CPA AUDIT REVIEW #2

Question 1

What is lapping?

Answer 1

Lapping is the delayed recording of cash receipts to cover a cash shortage.

Question 2

What is a output document from a revenue cycle?

Answer 2

Sales Invoice

Question 3

What is a document generated in the purchasing cycle?

Answer 3

Receiving Reports

Question 4

Matching bill of lading file copies with the sales invoices determines what?

Answer 4

Determines if any shipments were not billed (invoiced).

Question 5

What does the customer order file determine?

Answer 5

Determines if any orders were not approved or shipped.

Question 6

What is a remittance advice?

Answer 6

A remittance advice is a proof of payment sent from the customer to the business.

Question 7

What is the accounts receivable subsidiary ledger?

Answer 7

The accounts receivable subsidiary ledger contains all receivables outstanding to date.

An accounts receivable subsidiary ledger is an accounting ledger that shows the transaction and payment history of each customer to whom the business extends credit. The balance in each customer account is periodically reconciled with the accounts receivable balance in the general ledger to ensure accuracy.

Question 8

What is a key control of sales returns and allowances?

Answer 8

A receiving report should be created by the receiving department to verify that claimed returns actually occurred. This prevents fraudulent payments to customers (or false customers) who have not returned any goods.

Question 9

Upon receipt of the remittance listing a COPY of the listing should be sent to who?

Answer 9

The Accounts Receivable bookkeeper to update the subsidiary accounts receivable records.

Note: The actual remittance listing is sent to Cashier.

Question 10

What is the Accounts Receivable control account?

Answer 10

The accounts receivable control account reflects the total amount that a company is owed, while the its subledger shows how much each individual customer owes.

Question 11

What are three controls over the existence of cash receipts?

Answer 11

1. Lockbox system
2. Daily reconciliation of cash discounts and cash receipts.
3. A surveillance system over the cashier.

Question 12

If goods are shipped but not invoiced what happens to revenues, receivables and inventory?

Answer 12

Understatement of revenues and receivables and an overstatement of inventory.

Question 13

List the input controls designed to ensure the reliability and accuracy of data processing,

Answer 13

Edit checks are input controls.

These tests include
Field checks, financial totals, hash totals, reasonableness, limit or range checks, record counts, check digits, sequence checks, sign checks, and validity checks.

Question 14

If a member is in a client trade association but does not serve as an officer or director or in management is independence impaired?

Answer 14

NO

Question 15

If a client financial institution services a member loan is independence impaired

Answer 15

NO. The client financial institution is only performing clerical functions.

Question 16

Inclusion of a clause in an engagement letter providing for member indemnification by the client.

Answer 16

Independence is not impaired.

A clause that holds the member (and his or her partners, heirs, etc.) harmless from any liability or costs arising from knowing representations by management does not impair independence.

Question 17

What are factual misstatements?

Answer 17

No doubt exists about factual misstatements.

Question 18

What are judgemental misstatements?

Answer 18

Judgmental misstatements result from differences between the auditor’s and management’s judgments about (a) accounting estimates or (b) the selection or application of accounting policies.

Question 19

What are projected misstatements?

Answer 19

Projected misstatements are the auditor’s best estimate of population misstatements. They are projections (extrapolations) of identified misstatements in samples to the relevant population.

Question 20

What is the staffing function (Unit 7)?

Answer 20

Staffing provides the necessary personnel to achieve organizational objectives efficiently. Because honest and capable personnel also help create an environment that promotes effective internal control, hiring policies and procedures are crucial. Background checks, for example, may screen out potential hirees of questionable character.

Question 21

What is the directing function?

Answer 21

Professional development activities involve the directing function, that is, motivating people in an organization to contribute effectively to achieve goals.

Question 22

What is a standard control for the completeness for purchases?

Answer 22

Prenumbered documents.

Question 23

The authorization of purchases concerns which assertion?

Answer 23

The rights and obligations assertion.

Question 24

Which control reduces risk of material misstatements related to the existence assertion of manufactured products?

Answer 24

Perpetual inventory records are independently compared with goods on hand.

Question 25

What are appropriate controls over securities and investments?

Answer 25

1. Custodian bonded and separate from investment records
2. Storage in a safe-deposit box.
3. Proper authorization of transactions.

Question 26

What does a reasonable or limit tests test?

Answer 26

Reasonableness tests are used to test quantities received to determine whether they are comparable to an acceptable amount.

Question 27

What is the advantage of an electronic data interchange?

Answer 27

EDI eliminates the paper documents, both internal and external, that are the traditional basis for many audit procedures.

Question 28

Re-computation is related to which assertion?

Answer 28

Valuation assertion

Question 29

In determining the effectiveness of an entity’s policies and procedures relating to the occurrence assertion for payroll transactions, an auditor most likely would inquire about and

Answer 29

Observe the segregation of duties concerning human resources responsibilities and payroll disbursement.

In considering whether transactions actually occurred, the auditor is most concerned about the proper segregation of duties between the human resources department (authorization) and the payroll disbursement (custody function).

Question 30

What are entity-level controls?

Answer 30

Entity-level controls are the (5) components of internal.

Control Environment
Risk Assessment
Information & Communication
Monitoring
Control Activities

Question 31

A cooling-off period of how many years is required before a member of an issuer’s audit engagement team may begin working for the registrant in a key position?

Answer 31

One Year

Question 32

Which outside parties should a Auditor have a duty to report possible fraud?

Answer 32

To the SEC when the client reports an auditor change.

To a successor auditor when the successor makes appropriate inquiries.

To a government funding agency from which the client receives financial assistance

Question 33

What best decribes U.S. G.A.A.P?

Answer 33

Principles issued by bodies designated by the Council of the AICPA.

Question 34

What does the days sales in receivable ratio confirm?

Answer 34

The days’ sales in accounts receivable ratio (also known as the average collection period) tells you the number of days it took on average to collect the company’s accounts receivable during the past year.

Question 34

What does the days sales in receivable ratio confirm?

Answer 34

The days’ sales in accounts receivable ratio (also known as the average collection period) tells you the number of days it took on average to collect the company’s accounts receivable during the past year.

Question 35

What happens to the inventory turnover ratio if inventory increases?

Answer 35

It decreases

Cogs/inventory.

When the numerator decreases and the denominator stays the same, the fraction as a whole decreases.

2) When the denominator increases and the numerator stays the same, the fraction as a whole decreases.

3.) When the denominator decreases and the numerator stays the same, the fraction as a whole increases.

Question 36

What test of controls are used in the purchasing cycle?

Answer 36

1. Examine vouchers and supporting documents for authorization.
2. Reperform calculations on some supporting documentation.
3. Trace vouchers to entries in the vouchers register.

Question 37

If controls change what should the Auditor do if they intend to rely on the controls?

Answer 37

The Auditor must test for its operating effectiveness.

Question 38

Processing data through simulated files to understand the operating effectiveness of controls refers to which method?

Answer 38

Integrated test facility (minicompany technique).

Simulated - manufactured in imitation of some other material. imitating the conditions of something, especially as a training exercise.

Question 39

What should the Auditor do if there is a deviation from a prescribed control?

Answer 39

Make inquiry as to the potential consequences of the deviation.

Question 40

A material misstatement found by the Auditor but missed by the entity is what?

Answer 40

A significant deficiency.

Question 41

What is true about the test data approach?

Answer 41

1. Controls may only be tested for one moment in time.
2. Directly test controls
   3..Only controls important to the auditor are tested.
3. Only one transaction of each type need be tested.

Question 42

What are the overall responses to assessed risk of material misstatements?

Answer 42

(1) an emphasis on professional skepticism in evidence gathering and evaluation.

(2) increased supervision

(3) assignment of staff with greater experience or expertise.

(4) greater unpredictability in the choice of further audit procedures.

(5) changing the nature, timing, and extent of audit procedures

Question 43

Why does an auditor reduce test of details for a particular audit objective?

Answer 43

Analytical procedures have revealed no unusual or unexpected results.

The assessment of the RMMs is lower. The lower assessment may justify reducing tests of details.

Question 44

What are true facts about the CFO in the payroll function?

Answer 44

1. CFO signs and distributes checks. Cannot prepare the check (recording function)
2. The CFO has a ASSET CUSTODY FUNCTION. (S)he keeps the cash, checks and electronic transfer codes.
3. All unclaimed checks are returned to the CFO for safeguarding.

Question 45

What are true facts about accounting (payroll) department in the payroll function?

Answer 45

1. The payroll (accounting) department prepares payroll based on info or authorizations from HR or the timekeeper (RECORDING FUNCTION)
   2.The accounting departments prepares the checks.

Question 46

What does test of controls address?

Answer 46

(1) How they were applied at relevant times during the period.

(2) By whom or by what means they were applied.

(3) The consistency of their application during the period

Question 47

What does a field check determine?

Answer 47

A compatibility test (field check) determines whether characters are appropriate to a field.

Question 48

What are the roles of risk assessment in an integrated audit?

Answer 48

1. Determining significant classes of transactions, account balances, and relevant assertions.
2. Determining evidence necessary to conclude on the effectiveness of a given control.
3. Selecting controls to test.

Question 49

The primary audit objective regarding the purchasing of materials by the client is to

Answer 49

Determine the reliability of financial reporting by the purchasing function.

Question 50

What is the purpose of internal control?

Answer 50

To address business risk that threaten:

1. The reliability of financial reporting.

2.Effectiveness and efficiency of operations

3. Compliance with laws and regulations.

Question 51

What is the purpose of internal control?

Answer 51

To address business risk that threaten:

1. The reliability of financial reporting.

2.Effectiveness and efficiency of operations

3. Compliance with laws and regulations.

Question 52

What information would the auditor expect to find in the data dictionary that would assist in a payroll application audit?

Answer 52

Programs that access the data.

Question 53

What is a data dictionary?

Answer 53

The data dictionary is a file (possibly manual but usually computerized) in which the records relate to specified data items. It contains definitions of data records and files and the list of programs used to process them. Only certain persons or entities are permitted to retrieve data or to modify data items. Accordingly, these access limitations are also found in the data dictionary.