AUD Final Review Flashcards

Question

A4 M3 Which of the following controls would most likely detect a kiting scheme? A. Preparing a bank reconciliation. B. Comparison of the details of deposit tickets and recorded remittance credits. C. Preparing a bank transfer schedule. D. Use of a lockbox system for customer receipts.

Answer 1

Choice "C" is correct. A kiting scheme occurs when a check drawn on one bank is deposited in another bank, and the funds are included in both accounts. A bank transfer schedule is used to analyze bank transfers and identify such situations. Choice "A" is incorrect. Preparation of a bank reconciliation involves analysis of one account at a time, and therefore would not be useful in detecting a scheme involving interbank transfers. Choice "B" is incorrect. Comparing the details of deposit tickets and recorded remittance credits would help detect a lapping scheme, not a kiting scheme. Choice "D" is incorrect. A lockbox system helps safeguard customer receipts and might prevent lapping, but would not be helpful in detecting a kiting scheme.

Answer 2

Choice "A" is correct. A custodial statement provides valid and relevant external evidence regarding the existence of securities. Choice "B" is incorrect. A year-end listing of market prices is not relevant to the existence of marketable securities, although it would provide evidence about the valuation of such securities. Choice "C" is incorrect. The client's securities ledger is internal evidence, and as such it is not as valid as a custodial statement. Choice "D" is incorrect. Broker's advices regarding purchases and sales provide valid external evidence about transactions occurring during the year, but a custodial statement provides more direct evidence about the existence of securities as of the year-end date.

Answer 3

Choice "A" is correct. The legality of a dividend depends in part on whether it has been properly authorized. Thus, the auditor must determine that proper authorization exists, as both cash and stock dividends affect retained earnings. Choice "B" is incorrect because the write-down of an account receivable will not, in general, be recorded in retained earnings. Choice "C" is incorrect because gains from the disposition of treasury shares are recorded in paid-in capital accounts. Choice "D" is incorrect because only a memo entry is required for a stock split.

Answer 4

Choice “C” is correct. An acceptable alternative procedure is to examine the applicable sales order, shipping document, and subsequent cash receipts. Choice “A” is incorrect. Generally, an auditor would not visit the client’s customer and review documents in their possession. An appropriate alternative procedure is to review the specific subsequent cash receipts, shipping documentation, and invoice to verify the existence of the receivable. Choice “B” is incorrect. Obtaining an aging of accounts receivable and tracing it to the general ledger control account would provide evidence about the completeness, not existence, assertion. Choice “D” is incorrect. Examining subsequent cash disbursements and related receiving reports would be an appropriate alternative procedure when testing accounts payable for completeness when the accounts payable confirmations are not received.

Answer 5

Choice "A" is correct. Risk of misstatement associated with poor cutoff controls would result from overstatement of revenues recorded prior to year-end for shipments delivered after year-end. Goods shipped FOB destination would not pass to the buyer until the goods are received. Sales recognized prior to receipt of the goods by the buyer would be overstated. Choice "B" is incorrect. Risk of misstatement associated with poor cutoff controls would result from overstatement of revenues recorded prior to year-end for shipments delivered after year-end. Recording sales in the period after deliveries shipped FOB destination would understate revenue. Choice "C" is incorrect. Risk of misstatement associated with poor cutoff controls would result from overstatement of revenues recorded prior to year-end for shipments delivered after year-end. Recording sales and deliveries shipped FOB destination in the same period would appropriately match revenues with transfer of title. Choice "D" is incorrect. Risk of misstatement associated with poor cutoff controls would result from overstatement of revenues recorded prior to year-end for shipments delivered after year-end. Recording sales and deliveries shipped FOB destination in the same period would appropriately match revenues with transfer of title.

Answer 6

Choice “A” is correct. Comparing shipping totals with sales invoice totals is an effective control to reduce billing errors. This is a common internal control procedure performed by the accounts receivable department. Choice “B” is incorrect. Shipping, not receiving, documents would be matched with approved sales orders before invoice preparation. Receiving documents typically relate to the expenditure cycle. Choice “C” is incorrect. Reconciling control totals for sales invoices with the accounts receivable subsidiary ledger is not an effective control related to the billing process, because errors that exist in the preparation of invoices would likely carry through to accounts receivable. Choice “D” is incorrect. Requiring customers that purchase on account to be approved by the credit department is an important internal control that helps reduce sales to customers who are unlikely to pay. However, this control is unlikely to reduce errors that occur during the billing process.

Answer 7

Choice "C" is correct. The purchasing department creates a purchase order based on an approved requisition, while the accounts payable department approves the corresponding invoice for payment after matching the purchase order, receiving report, and vendor invoice. Choice "A" is incorrect. The accounts payable department (not the purchasing department) matches the purchase order, receiving report, and vendor invoice. The treasurer then reviews the matched documents and makes the payment. Choice "B" is incorrect. The receiving department should not have access to a complete copy of the purchase order, but rather should have a copy with the amounts blacked out, thus forcing an independent count to be made. Given this constraint, it would not be possible for the receiving department to compare the amount ordered with the amount received. The accounts payable department makes this comparison, as well as comparing these amounts with the amount billed. Choice "D" is incorrect. The accounts payable department compares what was ordered, what was received, and what was billed, by comparing the purchase order, receiving report, and vendor invoice. The purchasing department does not receive a copy of the receiving report and therefore would have no means of comparing what was received to what was ordered.

Answer 8

Choice "A" is correct. The warehouse and shipping departments would be part of the segregation of duties for the revenue cycle. Choice "B" is incorrect. The vouchers payable department would be part of the segregation of duties for expenditures. Choice "C" is incorrect. The receiving department would be part of the segregation of duties for expenditures. Choice "D" is incorrect. The purchasing department would be part of the segregations of duties for expenditures.

Answer 9

Choice "D" is correct. Restatement of previously issued financial statements to correct a material misstatement is an indication of a material weakness. Choice "A" is incorrect. Finding an incident of a control (approval of account reconciliation) not operating according to policy (approval was outside set timeframe) would not normally be considered a material weakness. The auditor must apply judgment in assessing whether the deficiency in the control would lead to a "reasonable possibility" that a material misstatement would go undetected. Compensating controls operating effectively would lead the auditor to conclude that the situation would not be considered a material weakness. Choice "B" is incorrect. After assessing the quantitative and qualitative factors, an immaterial misstatement would not normally be an indication of a material weakness. Choice "C" is incorrect. A misstatement that is identified by the client in the current period, would not normally be an indicator of a material weakness as it was identified through the processes put in place as a part of the client's internal control environment. If misstatements are identified by the auditor that would not have been detected by the client's internal control, that may be an indication of a material weakness.

Answer 10

Choice "B" is correct. A control deficiency exists when a control is not designed or implemented and carried out in a way that would allow employees or management, acting in the normal course of their assigned functions, to prevent, or detect and correct misstatements on a timely basis. Choice "A" is incorrect. Fraud schemes that are detected by management would not be considered to indicate a control deficiency as the controls in place allowed for the detection of the fraud. Choice "C" is incorrect. Errors that are detected and corrected by employees would not be considered to indicate a control deficiency as the controls in place allowed for the identification of the error. Choice "D" is incorrect. Controls are designed and operated by management and employees, and not by the auditors. The auditor's role is to evaluate the design and operating effectiveness of the control environment.

Answer 11

Choice "D" is correct. Items shipped without invoicing will result in a situation in which the accounting department is unaware of the sale. Therefore, debits to accounts receivable and credits to sales will not be recorded, resulting in an understatement of both revenues and receivables. Similarly, because accounting is unaware of the sale, no entry to reduce inventory will be made, resulting in an overstatement of inventory. Choices "A", "B", and "C" are incorrect, based on the above explanation.

Answer 12

Choice "C" is correct. Examining shipping documents and receiving reports for several days before and after year-end will help Jett determine whether purchases and sales were recorded in the proper period. Achieving an appropriate cutoff is important to the fair statement of inventory. Choice "A" is incorrect. The auditor observes the client's count, but does not typically perform the count. Choice "B" is incorrect. Consigned goods held by Calico's customers (for resale to third parties) are still owned by Calico, and would therefore properly be included in inventory. Choice "D" is incorrect. Consigned goods provided by Calico's suppliers (and held for resale to third parties) are not owned by Calico, and would therefore properly be excluded from inventory.

Answer 13

Choice "C" is correct. The auditor is not responsible for counting the inventory as that is the responsibility of the client. The auditor's responsibility is to observe the inventory count. Choice "A" is incorrect. Cycle counts may be performed by the client throughout the year. Choice "B" is incorrect. The client should ensure that any inventory owned by the client is included in the inventory count, regardless of whether it is held on or off-site. Choice "D" is incorrect. Physical inventory counts are often performed outside of normal business hours to ensure that inventory is not being shipped or received as the count is in progress.

Answer 14

hoice “C” is correct. Although the objectives of an audit of internal control and an audit of financial statements are different, the auditor should perform the integrated audit to achieve the objectives of both engagements simultaneously. This would include obtaining sufficient appropriate evidence to support the auditor’s opinion on internal control as of the period end and obtaining sufficient appropriate evidence to support the auditor’s control risk assessments for purposes of the audit of financial statements. Choice “A”, “D”, and “B” are incorrect, per the above explanation.

Answer 15

Choice “B” is correct. In an integrated audit for a nonissuer, no restriction on the use of the report is required. The communication of significant deficiencies and material weaknesses should include restricted use language only when part of an audit of the financial statements. Choice “A” is incorrect. In an audit of internal control for a nonissuer, communication of significant deficiencies and material weaknesses must be made by the report release date. Choice “C” is incorrect. Compensating controls, if found to be operating effectively, may limit the severity of an identified deficiency and prevent it from being a material weakness. Choice “D” is incorrect. Auditors are not required to search for control deficiencies that are less severe than a material weakness.

Answer 16

Choice “A” is correct. If a material weakness is subsequently eliminated, management may wish to communicate this fact to the investing public, and may also wish to have an independent auditor attest to the improvements in internal control. The auditor’s objective is to express an opinion on whether the previously reported weakness has been eliminated. Choice “B” is incorrect. An auditor’s testing is limited to the controls specifically identified by management as eliminating the material weakness. Choice “C” is incorrect. The auditor must obtain evidence about the design and operating effectiveness of the identified control. Choice “D” is incorrect. An engagement to report on whether a previously reported internal control weakness continues to exist is a voluntary engagement, not required by professional standards. The engagement may be performed at any time during the year.

Answer 17

Choice "A" is correct. An engagement for agreed-upon procedures provides no assurance, which means that a disclaimer of opinion is rendered on the subject matter. Specifically, the report should state that “We do not express an opinion,” which is a disclaimer of opinion. Choice "B" is incorrect. The report includes a listing of procedures performed and the related findings, but does not provide any assurance on these items. Choice "C" is incorrect. The procedures do not need to be comparable to those performed in a compilation. The procedures that the practitioner and specified parties agree upon may be as limited or as extensive as the specified parties desire. Choice "D" is incorrect. The sufficiency of procedures is solely the responsibility of the client, not the practitioner.

Answer 18

Choice “B” is correct. Pro forma financial statements are financial statements that show the effect of a hypothetical event on historical financial statements if it had occurred during the period covered by the financial statements. Choice “A” is incorrect. Financial projections reflect the financial results of a future period based on hypothetical situations. Choice “C” is incorrect. Financial forecasts reflect the expected financial results of a future period based on expected conditions and expected courses of action. Choice “D” is incorrect. Internal control over financial reporting involves the auditor looking at internal controls of the organization.

Answer 19

Choice “B” is correct. A report on management’s description of Speedy Payroll and the suitability of the design and operating effectiveness of internal control is considered a Type 2 report. A Type 2 report includes an opinion on the operating effectiveness of internal control of the service organization. Choice “A” is incorrect. Although Goldstein Bears' auditors must be satisfied regarding Everett’s competence, this information is not included in the audit report. Choice “C” is incorrect. The report should contain an indication that the controls were operating effective to achieve Speedy Payroll’s control objectives, but the report does not provide assurance regarding the achievement of the objectives of the user organization (in this case, Goldstein Bears). Choice “D” is incorrect. Everett’s report should include a restricted use paragraph that restricts use to the management of Speedy Payroll, its customers, and the independent auditors of Speedy Payroll customers.

Answer 20

Choice "C" is correct. There are two types of reports on the processing of transactions by service organizations: "reports on controls placed in operation" and "reports on controls placed in operation and tests of operating effectiveness." The former do not include tests of operating effectiveness and, therefore, are not intended to provide the user auditor with a basis for reducing the assessment of control risk below the maximum. Accordingly, such reports should include a disclaimer of opinion regarding the operating effectiveness of the controls. Choice "A" is incorrect because the report should contain an indication that the controls were suitably designed to achieve specified control objectives, but it does not provide any assurance regarding the achievement of the user organization's (in this case, the retailer's) objectives. Choice "B" is incorrect because the service auditor (Cook) is not required to disclose the assessed level of control risk for the service organization (PDC). Choice "D" is incorrect because the service auditor (Cook) is not required to identify the service organization's (i.e., PDC's) controls relevant to specific financial statement assertions, because this is not a financial statement audit.

Answer 21

Choice "C" is correct. Audits performed in accordance with government auditing standards require a written communication regarding the auditor’s work on internal control. Generally accepted auditing standards only require written communication about internal control when significant deficiencies are noted. Choice "A" is incorrect. An opinion on the financial statements taken as a whole is required by both GAAS and GAGAS. Choice "B" is incorrect. Both GAAS and GAGAS require an opinion on the financial statements taken as a whole. Choice "D" is incorrect. Neither GAAS nor GAGAS audits require an opinion on internal control over financial reporting.

Answer 22

Choice "B" is correct. Government Auditing Standards do not include expanded reporting requirements associated with the notes to the financial statements. They do, however, include requirements that expand reporting on the financial statements and internal controls, as well as provide more restrictive requirements on auditor independence. Choice "A" is incorrect. Strict independence requirements associated with Government Auditing Standards limit consulting engagements for audit firms. Choice "C" is incorrect. Government Auditing Standards require that the report on financial statements be expanded to include, among other requirements, the following items: a statement that the audit was performed in accordance with Government Auditing Standards, a description of the scope of the testing of internal controls, instances of fraud noted, etc. Choice "D" is incorrect. Government Auditing Standards require a written report on the auditor's understanding of internal control and the assessment of control risk in all audits. This is different from GAAS, which requires written communication only when significant deficiencies are noted.

Answer 23

Choice "A" is correct. The firm's discovery of a major federal financial assistance program would create additional audit requirements not fully met by a GAAS audit. The firm would be obligated to inform management and the audit committee that the GAAS audit may not be sufficient to meet the additional audit requirements associated with the program. Choice "B" is incorrect because the auditor is required to inform management and the audit committee that the scope of the engagement is too narrow, not to withdraw from the engagement. Choice "C" is incorrect because the failure to identify federal programs as part of audit planning or client acceptance does not automatically indicate that control risk should be assessed at a higher level. It does, however, mean that the auditor should inform management and the audit committee that the GAAS audit may not fulfill the audit requirements implied by a major federal program. Choice "D" is incorrect because the auditor is required to disclose the inadequacy of the audit’s scope to fully meet regulatory requirements, not to disclaim an opinion.

Answer 24

Choice “B” is correct. The predecessor accountant is not required to obtain a letter of representation from management before reissuing a compilation report. This procedure is required when an audit, not compilation, report is reissued. Choice “A” is incorrect. The predecessor accountant is required to compare the prior period financial statements with those issued previously and currently before reissuing a compilation report. Choice “C” is incorrect. The predecessor accountant is required to obtain a letter from the successor accountants before reissuing a compilation report. Choice “D” is incorrect. The predecessor accountant is required to read the financial statements and the report of the current period before reissuing a compilation report.

Answer 25

Choice "D" is correct. In a review engagement, an engagement letter is required, independence is required, procedures include analytical procedures and inquiry, and qualified conclusions are permitted. Choice "A" is incorrect. No assurance is provided during a compilation engagement. Choice "B" is incorrect. No assurance is provided during a preparation engagement, independence need not be assessed, and analytical procedures need not be performed. Choice "C" is incorrect. An audit would include additional auditing procedures than only analytical procedures and client inquiries. Additionally, an opinion, rather than a conclusion, is issued for an audit.

Answer 26

Choice "D" is correct. A review report states that a review includes primarily applying analytical procedures to management's financial data and making inquiries of company management. Choice "A" is incorrect because the review report does not state or express an opinion on the financial statements. The report states that the accountant does not express an opinion because the procedures are substantially less in scope than an audit. Choice "B" is incorrect because although a review does not contemplate obtaining corroborating evidential matter or applying certain other procedures ordinarily performed during an audit, this is not stated in the report. The review report simply states that a review is substantially less in scope than an audit. Choice "C" is incorrect because an audit report, not a review report, refers to "examining on a test basis." A compilation report, not a review report, refers to "information that is the representation of management."