Midterm Multiple Choice

Question 1

Which of the following categories of principles is most closely related to gathering audit evidence?
A. Performance.
B. Reasonable assurance.
C. Responsibilities.
D. Reporting.

Answer 1

A. Performance.

Question 2

One of an accounting firm’s basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following:
A. International auditing standards.
B. Standards within a system of quality control.
C. Generally accepted accounting principles.
D. Generally accepted auditing standards.

Answer 2

B. Standards within a system of quality control.

Question 3

Which of the following best demonstrates the concept of professional skepticism?
A. Evaluating potential financial interests held by auditors in the client.
B. Focusing on items that have a more significant quantitative effect on the entity’s financial statements.
C. Critically assessing verbal evidence received from the entity’s management.
D. Relying more extensively on external evidence rather than internal evidence.

Answer 3

C. Critically assessing verbal evidence received from the entity’s managemen

Question 4

Breaux & Co. CPAs require that all audit documentation indicate the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following?
A. Independence.
B. Adequate competence and capabilities.
C. Adequate planning and supervision.
D. Gathering sufficient appropriate evidence.

Answer 4

C. Adequate planning and supervision.

Question 5

Auditors’ understanding of the internal control in an entity provides information for
A. Ascertaining the independence in mental attitude of members of the audit team.
B. Planning the nature, timing, and extent of substantive procedures on an audit.
C. Determining whether members of the audit team have the required competence and capabilities to perform the audit.
D. Planning the professional development courses the audit staff needs to keep up to date with new auditing standards.

Answer 5

B. Planning the nature, timing, and extent of substantive procedures on an audit.

Question 6

Kramer, CPA, consulted an independent appraiser regarding the valuation of fine art for a not-for-profit museum. Consultation with the appraiser in this case would
A. Be considered as exercising proper due care.
B. Be considered a failure to follow GAAS because Kramer should have known how to value fine art before accepting the engagement.
C. Not be considered a violation of GAAS because GAAS does not apply to not-for-profit entities.
D. None of the other answer choices are correct.

Answer 6

A. Be considered as exercising proper due care.

Question 7

Which of the following is most closely related to the relevance of audit evidence?
A. Because of a large number of transactions occurring near year-end, auditors decide to confirm a larger number of receivables
following year-end instead of during the interim period.
B. In addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate
the collectability of accounts receivable.
C. In response to less effective internal control, auditors increase the number of customer accounts receivable confirmations
mailed compared to that in the prior year.
D. Auditors decide to physically inspect investment securities held by a custodian instead of obtaining confirmations from the
custodian.

Answer 7

B. In addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate
the collectability of accounts receivable.

Question 8

Which of the following statements is not true with respect to the performance principle?
A. Audit teams consider materiality in planning the audit, performing the audit, and evaluating the effect of misstatements on the
entity’s financial statements.
B. Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in
continuing audits.
C. Auditors are required to consider both the relevance and reliability of evidence in evaluating whether the evidence they have
gathered is appropriate.
D. In assessing the risk of material misstatements, the audit team considers the effectiveness of the entity’s internal controls in preventing and detecting misstatements.

Answer 8

B. Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in
continuing audits.

Question 9

The primary purpose for obtaining an understanding of the entity’s environment (including its internal control) in a financial statement audit is
A. To make consulting suggestions to the entity’s management.
B. To determine the nature, timing, and extent of substantive procedures to be performed.
C. To determine whether the entity has changed any accounting principles.
D. To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements.

Answer 9

B. To determine the nature, timing, and extent of substantive procedures to be performed.

Question 10

Which of the following recognizes that an audit conducted under generally accepted auditing standards may not detect all material misstatements?
A. Absolute assurance.
B. Professional judgment.
C. Reasonable assurance.
D. Reliability of audit evidence.

Answer 10

C. Reasonable assurance.

Question 11

Generally accepted auditing standards require that auditors always prepare and use
A. A written client consent to discuss audit matters with prospective auditors.
B. A written audit plan.
C. A written planning memorandum explaining the auditors’ understanding of the client’s business.
D. The written time budgets and schedules for performing each audit.

Answer 11

B. A written audit plan.

Question 12

Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the
A. Administrative audit documentation in the current file.
B. Current file audit documentation.
C. Planning memorandum in the current file.
D. Permanent file audit documentation.

Answer 12

B. Current file audit documentation.

Question 13

Spreadsheet software would be most useful for which of the following audit activities?
A. Testing internal controls over computerized accounting applications.
B. Drafting a planning memorandum.
C. Preparing a comparison of current-year expenses with those from the previous year.
D. Preparing an audit plan.

Answer 13

C. Preparing a comparison of current-year expenses with those from the previous year.

Question 14

A primary advantage of using CAATs in the audit of an advanced computerized system isthat it enables the auditor to
A. Verify the performance of machine operations that leave visible evidence of occurrence.
B. Gather and store large amounts of supportive audit evidence in machine-readable form.
C. Utilize the speed and accuracy of the computer.
D. Substantiate the accuracy of data through self-checking digits and hash totals.

Answer 14

C. Utilize the speed and accuracy of the computer.

Question 15

Which of the following communications is most likely to be written before the balance-sheet date?
A. An attorney’s letter regarding contingent liabilities.
B. Confirmation letters to vendors confirming the amounts they owe to the client.
C. An engagement letter.
D. A report to the audit committee on the results of testing of internal control over cash receipts.

Answer 15

C. An engagement letter.

Question 16

With respect to the concept of materiality, which of the following statements is correct?
A. Materiality depends on the nature of a transaction rather than the dollar amount of the transaction.
B. Materiality is determined by reference to AICPA guidelines.
C. Materiality is a matter of professional judgment.
D. Materiality depends only on the dollar amount of an item relative to other items in the financial statements.

Answer 16

C. Materiality is a matter of professional judgment.

Question 17

When evaluating whether accounting estimates made by management are reasonable, the audit team would be most interested in which of the following?
A. Evidence of a conservative systematic bias.
B. Key factors that are consistent with prior periods.
C. Measurements that are objective and not susceptible to bias.
D. Assumptions that are similar to industry guidelines.

Answer 17

A. Evidence of a conservative systematic bias.

Question 18

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?
A. They are often used to develop an auditor’s preliminary judgment about materiality.
B. They usually involve the comparison of assertions developed by management to ratios calculated by an auditor.
C. They typically use financial and nonfinancial data aggregated at a high level.
D. They often replace the tests of controls that are performed to assess control risk.

Answer 18

C. They typically use financial and nonfinancial data aggregated at a high level.

Question 19

The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may
A. Allow the internal auditor to perform tests of internal controls.
B. Allow the internal auditor to perform analytical procedures but not be involved with any tests of details.
C. Not assign any task to the internal auditor because of the internal auditor’s lack of independence.
D. Allow the internal auditor to audit a major subsidiary of the company.

Answer 19

A. Allow the internal auditor to perform tests of internal controls.

Question 20

Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?
A. The firm will have to hire a specialist in one audit area.
B. Staff will need to be rescheduled to cover this new client.
C. The client’s financial reporting system has been in place for 10 years.
D. There will be a client-imposed scope limitation.

Answer 20

D. There will be a client-imposed scope limitation

Question 21

The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client’s internal control is referred to as
A. Detection risk.
B. Control risk.
C. Risk of material misstatement.
D. Inherent risk.

Answer 21

C. Risk of material misstatement.

Question 22

The risk of material misstatement is composed of which audit risk components?
A. Inherent risk, control risk, and detection risk.
B. Inherent risk and control risk.
C. Control risk and detection risk.
D. Inherent risk and detection risk.

Answer 22

B. Inherent risk and control risk.

Question 23

Analytical procedures are generally used to produce evidence from
A. Relationships among current financial balances and prior balances, forecasts, and nonfinancial data.
B. Physical observation of inventories.
C. Confirmations mailed directly to the auditors by client customers.
D. Detailed examination of external, external-internal, and internal documents

Answer 23

A. Relationships among current financial balances and prior balances, forecasts, and nonfinancial data.

Question 24

Analytical procedures can be used in which of the following ways?
A. As a means of overall review near the end of the audit.
B. As “attention-directing” methods when planning an audit at the beginning.
C. As substantive audit procedures to obtain evidence during an audit.
D. All of the other answers are correct.

Answer 24

D. All of the other answers are correct.

Question 25

It is acceptable under generally accepted auditing standards for an audit team to
A. Decide that audit risk can be 40 percent.
B. Assess inherent risk at zero and perform a minimum of detection work.
C. Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive
tests.
D. Assess control risk at zero and perform a minimum of detection work.

Answer 25

C. Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive
tests.

Question 26

Which of the following risk types increase when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date?
A. Inherent.
B. Sampling.
C. Control.
D. Detection.

Answer 26

D. Detection.

Question 27

Which of the following matters relating to an entity’s operations would an auditor most likely consider as an inherent risk factor in planning an audit?
A. The entity enters into significant derivative transactions as hedges.
B. The entity’s financial statements are generated at an outside service center.
C. The entity’s fiscal year ends on June 30.
D. The entity’s financial data is available only in computer-readable form.

Answer 27

A. The entity enters into significant derivative transactions as hedges.

Question 28

What is the primary objective of the fraud brainstorming session?
A. Determine whether the planned procedures in the audit plan will satisfy the general audit objectives.
B. Assess the potential for material misstatement due to fraud.
C. Determine audit risk and materiality.
D. Identify whether analytical procedures should be applied to the revenue accounts.

Answer 28

B. Assess the potential for material misstatement due to fraud.

Question 29

Frauds are unintentional misstatements or omissions of accounts or disclosures in financial statements.
True
False

Answer 29

False

Question 30

When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to
A. Determine whether other similar acts could have occurred.
B. Determine whether to contact law enforcement officials.
C. Recommend remedial actions to the audit committee.
D. Evaluate the effect of the noncompliance on the financial statements.

Answer 30

D. Evaluate the effect of the noncompliance on the financial statements.

Question 31

Analytical procedures are used in planning stages
A.To provide substantive evidence about the account balances in the financial statements.
B. To assess the reasonableness of financial statement amounts and helps direct attention to possible problem areas.
C. To set materiality limits.
D. To test internal control activities.

Answer 31

B. To assess the reasonableness of financial statement amounts and helps direct attention to possible problem areas.

Question 32

In the audit risk model, if an audit team wanted to keep audit risk at a low level, but there was high inherent risk and high control risk, then
audit procedures would need to be designed so that
A. Detection risk was set at a high level.
B. Control risk was set at a low level.
C. Inherent risk was set at a high level.
D. Detection risk was set at a low level.

Answer 32

D. Detection risk was set at a low level.

Question 33

Failure to meet company objectives is a result of
A. Information risk.
B. Business risk.
C. Audit risk.
D. Inherent risk.

Answer 33

B. Business risk.

Question 34

Which of the following circumstances would most likely cause an audit team to perform extended procedures?
A. The company maintains several different petty cash funds.
B. The company has recently hired a new chief financial officer after the previous one retired.
C. The client made several large adjustments at or near year-end.
D. Supporting documents are produced when requested.

Answer 34

C. The client made several large adjustments at or near year-end.

Question 35

The risk that the auditors’ own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is
A. Inherent risk.
B. Control risk.
C. Detection risk.
D. Audit risk.

Answer 35

C. Detection risk.

Question 36

Analytical procedures used when planning an audit should concentrate on
A. Accounts and relationships that can represent specific potential problems and risks in the financial statements.
B. Predictability of account balances based on individual significant transactions.
C. Weaknesses in the company’s internal control activities.
D. Management assertions in financial statements.

Answer 36

A. Accounts and relationships that can represent specific potential problems and risks in the financial statements.

Question 37

Auditors are not responsible for accounting estimates with respect to
A. Determining that estimates are adequately disclosed in the financial statements.
B. Determining that estimates are presented in conformity with GAAP.
C. Determining the reasonableness of estimates.
D. Making the estimates.

Answer 37

D. Making the estimates

Question 38

Generally, fraudulent financial statements show financial performance and ratios that are better than current industry experience.
True
False

Answer 38

True

Question 39

The risk that material misstatements have occurred in transactions entering the accounting system is
A. Inherent risk.
B. Audit risk.
C. Detection risk.
D. Control risk.

Answer 39

A. Inherent risk.

Question 40

In general, a fraudulent companies will prepare financial statements that are materially misleading in which of the following manners
A. Understating revenues and assets.
B. Showing financial performance that is worse than industry averages.
C. Overstating expenses and liabilities.
D. Overstating revenues and assets

Answer 40

D. Overstating revenues and assets

Question 41

The primary reason for conducting an evaluation of a company’s internal control is to provide a basis for communicating significant
deficiencies.
True
False

Answer 41

False

Question 42

The audit task of control risk assessment involves finding out what the company does to prevent, detect, and correct errors and fraud.
True
False

Answer 42

True

Question 43

Auditors do not need to perform tests of controls on internal control activities that are evaluated as weak just to prove the weaknesses
actually exist.
True
False

Answer 43

True

Question 44

The primary purpose for obtaining an understanding of a nonpublic audit client’s internal control is to
A. Provide information for a communication of internal control–related matters to management.
B. Determine the nature, timing, and extent of further audit tests to be performed in the audit.
C. Provide the rationale for the inherent risk assessment at the financial statement assertion level.
D. Provide a basis for making constructive suggestions in a management letter.

Answer 44

B. Determine the nature, timing, and extent of further audit tests to be performed in the audit.

Question 45

According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to
A. Determine whether the company’s controls are processing company data effectively.
B. Determine that the company’s controls will satisfy the company’s control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed.
C. Determine that the company’s employees are processing the controls according to the policy and procedure manuals at the company.
D. None of the above.

Answer 45

B. Determine that the company’s controls will satisfy the company’s control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed.

Question 46

When testing a control activity’s operating effectiveness, procedures the auditor performs to test operating effectiveness would likely include
A. Inquiry of appropriate personnel.
B. Reperformance of the control activity.
C. Reading over the company’s code of conduct.
D. Inquiry of appropriate personnel and reperformance of the control activity.

Answer 46

D. Inquiry of appropriate personnel and reperformance of the control activity.

Question 47

The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the
A. Administrative controls from the internal accounting controls.
B. Operational responsibility from the record-keeping responsibility.
C. Authorization of transactions from the custody of related assets.
D. Human resources function from the controllership function.

Answer 47

C. Authorization of transactions from the custody of related assets.

Question 48

Tests of controls in a GAAS audit are required for
A. Obtaining evidence about the financial statement assertions.
B. Obtaining evidence about the operating effectiveness of client control activities.
C. Applying analytical procedures to financial statement balances.
D. Accomplishing control over the occurrence of recorded transactions.

Answer 48

B. Obtaining evidence about the operating effectiveness of client control activities.

Question 49

A material weakness is a situation in which
A. It is reasonably possible that an immaterial misstatement would not be detected on a timely basis.
B. It is reasonably possible that a material misstatement would not be detected on a timely basis.
C. It is probable that an immaterial financial statement misstatement would not be detected on a timely basis.
D. There is a remote likelihood that a material misstatement would be detected on a timely basis.

Answer 49

B. It is reasonably possible that a material misstatement would not be detected on a timely basis.

Question 50

Once the auditor detects a control deficiency, which of the following steps must he or she take first?
A. Perform tests of other controls related to the same assertion as the control deemed ineffective.
B. Test the deficient control, assuming a maximum level of risk.
C. Evaluate the severity of the deficiency on the auditor’s control risk assessment for that assertion.
D. Modify the planned substantive procedures as a result of the deficiency.

Answer 50

C. Evaluate the severity of the deficiency on the auditor’s control risk assessment for that assertion.

Question 51

The attitudes of managers and directors are probably the most pervasive influences on the control environment.
True
False

Answer 51

True

Question 52

Auditors perform tests of control activities to determine how the company’s controls actually functioned during the period under audit.
True
False

Answer 52

True

Question 53

An action taken to prevent, detect, and correct errors and frauds in transactions is referred to as a
A. Control objective.
B. Risk assessment.
C. Dual-purpose test.
D. Control activity.

Answer 53

D. Control activity.

Question 54

Significant deficiencies are defined as conditions that
A. Result in a reasonable possibility that a material misstatement exists in financial statements.
B. Could adversely affect the organization’s ability to initiate, record, process, and report financial data in the financial statements.
C. Exist when the design or operation of a control does not allow the company’s management or employees to detect or prevent
misstatements in a timely fashion.
D. Relate to either a necessary control that is missing or an existing control that is so poorly designed that it fails to satisfy the control’s objective.

Answer 54

B. Could adversely affect the organization’s ability to initiate, record, process, and report financial data in the financial statements.

Question 55

Which of the following is a preventive control?
A. Separation of duties between the payroll and personnel departments.
B. Recalculation of a sample of payroll entries by internal auditors.
C. Detailed fluctuation analysis completed by the CFO for revenue.
D. Reconciliation of a bank account.

Answer 55

A. Separation of duties between the payroll and personnel departments.

Question 56

Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client?
A. A narrative memorandum describing the control system.
B. An internal control questionnaire.
C. A flowchart of the documents and procedures used by the company.
D. All of the above.

Answer 56

B. An internal control questionnaire.

Question 57

If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must
A. Assess control risk at less than the maximum for all relevant assertions.
B. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period
of reliance.
C. Provide additional examples of responses to assessed fraud risks relating to fraudulent financial reporting.
D. Perform only substantive procedures.

Answer 57

B. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period
of reliance.

Question 58

Once the auditor detects a control deficiency, which of the following steps must he or she take first?
A. Modify the planned substantive procedures as a result of the deficiency.
B. Test the deficient control, assuming a maximum level of risk.
C. Evaluate the severity of the deficiency on the auditor’s control risk assessment for that assertion.
D. Perform tests of other controls related to the same assertion as the control deemed ineffective.

Answer 58

C. Evaluate the severity of the deficiency on the auditor’s control risk assessment for that assertion.

Question 59

Matters that could affect the necessary extent of testing for a control activity as it related to the degree of auditor reliance on a control activity would not include the following:
rev: 12_10_2014_QC_CS-601
A. The frequency of the performance of the control by the company during the period being audited.
B. The length of time that the auditor is planning to rely on the operating efficiency of the control activity.
C. The expected rate of deviation for a control activity.
D. All of the above are matters that could affect the necessary extent of testing of a control.

Answer 59

D. All of the above are matters that could affect the necessary extent of testing of a control.

Question 60

The auditor should assess control risk for each relevant assertion by evaluating the evidence obtained from all sources, including
A. The auditor’s testing of controls for the audit of internal control on a public company.
B. Misstatements detected during the financial statement audit.
C. Any control deficiencies identified during the audit.
D. All of the above.

Answer 60

D. All of the above.

Question 61

Sampling is ordinarily used when the number of items comprising the population is relatively small.
True
False

Answer 61

False

Question 62

Sampling risk is the probability that the decision made based on the sample is different from the decision that would be made examining the
entire population.
True
False

Answer 62

True

Question 63

Attributes sampling is used by the auditor during the study of internal control.
True
False

Answer 63

True

Question 64

The risk that the decision made based on the sample will differ from the decision made based on the entire population is referred to as
Examination risk.
Audit risk.
Sampling risk.
Nonsampling risk.

Answer 64

Sampling risk.

Question 65

If systematic selection is used with a starting point of 10, a population size of 100, and a necessary sample size of 20, the first three items selected for examination would be
10, 110, 210.
15, 20, 25.
110, 210, 310.
10, 15, 20.

Answer 65

10, 15, 20.

Question 66

The risks of incorrect acceptance in variables sampling and of assessing control risk too low in attributes sampling both relate to
Evidence about assertions in financial statements.
Efficiency of an audit.
Effectiveness of an audit.
Control risk assessment decisions.

Answer 66

Effectiveness of an audit.

Question 67

Which of the following steps would normally be performed last in a sampling application?
A. Determine the level of reliability for the sampling application.
B. Identify the objective of the sampling application.
C. Examine sample items and determine the sample estimate.
D. Determine the appropriate sample size.

Answer 67

C. Examine sample items and determine the sample estimate.

Question 68

Variables sampling is normally used when the audit team performs substantive procedures.
True
False

Answer 68

True

Question 69

In which of the following scenarios would the use of sampling be most appropriate?
A. The need for precise information about the population is not important.
B. The population consists of a relatively small number of items.
C. The costs associated with an incorrect decision are extremely high.
D. The decision to be made is relatively critical.

Answer 69

A. The need for precise information about the population is not important.

Question 70

Which of the following is an advantage of nonstatistical sampling?
A. It measures the audit team’s exposure to sampling risk.
B. It is typically less complex than statistical sampling.
C. It is required by generally accepted auditing standards.
D. It ensures that samples are randomly selected.

Answer 70

B. It is typically less complex than statistical sampling.

Question 71

In audit sampling applications, sampling risk is
A. The probability that the audit team will fail to recognize erroneous accounting in the client’s documentation.
B. The probability that an audit team’s conclusion based on a sample might be different from the conclusion based on an audit of the entire population.
C. The probability that accounting misstatements will arise in transactions and enter the accounting system.
D. A characteristic of statistical sampling applications but not of nonstatistical applications.

Answer 71

B. The probability that an audit team’s conclusion based on a sample might be different from the conclusion based on an audit of the entire population.

Question 72

The type of sampling most frequently used by auditors during their study of internal control is referred to as
Control sampling.
Variables sampling.
Monetary unit sampling.
Attributes sampling.

Answer 72

Attributes sampling.

Question 73

Which of the following components of the audit risk model is most closely associated with attributes sampling?
Control risk.
Detection risk.
Inherent risk.
Audit risk.

Answer 73

Control risk.

Question 74

An advantage of statistical sampling over nonstatistical sampling methods is that statistical methods
A. Provide an objective basis for quantitatively evaluating sampling risk.
B. Eliminate the need to use judgment in determining appropriate sample sizes.
C. Can more easily convert the sample into a dual-purpose test useful for substantive procedures.
D. Afford more assurance than a nonstatistical sample of equal size.

Answer 74

Provide an objective basis for quantitatively evaluating sampling risk.

Question 75

Sampling risk typically occurs because of errors in judgment or execution.
True
False

Answer 75

False

Question 76

In variables sampling, the risk of incorrect acceptance relates to the effectiveness of the audit examination.
True
False

Answer 76

True

Question 77

Which of these arrangements of duties could most likely lead to an embezzlement or theft?
A. The financial vice president received checks made out to suppliers and the supporting invoices, signed the checks, and mailed the checks
B. The inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records.
C. The cashier prepared the bank deposit, endorsed the checks with a company stamp, and delivered the cash and checks to the bank for deposit (no other bookkeeping duties).
D. The accounts receivable clerk received a list of payments received by the cashier so he could make entries in the customers’ accounts receivable subsidiary accounts.

Answer 77

B. The inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records.

Question 78

A good fraud prevention program should address employees’ motivation to steal from the company. The best method for doing this is to
A. Require reconciliations of all accounts to be reviewed by a supervisor.
B. Establish employee assistance programs.
C. Require a fidelity bond on all employees.
D. Ensure that all accounts with high inherent risk of fraud are audited.

Answer 78

B. Establish employee assistance programs.

Question 79

Which of the following is least indicative of fraudulent activity?
A. Three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later.
B. Numerous cash refunds have been made to different people at the same post office box address.
C. Internal auditors cannot locate several credit memos to support reductions of customers’ balances.
D. Bank reconciliation has no outstanding checks or deposits older than 15 days.

Answer 79

D. Bank reconciliation has no outstanding checks or deposits older than 15 days.

Question 80

Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances?
A. The cashier makes the daily deposit at a local bank.
B. The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
C. The cashier prepares the daily deposit.
D. The cashier endorses the checks.

Answer 80

B. The cashier posts the receipts to the accounts receivable subsidiary ledger cards.

Question 81

Upon receipt of customers’ checks in the mail room, a responsible employee should prepare a remittance list that is forwarded to the cashier. A copy of the list should be sent to the
A. Treasurer to compare the list with the monthly bank statement.
B. Internal auditor to investigate the list for unusual transactions.
C. Entity’s bank to compare the list with the cashier’s deposit slip.
D. Accounts receivable bookkeeper to update the subsidiary accounts receivable records.

Answer 81

D. Accounts receivable bookkeeper to update the subsidiary accounts receivable records

Question 82

Embezzlement is a type of fraud that involves
A. An employee’s misappropriating an employer’s money or property not entrusted to him or her.
B. An employee’s mistaken representation of opinion that causes incorrect accounting entries.
C. An employee misappropriating an employer’s money or property entrusted to the employee’s control in the employee’s normal
job.
D. A manager’s falsification of financial statements for the purpose of misleading investors and creditors.

Answer 82

C. An employee misappropriating an employer’s money or property entrusted to the employee’s control in the employee’s normal
job.

Question 83

During an audit of cash, the auditor is most concerned with the management assertion of
Rights and obligations.
Existence.
Valuation or allocation.
Occurrence.

Answer 83

Existence.

Question 84

Which of the following control activities could prevent a paid disbursement voucher from being presented for payment a second time?
A. The official signing the check should compare it with the voucher and should stamp “paid” on the voucher documents.
B. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.
C. Vouchers should be prepared by individuals who are responsible for signing disbursement checks.
D. Disbursement vouchers should be approved by at least two responsible management officials.

Answer 84

A. The official signing the check should compare it with the voucher and should stamp “paid” on the voucher documents.

Question 85

Fraud risk factors are events or conditions that indicate which of the following:
A. An incentive or pressure to perpetrate fraud.
B. All of these are correct.
C. An attitude or rationalization that justifies a fraudulent action.
D. An opportunity to carry out a fraud.

Answer 85

All of these are correct.

Question 86

Which of these arrangements of duties could most likely lead to an embezzlement or theft?
A. The financial vice president received checks made out to suppliers and the supporting invoices, signed the checks, and mailed the checks
B. The accounts receivable clerk received a list of payments received by the cashier so he could make entries in the customers’ accounts receivable subsidiary accounts.
C. The cashier prepared the bank deposit, endorsed the checks with a company stamp, and delivered the cash
and checks to the bank for deposit (no other bookkeeping duties).
D. The inventory warehouse manager has responsibility for making the physical inventory observation and
reconciling discrepancies to the perpetual inventory records.

Answer 86

D. The inventory warehouse manager has responsibility for making the physical inventory observation and
reconciling discrepancies to the perpetual inventory records.

Question 87

Which of the following is an effective audit procedure that an auditor might use to detect kiting between
intercompany banks?
Prepare a year-end bank reconciliation.
Prepare a schedule of the bank transfers.
Review subsequent bank statements.
Review the composition of authenticated deposit slips.

Answer 87

Prepare a schedule of the bank transfers.

Question 88

Immediately upon receipt of cash, a responsible employee should
Prepare a deposit slip in triplicate.
Prepare a remittance listing.
Update the subsidiary accounts receivable records.
Record the amount in the cash receipts journal.

Answer 88

Prepare a remittance listing.

Question 89

Each morning the controller gets the prior day’s list of remittances, a copy of the payment report, and a copyof the deposit slip returned from the bank. When comparing these items, the controller would be able todetermine that
A. The cash received and remittance advice received were maintained in a single batch.
B. The accounts receivable system has controls over unauthorized access.
C. No checks were returned for insufficient funds.
D. The assistant controller does not also reconcile the subsidiary accounts payable.

Answer 89

A. The cash received and remittance advice received were maintained in a single batch.

Question 90

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?
A. Overstating the accounts receivable subsidiary ledger.
B. Overstating the sales journal.
C. Understating the sales journal.
D. Overstating the accounts receivable control account.

Answer 90

C. Understating the sales journal.

Question 91

Which of the following control activities would best protect against the preparation of improper or inaccurate
cash disbursements?
A. All signed checks must be reviewed and compared with supporting documentation by the treasurer before mailing.
B. All checks must be perforated or otherwise effectively canceled when they are returned with the bank statement.
C. All checks must be sequentially numbered and accounted for by internal auditors.
D. All checks must be signed by an officer designated by the board of directors.

Answer 91

A. All signed checks must be reviewed and compared with supporting documentation by the treasurer before mailing.

Question 92

In preparing for the audit of cash, the auditors perform analytical procedures concerning cash balances. Which of the following would be the best source of information for use in the estimate of cash?
Cash budgets.
Management inquiry.
Aged accounts receivable reports.
Prior-years' balances.

Answer 92

Cash budgets.

Question 93

In what way can audit procedures be modified to address assessed fraud risks?
All of these are valid modifications.
Apply computer-assisted techniques to all items.
Obtain more reliable information.
Perform procedures close to year-end.

Answer 93

All of these are valid modifications.