AUD 4 -

Question 1

a client will not permit the inquiry of outside counsel, should the auditor withdraw from engagement, or modify the opinion?

Answer 1

they disclaim the opinion.

Question 2

Who requests the inquiry of the client’s lawyer?

Answer 2

client’s management, NOT the auditor

Question 3

if an auditor concludes there is substantial doubt about an entity’s ability to continue as a going concern and that the entity’s disclosures are adequate, then the report may be:

Answer 3

unqualified opinion with explanatory paragraph

or

disclaimer of opinion

Question 4

does the mgmt rep letter need to address only the current year when there are comparative years being presented?

Answer 4

no, the rep letter needs to cover all years presented.

Question 5

When evaluating whether a control deficiency is a significant deficiency or material weakness, the auditor should consider

Answer 5

1. likelihood of the misstatement
2. magnitude of the misstatement

Question 6

Subsequent events procedures include:

Answer 6

(1) reading the latest subsequent interim statements, if any;
(2) inquiring of management and those charged with governance about the occurrence of subsequent events and various financial and accounting matters;
(3) reading the minutes of meetings of owners, management, and those charged with governance;
(4) obtaining a letter of representations from management;
(5) inquiring of client’s legal counsel; and
(6) obtaining an understanding of management’s procedures for identifying subsequent events.

Question 7

For effective internal control, the AP dept should compare the vendor’s invoice with?

Answer 7

the receiving report and the purchase order

Question 8

Supporting documentation relating to a payment should be cancelled by what department?

Answer 8

the treasurer after the check is mailed. (not the AP dept)

Question 9

What is the primary evidence regarding year end cash balances in the financial statements?

Answer 9

a bank reconciliation

Question 10

What audit procedure is most likely related to the understandability of the presentation and classification of the financial statements with respect to inventory?

Answer 10

Confirming inventories pledged under loan agreements…NOT examining consignment agreements

Question 11

Immediately upon receipt of cash, a responsible employee should:

A. Update the subsidiary accounts receivable records.

B. Prepare a remittance listing.

C. Prepare a deposit slip in triplicate.

D. Record the amount in the cash receipts journal.

Answer 11

B. Prepare a remittance listing.

Effective control of cash requires that receipts be recorded promptly. For mail receipts, a listing of remittance advices by an employee not performing incompatible functions is a standard control procedure. If the customer does not return the remittance advice, one should be prepared at the time the mail is opened. If remittance advices are not used, a listing of receipts should still be made when the mail is opened.

Question 12

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?

A. Overstating the accounts receivable subsidiary ledger.

B. Overstating the accounts receivable control account.

C. Understating the cash receipts journal.

D. Understating the sales journal.

Answer 12

D. Understating the sales journal.

Not recording sales on account in the books of original entry is the most effective way to conceal a subsequent theft of cash receipts. The accounts will be incomplete but balanced, and procedures applied to the accounting records will not detect the defalcation.

Question 13

Difference between time cards and job time tickets?

Answer 13

Time cards - payroll should be prepared using the time cards, which are the official records of time worked.

Job time tickets - used to determine the allocation of direct labor to various jobs and the identification of indirect labor that should be charged to overhead

Question 14

13) Which of the following internal control activities is not usually performed in the vouchers payable department?
A. Matching the vendor’s invoice with the related receiving report.
B. Indicating the asset and expense accounts to be debited.
C. Approving vouchers for payment by having an authorized employee sign the vouchers.
D. Accounting for unused prenumbered purchase orders and receiving reports.

Answer 14

D. Accounting for unused prenumbered purchase orders and receiving reports.

Employees in the vouchers payable department should have no responsibilities related to purchasing or receiving goods. The purchasing department accounts for unused prenumbered purchase orders. The receiving department accounts for unused prenumbered receiving reports.

Question 15

An auditor anticipates relying on the operating effectiveness of controls in a computerized environment. Under these circumstances, on which of the following activities would the auditor initially focus?

A. Output controls.
B. Application controls.
C. Programmed controls.
D. General controls.

Answer 15

D. General controls.

Relying on controls involves (1) identifying specific controls that are suitably designed to prevent, or detect and correct, material misstatements in relevant assertions; (2) performing tests of controls; and (3) assessing the RMMs. Some computer controls relate to all computer activities (general controls), and some relate to specific tasks (application controls). Because general controls have pervasive effects, they should be tested before application controls. If the general controls are ineffective, tests of the application controls over input, processing, and output are unlikely to permit the auditor to rely on controls.

Question 16

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following?

A. The planned level of control risk.

B. The effectiveness of internal controls.

C. Management’s assertions that internal controls exist and are operating efficiently.

D. The planned level of assurance at the relevant assertion level.

Answer 16

D. The planned level of assurance at the relevant assertion level.

Tests of details of transaction classes, account balances, and disclosures are substantive procedures. Some substantive procedures should be performed for all relevant assertions related to each material transaction class, balance, and disclosure. With respect to obtaining audit evidence, the auditor’s objective is to obtain sufficient appropriate evidence to be able to draw reasonable conclusions as a basis for an opinion on whether statements are materially misstated. To design and perform further audit procedures (substantive procedures and tests of controls), the auditor assesses the risks of material misstatement at the financial statement and relevant assertion levels.

Question 17

An auditor is auditing internal control in conjunction with the audit of financial statements for an issuer. The auditor is considering the appropriate materiality level for planning the audit of internal control. Relative to the materiality level for the audit of the financial statements, materiality levels for the audit of internal control are
A. Smaller.
B. Cannot determine.
C. Larger.
D. The same.

Answer 17

D. The same.

Auditing standards indicate that the auditor should use the same materiality considerations in the audit of internal control over financial reporting that (s)he would use in planning the audit of annual financial statements.

Question 18

An auditor selects a sample of recorded cash receipts and vouches them to accounts receivable and customer orders. This procedure is relevant to which assertion?

A. Existence.
B. Completeness.
C. Cutoff.
D. Occurrence.

Answer 18

D. Occurrence.

Assertions about classes of transactions and events include that they have occurred and pertain to the entity. To determine whether cash transactions actually occurred, the auditor vouches a sample of recorded cash receipts to accounts receivable and customer orders.

Question 19

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely is
A. Invoices filed in the entity’s open invoice file.
B. Payees of checks drawn in the month after the year end.
C. Amounts recorded in the accounts payable subsidiary ledger.
D. Vendors with whom the entity has previously done business.

Answer 19

D. Vendors with whom the entity has previously done business.

When sending confirmations for accounts payable, the population of accounts should include small and zero balances as well as large balances. The auditor should use the activity in the account as a gauge for sample selection. That is, if orders are placed with a vendor on a consistent basis, a confirmation should be sent to that vendor regardless of the recorded balance due.

Question 20

Your objective is to determine that nonrecurring purchases, initiated by various user organizations, have been properly authorized. If all purchases are made through the purchasing department, to which of the following documents should you vouch purchases?
A. Purchase requisitions.
B. Receiving reports.
C. Purchase orders.
D. Invoices.

Answer 20

A. Purchase requisitions.

When the auditor tests for unauthorized nonrecurring purchases, (s)he should vouch purchases to the purchase requisitions. The initiating authorization by the user department is embodied in a properly authorized purchase requisition.

Question 21

As a result of tests of controls, an auditor overrelied on controls and decreased substantive testing. This assessment occurred because the true deviation rate in the population was

A. Less than the risk of overreliance, based on the auditor’s sample.
B. Less than the deviation rate in the auditor’s sample.
C. More than the deviation rate in the auditor’s sample.
D. More than the risk of overreliance, based on the auditor’s sample.

Answer 21

C. More than the deviation rate in the auditor’s sample.

In the case of a test of controls, overreliance is the erroneous conclusion that controls are more effective than they actually are. Overreliance occurs if the sample has fewer observed deviations than the true deviation rate in the population.