Appendix A Wrong Answers Flashcards
Internal control must be tested when…
Substantive procedures alone will not provide sufficient evidence
What is a limitation of internal control, that may render internal control ineffective?
Employee collusion
In addition to changes in significant account policies, The audit committee should be informed about…
Changes in significant accounting policies
The auditor may refer to the specialist in their report…
Only when the specialist’s work affects the auditor’s opinion
A client’s accounting data cannot…
Be considered sufficient evidence
Independence is impaired when prior year fees for professional services remain unpaid for…
More than one year prior to the date of the report
A company has changed its method of inventory valuation from an unacceptable one to one in conformity with GAAP. The auditor’s report on the financial statements of the year of change should…
Include an emphasis of matter paragraph explaining he change
Covered members include…5
1 members of attest engagement team
2 individual in position of influence of attest engagement
3 partner who provides nonattest services to attest client
4 partner in the office where the lead attest engagement partner
Practices
5 the firm
A staff person that performs tax services for the attest client is…
Not a covered member
Assertion about subject matter is not…
Always present in an Attestation engagement
Which of the following is always present in an Attestation engagement?
Subject matter
An Attestation engagement always involves…
Comparison of subject matter to a set of criteria
If there is no need for any assurance of a third party…2
1 Information is for management’s use only
2 no report would be issued for a compilation
When performing a review of an issuer company a CPA would inquire about…
Subsequent events
When performing a review of an issuer company what is not a required inquiry?
Inquiries about communications with related parties
Risk assent procedures are performed to…
Obtain an understanding of an entity and its environment
Risk assessment procedures are performed to obtain an understanding of the entity and its environment to provide a basis to…
Assess the risk of material misstatement and design further
Audit procedures
When a balance is audited at an interim date there is…
Incremental audit risk that must be controlled by the auditor
The auditor normally does not have the requisite skills to…
Determine the value of precious stones
In auditing long term debt the auditor should examine…
2) why?
Examine the bond trust indenture
2) to assure that covenants in the indenture are adequately
disclosed in the financial statements
An interpretation of the independence rule prohibits…
Credit card accounts in excess of $10,000
The auditor would most likely decide not to sample when…
Tolerable misstatement is small and the expected misstatement
Rate is high
The auditor would most likely decide not to sample when the tolerable misstatement is small and the expected misstatement rate is high. In this case it would be more appropriate to…
All or most of items in the population
Compilation reports are modified for…
Departures from GAAP
Compilation reports are not modified for…
Going concern issues
Analyzing repairs and maintenance expense may result in…
2) what effect does this have on the equipment account?
Discovery of property and plant expenditures that were erroneously
Expensed,
2) thus understanding equipment
Intentional violations of occupational safety and health laws are the most difficult to detect because…
1 they aren’t related to financial statement numbers
2 they aren’t within auditor’s expertise
Direct personal observations of employees performing activities is…
The best test of segregation of duties
The audit committee would not be expected to…
2) therefore this would not be…
Oversee the details of raw material purchases
2) not an indicator of weakness in internal control considered by
PCAOB
What 2 items must be known to evaluate sample results?
Explanation for 2nd item
1 sample size
2 occurrence rate (doesn’t need to be actual occurrence rate)
Integrated test facility introduces…
Test (dummy) transactions with live transactions to test the effectiveness of IT controls
Processing data through the use of simulated files provides an auditor with information about the reliability of controls. One of the techniques involved in is approach makes use of…
Integrated test facility
After the audit documentation completion date, the auditor may…
Make changes or deletions to audit documentation providing the
Fact that the changes were made is documented
An accountant should establish an understanding with management regarding the services to be performed and document in writing for…2
1 compilation
2 review
Direct effect illegal acts affect…
The numbers in the financial statements
What’s an example of a direct effect illegal act
Violation of tax law
What internal control can be implemented to correct the problem below? 2) why?:
Invoices posted to incorrect customer accounts
Monthly statements are mailed to all customers with outstanding balances
2) Will be detected by analyzing customer responses to monthly
Statements that include errors Particularly in errors not in favor of customers
What internal control can be implemented to correct the problem below? 2) why?:
Goods ordered by customers are shipped, but are not billed to anyone
Comparison of shipping documents with sales invoices
2) will detect goods that have been shipped but not billed when
no sales invoice is located for a particular shipping document
What internal control can be implemented to correct the problem below? 2) why?:
Invoices are sent for shipped goods, but are not recorded in the sales journal.
Compare daily sales summaries with invoices
2) provides assurance that all invoiced goods that have been
shipped are recorded as sales
What internal control can be implemented to correct the problem below? 2) why?:
Invoices are sent for shipped goods and are recorded in the sales journal, but are not posted to any customer account
Compare amounts posted to accounts receivable ledger with
control total for invoices
2) will provide assurance that all invoices have been posted to
A customer account
What internal control can be implemented to correct the problem below? 2) why?:
Goods are removed from inventory for unauthorized orders.
Require an approved sales order before goods are released
From the warehouse
2) will provide assurance that goods are not removed for
unauthorized orders
What internal control can be implemented to correct the problem below? 2) why?:
Goods shipped to customers do not agree with goods ordered by customers.
A comparison by shipping clerks of goods received from the warehouse with the approved sales orders
2) will provide assurance that goods shipped to customers agree
With goods ordered by customers
What internal control can be implemented to correct the problem below? 2) why?:
Invoices are sent to allies in a fraudulent scheme and sales are recorded for fictitious transactions
Comparing sales invoices with shipping documents and approved sales orders
2) will detect invoices that do not have proper support (help
Prevent fictitious transactions)
To provide assurance that all invoiced goods that have been shipped are recorded as sales, daily sales summaries should be compared with invoices. For example a sale…
A sale that has not been recorded will result in a sales summary
that does not include certain sales invoices
Comparing amounts posted to accounts receivable ledger with the validated bank deposit will detect…
Improper postings to accounts receivable since any differences
In amounts will be investigated
Comparing customers orders with an approved customer list will provide assurance that…
Credit sales are made only to customers that have been granted
Credit
What internal control can be implemented to correct the problem below? Why?:
Customers’ checks are misappropriated before being forwarded to the cashier for deposit.
Monthly statements are mailed to all customers with outstanding
Balances
2) When customers indicate that they have made payments for items shown as payable on their monthly statement misappropriations of customers checks will be detected
What internal control can be implemented to correct the problem below? 2) why?:
Customer checks are credited to incorrect customer accounts.
Monthly statements are mailed to all customers with outstanding balances
2) mispostings of payments made will be detected when customers indicate they have made payments for items shown as payable on
Their monthly statements
Crediting more than one account for a cash receipt will help detect when…
The total amounts posted to the accounts receivable ledger is compared with the validated bank deposit slip
What internal control can be implemented to correct the problem below? 2) why?:
Customers’ checks are properly credited to customer accounts and are properly deposited, but errors are made in recording cash receipts journal.
Have employee, other than the bookkeeper, periodically prepare
A bank reconciliation
2) reveal improper total recording of receipts in cash receipts journal
b/c unlocated differences btw/ bank balances will occur and be investigated
What internal control can be implemented to correct the problem below? 2) why?:
Customers’ checks are misappropriated after being forwarded to the cashier for deposit.
Compare total at amounts posted to accounts receivable ledger
with the validated bank deposit slip
2) will detect difference between total cash receipts and the amount
Credited to accounts receivable ledger
Requiring the approval of the supervisor of the sales department for goods received will provide assurance that…
Invalid transactions granting credit for sales returns are not recorded
Reliability
The complement of the risk of incorrect acceptance
The audit procedure must identify situations in which there should be invoices, but there are not.
Investigate unmatched receiving reports dated prior to The following
Year
For an audit procedure, One would expect that when a receiving report has been prepared…
2) when one is not present…
An invoice will either be available or soon be available from the supplier
2) when an invoice is not present, it may have been misplaced
Audit procedure, an examination of disbursements after year end will reveal situations in which…
Payables that should have been recorded prior to year end were
Not recorded until subsequent year end
Audit procedure: identifying open purchase orders and vendors’ invoices will reveal a situation in which…
On would expect a receiving report to have been prepared
A misplace,ent of a receiving report might result in…
No preparation of a sales invoice
For audited financial statements, Valuation of assets at appraised values is…
Not in accordance with GAAP, so adverse or qualified opinion issued
On audited financial statements, when appraised value is used and the difference between appraised value and cost is significant…
An unmodified opinion would not be appropriate
Company has material investments in stocks of subsidiary companies…CPA firm’s engagement doesn’t extend to subsidiary company. The CPA firm is able to determine that all investments are carried at original cost and the auditor’s have no reason to suspect that the amounts are not fairly stated.
What is the opinion in the auditor’s report?
Scope limitation, either qualified or disclaimer of opinion
When a CPA has acquired sufficient competent evidence to the effect that the client will never ultimately realize a substantial portion of the investments and the client has disclosed this in the notes…
An adverse or qualified opinion is necessary
Note disclosure does not compensate for improper balance sheet presentation
