Exam 3 Review Flashcards
The audit team is required by auditing standards to make an ordinary presumption of the risk of fraud due to revenue misstatements on every engagement. (T/F)
True
Alternative procedures that would provide evidence of the existence of receivables would include which of the following?
Review of subsequent collections.
Auditors test the assertion of completeness by determining if any restrictions on the use of commercial paper by an entity are disclosed in the footnotes (T/F)
False
The auditor has determined that the control risk for the existence assertion is low; therefore the auditor may reduce the number of items tested on a substantive basis (T/F)
True
Management has been found involved in many fraudulent schemes; a common one is “channel stuffing.” What does “channel stuffing” involve?
Shipment of goods not ordered
Which of the following is not a reason for a client to employ cash management techniques?
Reduce the effect of compensating balances
An imprest payroll account should never reach a zero balance. (T/F)
False
A primary feature of automated control in the acquisition cycle includes which of the following?
Calculated order quantities based on set criteria
Which of the following is not a normal edit test as part of computerized control for checks?
Cross-references.
The acquisition cycle begins with which of the following?
A requisition
Notes issued by major corporations are known as commercial paper.
True
Which of the following procedures is a substantive procedure that relates to the rights and obligations assertion?
Examine documents of title.
Many frauds are committed by overstating inventory accounts (T/F)
True
Monthly statements provide a detailed list of the customer’s activity for the previous month and a statement of all open items. (T/F)
True
The cutoff bank statement is used by the auditor to address which of the following concerns?
Omitting outstanding checks on reconciliations.
Estimation of the allowance for doubtful accounts is a simple management decision as it is determined as a percentage of sales (T/F)
False
Which statement is true about a company’s choice of capitalization policy?
The company’s policy is determined relative to materiality and the cost of maintaining asset records.
The auditor performs substantive procedures related to property, plant and equipment to determine if the assets have been pledged as collateral or title has transferred. What is the primary assertion the auditor is testing?
Rights
All marketable securities are carried at fair market value on the balance sheet. (T/F)
False
The aged accounts receivable report is utilized by the auditor to accomplish which of the following?
Assess the adequacy of the allowance for doubtful accounts
The ending price of securities can be verified through reliable publications and websites such as the Wall Street Journal (T/F)
True
The cash account is not part of the acquisitions and payment cycle (T/F)
False
It is likely in the acquisition and payment cycle that audit evidence from substantive analytical procedures alone will be sufficient enough for the auditor. (T/F)
False
The valuation assertion is most relevant to the audit of marketable securities. (T/F)
True
Assume that an auditor notes a large series of checks that does not clear the bank for an unusually long time after period end. Which of the following would the auditor likely suspect from this observation?
The presence of held-checks at period-end
Use of reasonableness tests by Bono Mullins, PC will include relationships between financial but not non-financial data. (T/F)
False
Which of the following controls over cash would an auditor expect to observe?
Checks permanently marked “for deposit only” with the proper routing information.
An appropriate mix of evidence for a low risk client could include 20% tests of details, 40% analytics, and 40% tests of controls; an appropriate mix of evidence for a high risk client could include 60% tests of details, 20% analytics, and 20% tests of controls. (T/F)
True
Which of the following procedures is not a fraud-related audit procedure used to respond to identified fraud risk factors?
All of the above are fraud-related audit procedures
A compensating balance arrangement usually results in which of the following for a company?
Increase the effective interest rate on corporate borrowing.
Which assertion related to investments is tested when the auditor examines the documents for any restrictions?
Rights.
Which of the following items would not normally appear on bank reconciliations?
Outstanding deposits list.
Which of the following is required by accounting standards for the presentation and disclosure of investments in marketable securities?
By classification as trading, available-for-sale or held-to maturity.
If the auditor is performing substantive procedure to determine whether the long-lived asset balance is reflected on the balance sheet in the noncurrent section, which of the following assertions is being tested?
Presentation and Disclosure
Which of the following best describes kiting
A fraudulent cash scheme to overstate cash assets at year end by manipulating year-end transfers between cash accounts.
The obsolescence of long-lived assets is an inherent risk that should be considered by the auditor. (T/F)
True
Valuation is the most complex assertion related to inventory. (T/F)
True
Knowledge of industry product trends is crucial to the auditor’s identification of the potential for the impairment of assets. (T/F)
False
The auditor’s procedures should include a determination as to whether tangible assets have reasonable useful lives. (T/F)
True
Lapping of accounts receivable is least likely to occur when there is an inadequate segregation of duties. (T/F)
False
Which of the following statement is true?
Intangible assets should be recorded at cost.
A turnaround document is an effective control because it lists useful information for further processing of the collection on account (T/F)
True
An example of alternative procedures for the confirmation of accounts receivable includes which of the following actions?
Review of subsequent collections on account by the client.
Which of the following would meet the need for additional control procedures when using computer-generated purchase orders?
Establishment of a maximum quantity limits that can be ordered within a given time period.
According to auditing standards, accounts receivable confirmations are required to be used in which of the following situations?
If the balance is material.
A control that may be implemented to ensure all sales that occur are recorded in the general ledger includes which of the following?
Use of prenumbered shipping, invoice and sales documents.
Which of the following controls is not a typical control that affects multiple assertions for long-lived assets?
Reviewing insurance policies for adequate replacement coverage of assets.
The use of analytical review procedures applied to related expense accounts would not be used to determine if accounts payable were understated (T/F)
False
Approval of items for payment usually involves a three-way match among the vendor invoice, the purchase order, and the receiving report (T/F)
True
The auditor’s primary concern with accounts payable is that of existence (T/F)
False
Which of the following is a term used to describe management’s recognition that a significant portion of fixed assets is no longer as productive as had originally been expected?
Asset impairment
Confirmations that are sent to select customers asking them to review the current balance due the client as shown on the client’s statement and return the letters directly to the auditor indicating whether they agree with the indicated balance, are known by which of the following terms?
Positive confirmations.
The auditor tests significant repairs and maintenance expenses to ensure that an item that should be capitalized has not been expensed. (T/F)
True
Auditing the valuation assertion for inventory of a client utilizing the FIFO cost flow assumption will require the auditor to examine which of the following?
Invoices representing the more recent purchases of inventory.
The significance of the bill of lading is to provide which of the following?
Evidence of title transfer of goods to customers
Sales transactions should be documented at initiation in order to accomplish which of the following objectives?
To provide the customer a copy of the transaction
Homer and Moe, PC are auditing the financial statements of Lyoncraft, Inc. and decide to confirm a sample of accounts receivable. This test is performed by Homer and Moe primarily to substantiate which of the following assertions?
Existence of accounts receivable.
Much of the inherent risk related to long-lived assets is due to the importance of management estimates. (T/F)
True
One reason the inventory observation is performed is for the purpose of determining the accuracy of client counting procedures (T/F)
True
Reconciliation of vendor statements to recorded payables provides assurance related to the completeness assertion. (T/F)
True
