first 50

Question 1

Control environment

Answer 1

1) HR
2) management philosophy and operating style
3) integrity and ethical values
4) commitment to competence
5) participation with governance
6) entitys authority and responsibility
7) entitys organizational structure

The overall attitude and awareness of an entity’s board of directors concerning the importance of internal control usually are reflected in its control environment.

Question 2

Reasonable Assurance

Answer 2

cost should not exceed benefit

Question 3

An auditor always performs substantive tests regardless of the assessed risk

Answer 3

true

Question 4

when CR is at max level

Answer 4

document the assessment

controls do not pertain to assertions

Question 5

what is the objective of tests of details?

Answer 5

evaluate if ic is operating effectively and detect mm in fs

Question 6

There are no significant deficiencies in the design or operation of the internal control structure.

Answer 6

should never be included in a report

Question 7

internal controls require a restriction on the distribution of the report.

Answer 7

true

Question 8

material weaknesss are separate from sigfig def

Answer 8

true

Question 9

An independent auditor may NOT share responsibility with an internal auditor in any audit judgment area, regardless of the internal auditor’s competence and objectivity.

Answer 9

true

Question 10

internal auditors are allowed to perform tests of controls or substantive tests

Answer 10

true

Question 11

Internal auditing standards developed by The Institute of Internal Auditors assess objectivity

Answer 11

true

Question 12

fixed assets affect internal audits

Answer 12

true

Question 13

objectivity

Answer 13

(1) the organizational status of the internal audit function; and (2) the policies affecting the internal auditor’s objectivity about areas audited.

Question 14

prenumbering helps to ensure that everything is recorded and “complete”

Answer 14

true

Question 15

treasurer should authorize write offs

Answer 15

true

Question 16

how do you ensure that billed sales are correctly posted to AR ledger?

Answer 16

compare daily summaries to daily postings in AR; daily summaries provides you info about the population of billed sales

Question 17

how do you ensure that good ships are properly billed?

Answer 17

examine shipping documents with matched invoices

Question 18

credit and sales should be separate functions

Answer 18

true

Question 19

returning goods should be given to receiving clerks

Answer 19

true; debit memo

Question 20

batch systems take more time than online systems

Answer 20

true

Question 21

A/P function

Answer 21

• The accounts payable clerk files invoices and supporting documentation after payment.
• The accounts payable clerk manually verifies arithmetic on the vendor invoice.
• The accounts payable system compares the receiving report to the vendor invoice.
• indicating asset and expense account to be debited

Question 22

what helps to maintain accurate inventory records?

Answer 22

The use of periodic inventory counts to adjust the perpetual inventory records ensures that the inventory records are accurate. The physical count is compared to the book amount and the necessary adjustments are made.

Question 23

follow up errors ensure rights and obligations

Answer 23

true

Question 24

credit approval ensures valuation and allocation

Answer 24

true

Question 25

Period Ened

Answer 25

There are 4 assertions applicable to account balances at the period end: (1) existence; (2) completeness; (3) rights or obligations; and (4) valuation and allocation.

Question 26

Tests of controls do not provide a basis for making conclusions about material misstatements in the financial statements. Substantive tests are used to detect material misstatements.

Answer 26

true

Question 27

tests of details/substantive tests- relevant assertion level

tests of control- if internal controls are effective

Answer 27

true

Question 28

judgmental misstatements

Answer 28

unreasonable accounting estimates

Question 29

factual misstatements

Answer 29

The misapplication of accounting principles.

An inaccuracy in accounting processing data.

A difference between the classification of a reported financial statement element and the classification according to generally accepted accounting principles

Question 30

The use of negative accounts receivable confirmations requires:

Answer 30

1) a low risk of material misstatement;
2) a large number of small balances; and
3) an expected very low exception rate;
4) no reason to believe that the recipients of the confirmations would not review them properly.

Question 31

how does one evaluate the reasonableness of accounting estimates?

Answer 31

deviations from historical patterns
subjective to bias
sensitive to variations
significant to AE

*review the lawyers letters about litigation to discover ALL accounting estimates that may be material

Question 32

What is the best indicator of fair value?

Answer 32

Examining published price quotations in an active market.

Question 33

Management rep letter

Answer 33

• indicate fraud
• minute of meetings
• compensating balances and other arrangements involving restrictions on cash balances have been disclosed.

Question 34

in obtaining written rep materiality levels would apply to related transactions but would not apply to ?

Answer 34

irregularities involving management

Question 35

“There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency.”

Answer 35

management rep letter

Question 36

material weaknesses are acknowledged by the auditor

Answer 36

true

Question 37

when evaluating related parties what is important

Answer 37

disclosure and if approved by board

Question 38

subsequent events

Answer 38

investigate long term debt occurring after year-end

Question 39

In reviewing subsequent events, the auditor would read the latest interim financial statements and board of directors’ minutes, inquire with legal counsel concerning litigation, claims, and assessments, and make specific inquiries of management.

Answer 39

true

Question 40

signs of going concern

Answer 40

delay in expenditure
negative balances
debt agreements
disposal of assets
decrease in ownership equity
credit denied

Question 41

if disclosed financial difficulties then qualified opinion is not necessary

Answer 41

true

Question 42

when concluding going concern what should the auditor do

Answer 42

Consider the adequacy of disclosure about the client’s possible inability to continue as a going concern.

confirm with third parties

possible effects of financial statements

Question 43

Accounts Receivable Existence

Answer 43

confirm selected individual customer accounts

Question 44

Accounts Receivable Valuation

Answer 44

evaluate the reasonableness of management estimates for allowance for uncollectibles and sale returns

review the aged trial balance of ar

review the receivers after year-end for sales returns; consider prior years in view of economic conditions

review adjusting journal entries or write offs for appropriate authorization

Question 45

Accounts Receivable Completeness

Answer 45

perform cutoff tests of sales by examining the shipping documents forthe last few shipments before year-end and the first few shipments after year-end; compare these shipping documents with sales invoices and assess whether the sales were recorded in the appropriate period

• compare shipping doc around end of the period with the related sales invoices to assess whether the sales were recorded in appropriate period
• proper cutoff involves two assertions (existence and completion)

Question 46

Accounts Receivable and Rights+Obligations

Answer 46

receivables pledged as collateral for debts
shipments on consignment that are not actual sales
receivables from employees or management that should be classified separately from trade receivables
document such inquiries in management representation letter