EXAM 2 Flashcards
A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size?
Smaller amount of tolerable misstatement
Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?
Expected misstatement = yes, tolerable misstatement = yes
The risk of incorrect acceptance relates to the
Effectiveness of the audit
Which of the following statements concerning monetary-unit sampling is correct?
The auditor controls the risk of incorrect acceptance by specifying the desired confidence level for the sampling plan
How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?
Increase in Tolerable Misstatement = Decrease in Sample Size
Increase in assessed level of control risk = Increase sample size
For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve
Write-offs of customer accounts
Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded?
The billing department supervisor matches prenumbered shipping documents with entries in the sales journal
Which of the following internal controls would be most likely to deter the lapping of collections from customers?
Segregation of duties between receiving cash and posting the accounts receivable ledger
Smith Corporation has numerous customers. A customer file is kept on a disk. Each customer file contains a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are exceeded. The best procedure for the auditor to follow would be to
Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit
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?
Understanding the sales journal
If accounts receivable turnover (credit sales/receivables) was 7.1 times in 2011 compared to only 5.6 times in 2012, it is possible that there were
Fictitious sales in 2012
If the number of days’ sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated?
Completeness
Which of the following is most likely to be detected by an auditor’s review of a client’s sales cutoff?
Unrecorded sales for the year
Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because
The auditor cannot infer that all nonrespondents have verified their account information
The negative request form of accounts receivable confirmation is useful particularly when
The assessed level of control risk relating to receivables is = low, the number of small balances is = high, consideration by the recipient is = likely
An auditor should perform alterative procedures to substantiate the existence of accounts receivable when
No reply to a positive confirmation request is received
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity’s aging of receivables to support management’s financial statement of assertion of
Valuation and allocation
Ensure that the entity has legal title to accounts receivable (rights and obligations)
Review of bank confirmations and loan agreements.
Determine that recorded accounts receivable include all amounts owed to the client (completeness)
Select a sample of shipping documents, match them with related sales invoices, and determine that they have been included in the sales journal and accounts receivable subsidiary ledger.
Verify that all accounts receivable are recorded in the correct period (cutoff)
Select a sample of shipping documents for a few days before and after year-end.
Ensure that the allowance for uncollectible accounts is properly stated (valuation and allocation)
Review of aging of accounts receivable with the credit manager.
Confirm that recorded accounts receivable are valid (existence)
Confirmation of accounts receivable.
In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition, and receiving report are verified. The next step in the system is
Entering of the voucher into the voucher register
When goods are received, the receiving clerk should match the goods with
The vendor shipping document and the purchase order
Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the
Receiving department
Which of the following control activities is not usually performed in the accounts payable department?
Accounting for unused prenumbered purchase orders and receiving reports
In a properly designed purchasing process, the same employee most likely would match vendors’ invoices with receiving reports and also
Recompute the calculations on vendors’ invoices
For effective internal control purposes, which of the following individuals should be responsible for mailing signed checks?
Treasurer
To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all
Receiving reports
Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable apply to the prior period.
Purchase cutoff procedures should be designed to test whether all inventory
Purchased and received before the end of the year was recorded
Which of the following procedures is least likely to be performed before the balance sheet date?
Search for unrecorded liabilities
When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be
Vendors with whom the entity has previously done business
During the year being audited, the Matthews Corporation changed from a system of recording time worked on clock cards to an IT payroll system in which employees record time in and out with magnetic cards. The IT system automatically updates all payroll records. Because of this change
Without paper clock cards, part of the audit trail is altered
Which of the following procedures would most likely be considered a weakness in an entity’s internal controls over payroll?
The employee who distributes payroll checks returns unclaimed payroll checks to payroll department
In meeting the control objective of safeguarding of assets, which department should be responsible for the following?
Distribution of paychecks and custody of unclaimed paychecks = treasurer
For an appropriate segregation of duties, journalizing and posting summary payroll transactions should be assigned to
General accounting
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the
Authorization of transactions from the custody-related assets
An auditor who is testing IT controls in a payroll system would most likely use test data that contain conditions such as
Time cards with invalid job numbers
It would be appropriate for the payroll department to be responsible for which of the following functions?
Preparation of periodic governmental reports as to employees’ earnings and withholding taxes
Which of the following audit tests would most likely be used to test the occurrence assertion for payroll transactions?
Trace a sample of payroll checks to the approved time sheet summary and the master employee list to verify validity
Effective control activities over the payroll function may include
Verification of agreement of job time cards with employee clock card hours by a payroll department employee.
