
A. Option A
B. Option B
C. Option C
D. Option D
14. If the auditors encounter a significant scope limitation in evaluating a public company's internal control over financial reporting, which of the following types of opinions on the effectiveness of the company's internal control over financial reporting would be appropriate?
A. Unqualified opinion or adverse opinion.
B. Qualified opinion or adverse opinion.
C. Unqualified opinion or disclaimer of opinion.
D. Disclaimer of opinion.
15. Significant deficiencies are defined as conditions that
A. Could adversely affect the organization's ability to initiate, record, process, and report financial data in the financial statements.
B. Result in a reasonable possibility that a material misstatement exists in financial statements.
C. Exist when the design or operation of a control does not allow the company's management or employees to detect or prevent misstatements in a timely fashion.
D. Relate to either a necessary control that is missing or an existing control that is so poorly designed that it fails to satisfy the control's objective.
16. An audit plan of substantive procedures for cash would not include
A. Requesting a cutoff bank statement be mailed to the client.
B. Requesting the client to prepare bank reconciliations.
C. Preparing a schedule of interbank transfers for a period of 10 business days before and after year-end date.
D. Obtaining a written client representation concerning compensating balance agreements.
17. An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using
A. Employee fidelity bonds.
B. Independently prepared mailroom prelists.
C. Daily check summaries.
D. A bank lockbox system.
18. An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if
A. The illegal act is a violation of generally accepted accounting principles.
B. The client does not take the remedial action that the auditor considers necessary.
C. The illegal act was committed during a prior year that was not audited.
D. The auditor has already assessed control risk at the maximum level.
19. Your client is in the process of acquiring another company. You have been requested to verify that cash for the company being acquired is properly stated. The audit technique that will yield the most persuasive evidence is
A. Examination of the company's escrow account.
B. Interview with the company's treasurer and cash manager.
C. Preparation and review of standard bank confirmation inquiries.
D. Analytical computations comparing current cash in the bank with previous accounting periods.
20. As payments are received, one mailroom employee is assigned the responsibility of prelisting receipts and preparing the deposit slip prior to forwarding the receipts, deposit slip, and remittance advices to accounts receivable for posting. Accounts receivable personnel refoot the deposit slip, stamp a restrictive endorsement on the back of each check, and then forward the receipts and deposit slip to the treasury department. Evaluate the internal control of the described process. Which of the following is a reasonable assessment of internal control in this process?
A. Adequate internal control.
B. Inadequate internal control because mailroom employees should not have access to cash.
C. Inadequate internal control because treasury employees should prepare the deposit slip.
D. Inadequate internal control because of a lack of separation of duties.
21. Two people should open mail that includes payments. This control is called
A. Separation of duties.
B. Joint custody.
22. Most fraud investigators utilize the fraud triangle theory. A new theory called the fraud diamond has been proposed. Which of the following is an element of the fraud diamond that is not an element of the fraud triangle?
23. 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 hot line for reporting unethical behavior.
C. The violation of the code of ethics by senior management.
D. The posting of the code of ethics in the company workplace.
24. Immediately upon receipt of cash, a responsible employee should
A. Record the amount in the cash receipts journal.
B. Prepare a remittance listing.
C. Update the subsidiary accounts receivable records.
D. Prepare a deposit slip in triplicate.
25. 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 listing should be sent to the
A. Internal auditor to investigate the list for unusual transactions.
B. Treasurer to compare the list with the monthly bank statement.
C. Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
D. Entity's bank to compare the list with the cashier's deposit slip.
26. 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 employee's mistaken representation of opinion that causes incorrect accounting entries.
D. An employee misappropriating an employer's money or property entrusted to the employee's control in the employee's normal job.
27. 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. Cash budgets.
D. Aged accounts receivable reports.
28. The phases of employee fraud do not include the
A. Conversion of money to fraudster's use.
C. Fraudulent act.
29. The probability of fraud is not a function of
C. Lack of integrity.
30. The standard format for the audit approach to fraud cases would not include
A. Audit of balance.
B. Test of controls.
C. Paper trail.
D. Discovery summary.
31. "Bill and hold" refers to an arrangement where
A. Sales are recorded but are not shipped.
B. Sales are shipped but are not recorded.
C. Sales are billed but not collected.
D. Inventory is held but not billed.
32. Alpha Brewery Corporation recorded sales through January 4, 2005, dating them December 31, 2004. This situation is an example of a violation of which of the following assertions?
A. Existence or occurrence.
33. To determine whether sales transactions have been recorded in the proper accounting period, the auditor performs cutoff tests. Which of the following best describes the overall approach used when performing cutoff tests?
A. Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period.
B. Analyze transactions occurring within a few days before and after year-end.
C. Confirm year-end transactions with regular customers.
D. Examine cash receipts in the subsequent period.
34. In the revenue and collection cycle, the auditor checks the numerical sequence of shipping documents. This procedure is related to which of the following assertions?
C. Rights and obligations.
D. Valuation or allocation.
35. The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because
A. Many customers merely sign and return the confirmation without verifying its details.
B. Recipients usually respond only if they disagree with the information on the request.
C. Customers may not be inclined to report understatement errors in their accounts.
D. Auditors typically select many accounts with low recorded balances to be confirmed.
36. An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that
A. Sales invoices represent bona fide sales.
B. All sales have been recorded.
C. All sales invoices have been properly posted to customer accounts.
D. Entries in the accounts receivable subsidiary ledger were properly invoiced.
37. 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 balances confirmed.
D. Internal control over balances confirmed.
38. The negative request form of accounts receivable confirmation is useful particularly when the
A. Option A
B. Option B
C. Option C
D. Option D
39. The financial records of the Movitz Company show that Mr. Dennis owes $4,100 on an account receivable. An independent audit is being carried out and the auditors send a positive confirmation to Mr. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here?
A. Control risk was particularly low for accounts receivable.
B. Inherent risk was particularly high for accounts receivable.
C. Mr. Dennis's account was not yet due.
D. Mr. Dennis's account was not with a related party.
40. In the revenue and collection cycle, the order of the activities in the cycle is best illustrated by
A. Delivering goods, billing customer, granting credit, and performing collection activities.
B. Customer ordering, delivering goods, granting credit, and billing customers.
C. Processing customer orders, granting credit, delivering goods, and billing customers.
D. Granting credit, billing customers, delivering goods, and processing cash receipts.
41. The positive form of confirmation is best used when
A. Account balances are relatively large.
B. Account balances are small in amount but numerous.
C. Accounts are not in dispute.
D. Internal control is considered effective.
42. Which of the following is not an alternative procedure when a confirmation is not received?
A. Examine sales invoices and vouch them to underlying shipping documents.
B. Examine payments received before the end of the period.
C. Examine customer purchase orders.
D. Examine client correspondence with the customer.
43. A person who has access to both cash and accounts receivable records may be able to take cash receipts by
C. Overstating cash receipts.
D. Underfooting the bank reconciliation.
44. "All purchase orders are supported by requisitions from proper persons" is a specific example of which management assertion?
45. 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 are included in the inventory balance.
C. No goods observed during the physical count are pledged or sold.
D. All goods owned at year-end are included in the inventory balance.
46. Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
A. Reconcile receiving reports with related cash payments made just prior to year-end.
B. Contrast the ratio of accounts payable to purchases with the prior year's ratio.
C. Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.
D. Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.
47. A weakness in internal control over recording retirements of equipment may cause an auditor to
A. Inspect certain items of equipment in the plant and trace those items to the accounting records.
B. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year.
C. Trace additions to the "other assets" account to search for equipment that is still on hand but no longer being used.
D. Select certain items of equipment from the accounting records and locate them in the plant.
48. Which of the following would be an indicator of potential fraud?
A. Photocopies of invoices in the voucher file.
B. Vendor invoices in numerical order.
C. Vendors with only post office box addresses.
D. All of the above indicate potential fraud.
49. Tracing a sample of time clock cards to payroll registers (journals) is a procedure designed to obtain evidence about the transaction assertion(s) of
A. Occurrence only.
B. Occurrence and accuracy only.
C. Completeness only.
D. Accuracy only.
50. The permanent reference files (master files) in a personnel and payroll database ordinarily do not include which of the following?
A. Deduction table.
B. Payroll master.
C. Compensation table.
D. Employee earning record.
51. An auditor most likely would assess control risk at the maximum if the payroll department supervisor is responsible for
A. Examining authorization forms for new employees.
B. Comparing payroll registers with original batch transmittal data.
C. Distribute payroll checks to all employees.
D. Hiring all subordinate payroll department employees.
52. Substantive tests of account balances in the payroll cycle are likely to include the following procedures except
A. Analytical review procedures.
B. Recalculation of accruals.
C. Comparison of accruals to subsequent payments.
D. Detail vouching of payroll expense entries.
53. A client's purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes auditors' primary concern with respect to liabilities resulting from the purchasing system?
A. Accounts payable are not materially understated.
B. Authority to incur liabilities is restricted to one designated person.
C. Acquisition of materials is not made from one vendor or one group of vendors.
D. Commitments for all purchases are made only after established competitive bidding procedures are followed.
54. An audit team would most likely examine the detail support for which of the following charges?
A. Payroll expense.
B. Cost of goods sold.
C. Supplies expense.
D. Legal expense.
55. Which of the following accounts would most likely be audited in connection with a related balance sheet account?
A. Property Tax Expense.
B. Payroll Expense.
C. Research and Development.
D. Legal Expense.
56. When auditing liabilities account balances, auditors are most concerned with management' assertion about
B. Rights and obligations.
D. Valuation and allocation.
57. Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries?
58. Matthew Corp. has changed from a system of recording time worked on clock cards to a computerized payroll system in which employees record time in and out with magnetic cards. The computerized system automatically updates all payroll records. Because of this change,
A. A generalized computer audit plan must be used.
B. Part of the audit trail is altered.
C. The potential for payroll-related fraud is diminished.
D. Transactions must be processed in batches.
59. A client's physical count of inventories was higher than the inventory quantities shown in the perpetual records. This situation could be the result of the failure to record
B. Sales discounts.
D. Purchase discounts.
60. Mary Monitor, CPA, noted that ABC Co. received goods prior to year-end that were included in physical inventory but had not been recorded. In this case, which of the following adjustments should be made?
A. Debit Purchases/credit Cost of Goods Sold.
C. Debit Inventory/credit Accounts Payable.
D. Debit Cost of Goods Sold/credit Accounts Payable.