2.9.19

Question 1

In obtaining an understanding of an issuer’s internal control, an auditor does all the following except

Answer 1

Send confirmations to customers.

Confirmations to customers are substantive procedures used to test the existence assertion. They are not useful in obtaining an understanding of controls.

Question 2

Which of the following might be detected by an auditor’s review of the client’s sales cutoff?

Answer 2

Inflated sales for the year.

Sales cutoff tests are designed to detect the client’s manipulation of sales. By examining recorded sales for several days before and after the balance sheet date and comparing them with sales invoices and shipping documents, the auditor may detect the recording of a sale in a period other than that in which title passed.

Question 3

Accounting records alone do not provide sufficient appropriate evidence on which to base an opinion on the financial statements. Thus, the auditor should obtain other information. Which of the following is audit evidence other than accounting records?

Answer 3

Confirmations of accounts receivable.

Audit evidence is all information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence includes (1) the accounting records underlying the financial statements and (2) other information. Sources of information other than accounting records include (1) minutes of meetings; (2) external confirmations; (3) analysts’ reports; (4) comparable data about competitors; and (5) information obtained by the auditor from (a) inquiries (e.g., management’s written representations), (b) observation, (c) inspection, (d) recalculation, (e) reperformance, and (f) analytical procedures.

Question 4

A large university has relatively ineffective internal control. The university’s auditor seeks assurance that all tuition revenue has been recorded. The auditor could best obtain the desired assurance by

Answer 4

Comparing business office revenue records with registrar’s office records of students enrolled.

To be assured that all tuition revenue is being recorded, the auditor must perform substantive procedures, which are tests of details and substantive analytical procedures to detect material misstatements in an account balance, transaction class, or disclosure component. Comparing business office revenue records with registrar’s office records of students enrolled provides analytical evidence based on independently generated records.

Question 5

The Smith Corporation uses prenumbered receiving reports that are released in numerical order from a locked box. For 2 days before the physical count all receiving reports are stamped “before inventory,” and for 2 days after the physical count all receiving reports are stamped “after inventory.” The receiving department continues to receive goods after the cutoff time while the physical count is in process. The least effective method for checking the accuracy of the cutoff is to

Answer 5

Observe that the receiving clerk is stamping the receiving reports properly.

The least effective method of checking the accuracy of the cutoff of inventory is to observe that the receiving clerk is stamping the receiving reports properly. The auditor is primarily concerned with the dates on the receiving reports to verify that goods received or shipped near year end are accounted for in the proper reporting period.

Question 6

A mail-order retailer has just modified its processing programs to charge each customer the appropriate sales tax. The best approach for detecting whether sales taxes are applied correctly is to

Answer 6

Add the program code that will sort orders by area, compute taxes in the aggregate, and compare the amount with the sum of individual taxes charged for each area.

Sales taxes vary from one jurisdiction to another. Thus, the program should sort orders by area. Verification of the accuracy of the tax charges then can be obtained by calculating the total taxes for each area in two ways: applying the tax rate to total sales or adding the taxes charged on individual sales.

Question 7

Evidence supporting the financial statements consists of the accounting records and all other information available to the auditor. Which of the following is an example of other information?

Answer 7

Minutes of meetings.

Audit evidence is all information used by the auditor to draw the conclusions on which the auditor’s opinion is based. It consists of (1) accounting records and (2) sources of information other than accounting records. Accounting records by themselves do not provide sufficient appropriate evidence. They include initial entries (manual or electronic) and supporting records. Examples are (1) checks, (2) electronic funds transfers (EFTs), (3) invoices, (4) contracts, (5) the general and subsidiary ledgers, (6) journal entries and other adjustments of the statements, (7) worksheets, (8) spreadsheets, (9) reconciliations, (10) cost allocations, (11) computations, and (12) disclosures. Sources of information other than accounting records include (1) minutes of meetings; (2) external confirmations; (3) analysts’ reports; (4) comparable data about competitors; and (5) information obtained by the auditor from (a) inquiries (e.g., management’s written representations), (b) observation, (c) inspection, (d) recalculation, (e) reperformance, and (f) analytical procedures.

Question 8

Independent internal verification of inventory occurs when employees who

Answer 8

Compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory.

The recorded accountability for assets should be compared with existing assets at reasonable intervals. If assets are susceptible to loss through fraud or error, the comparison should be made independently. An independent comparison is one made by persons not having responsibility for asset custody or the authorization or recording of transactions. If these functions are segregated, and an independent reconciliation is made, the opportunity for any person to be in a position to both perpetrate and conceal fraud or error in the normal course of his or her duties is reduced.

Question 9

An auditor’s document includes the following statement:
“Our audit is subject to the risk that errors, fraud, or illegal acts, if they exist, will not be detected. However, we will inform you of any such matters that come to our attention.”

The above passage is most likely from

Answer 9

An engagement letter.

The primary purpose of an engagement letter is to document in written form the agreement with the client about the services to be provided by the auditor. It sets forth the rights and responsibilities of the parties and the objective and scope of the audit (AU-C 210).

Question 10

Which of the following best describes the responsibility of an auditor of a private entity with respect to significant deficiencies and material weaknesses under AU-C 265, Communication of Internal Control Related Matters Identified in an Audit?

Answer 10

The communication by the auditor must be in writing.

The auditor communicates on a timely basis and in writing to those charged with governance significant deficiencies and material weaknesses identified during the audit. This communication includes those remediated during the audit. The auditor also communicates on a timely basis and in writing to the appropriate level of management significant deficiencies and material weaknesses communicated (or intended to be communicated) to those charged with governance. (But certain deficiencies should not be reported directly to management.)

Question 11

Using personal computers in auditing may affect the methods used to review the work of staff assistants because

Answer 11

Audit documentation may not contain readily observable details of calculations.

With the introduction of computers, accountants have been able to perform fewer manual calculations. Usually, the necessary numbers are entered into computer spreadsheets, and the answer is produced. Thus, the use of computers makes the review of a staff assistant’s work different from that needed when the calculations are done manually.

Question 12

The Sarbanes-Oxley Act of 2002 (SOX) requires management of issuers to do all of the following except

Answer 12

Provide a statement that the board approves changes in internal control procedures.

SOX imposes many requirements on management, boards of directors, and auditors. Section 404 applies to internal controls and reports on them. Section 404 requires management to establish and document internal control procedures and to include in their annual reports a report on the entity’s internal control over financial reporting. The report is to include (1) a statement of management’s responsibility for internal control, (2) management’s assessment of the effectiveness of internal control as of the end of the most recent fiscal year, and (3) identification of the framework used to evaluate the effectiveness of internal control (such as the COSO report). Because of this requirement, PCAOB AS 2201 states that audit opinions are to be expressed on the effectiveness of those controls and on the financial statements. Section 301 addresses activities of the board but does not require the board to approve changes in controls.

Question 13

The audit working paper that reflects the major components of an amount reported in the financial statements is the

Answer 13

Lead schedule.

Lead schedules help to eliminate detail from the auditor’s working trial balance by classifying and summarizing similar or related items that are contained on the supporting schedules. A lead schedule contains the detailed accounts from the general ledger making up the line item total in the financial statements; e.g., the cash account in the financial statements might consist of petty cash, cash-general, cash-payroll, etc.

Question 14

Many entities use the Internet as a network to transmit electronic data interchange (EDI) transactions. An advantage of using the Internet for electronic commerce rather than a traditional value-added network (VAN) is that the Internet

Answer 14

Permits EDI transactions to be sent to trading partners as transactions occur.

VAN services have typically used a proprietary network or a network gatewayed with a specific set of other proprietary networks. A direct Internet connection permits real-time computer-to-computer communication for client-server applications, so transactions can be sent to trading partners as they occur.

Question 15

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?

Answer 15

Compare cash payments made after the balance sheet date with the accounts payable trial balance.

Tracing subsequent payments to recorded payables is a primary procedure to match payments (checks issued) after year end with the related payables. Checks should be issued only for recorded payables. Any checks that cannot be matched are likely indications of unrecorded liabilities. Management may want to delay recording of liabilities to improve the current ratio. However, unrecorded accounts payable still must be paid, and financial statements that fail to report all liabilities at year end are misstated.

Question 16

Which of the following levels would most likely address the risk of material misstatement by the auditor’s consideration of an entity’s control environment?

Answer 16

Financial statements.

The (1) assessment of the risks of material misstatement (RMM) at the financial statement level and (2) the auditor’s overall responses depend on the understanding of the control environment. An effective control environment improves the reliability of internally generated audit evidence. However, the nature, timing, and extent of further audit procedures respond to the assessed RMMs at the assertion level.
NOTE: We understand that this question may seem to be awkwardly written. There is a chance that you will encounter poorly written questions on your exam. You must answer each question to the best of your ability, even if it means making an educated guess, and then move on to the next question.

Question 17

An auditor decides to use the blank form of accounts receivable confirmation rather than the traditional positive form. The auditor should be aware that the blank form may be less efficient because

Answer 17

More nonresponses are likely to occur.

The blank form of accounts receivable confirmation requests the recipient to complete the confirmation by providing the balance due to the client. This procedure may require more effort by the recipient and thus limit response rates. Accordingly, the auditor may have to perform alternative procedures.

Question 18

An inappropriate audit procedure relative to accounts receivable is to determine that the

Answer 18

Accounts are collected by the balance sheet date.

Accounts receivable represent the amounts due the client at the balance sheet date. The auditor should not expect the accounts to be collected at the balance sheet date.

Question 19

Once a CPA has determined that accounts receivable have increased because of slow collections in a tight money environment, the CPA is likely to

Answer 19

Expand the test of collectability.

Whenever collections of receivables have slowed, the auditor should determine the effects on the allowance for doubtful accounts. (S)he should therefore expand tests of collectibility, e.g., with a review of collections subsequent to the balance sheet date and investigation of credit ratings. The verification of the allowance for doubtful accounts ensures that receivables are fairly presented at their net realizable value in the balance sheet and that bad debt expense is fairly stated in the income statement.

Question 20

The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with

Answer 20

Knowledge necessary for audit planning.

The auditor is required to obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement of the financial statements, whether due to fraud or error, to provide a basis for responding to the assessed RMMs. The auditor obtains the understanding and assesses the RMMs to plan the audit. The audit plan describes (1) the risk assessment procedures, (2) further audit procedures at the assertion level, and (3) other procedures required by GAAS.