Test 3

Question 1

PROBLEM I - MATCH THE ASSERTION:

Management may overstate sales by adding fictitious transactions or inflating actual sales

Answer 1

Occurrence

Question 2

PROBLEM I - MATCH THE ASSERTION:

Management may fail to recognize the possibility of customer returns

Answer 2

Occurrence

Question 3

PROBLEM I - MATCH THE ASSERTION:

Not all sales are recorded

Answer 3

Completeness

Question 4

PROBLEM I - MATCH THE ASSERTION:

Sales have been recorded in incorrect periods

Answer 4

Cutoff

Question 5

PROBLEM I - MATCH THE ASSERTION:

Accounts Receivable are overstated and do not represent actual sales

Answer 5

Existence

Question 6

PROBLEM I - MATCH THE ASSERTION:

Not all accounts receivable have been recorded

Answer 6

Completeness

Question 7

PROBLEM I - MATCH THE ASSERTION:

Receivables are not included in financial statements at the appropriate amount, and valuation adjustments are not recorded properly

Answer 7

Valuation

Question 8

PROBLEM II: What is Financial Statement Risk?

Answer 8

understatement of payables and expenses; overstatement of net profit

Question 9

PROBLEM II: What is Assertion Risk?

Answer 9

is there (1) Completeness and (2) Cutoff for both payables and expenses?

Question 10

PROBLEM II: What are 3 ways to audit the “completeness” of A/P?

Answer 10

1. Obtain trial balance of A/P as of balance sheet date and reconcile with G/L
2. Search for unrecorded liabilities subsequent to year end
3. Reconcile liabilities with monthly statements from creditors

Question 11

TRUE/FALSE: Fraud is intentionally making material misrepresentations of fact with the intent of inducing someone to believe the falsehood and act upon it

Answer 11

TRUE

Question 12

Are errors intentional or unintentional?

Answer 12

Unintentional

Question 13

What are the three pieces of the Fraud Triangle?

Answer 13

Motivation
Opportunity
Rationalization

Question 14

How is fraud prevented?

Answer 14

strong internal controls

Question 15

What is the #1 internal control?

Answer 15

segregation of duties

Question 16

What are the relevant assertions in Audit of Cash?

Answer 16

existence and presentation/disclosure

Question 17

What does “Joint Custody” refer to?

Answer 17

two people opening the mail containing customer receipts (not just one)

Question 18

What does a Bank confirmation do?

Answer 18

confirm cash balance with financial institutions at year end (REQUIRED PROCEDURE!)

Question 19

What does a Cutoff Bank Statement detect?

Answer 19

outstanding deposits or checks at year-end and can be compared to the bank reconciliation

Question 20

What does PBC mean?

Answer 20

prepared by client

Question 21

Where does the auditor get the client’s bank statement

Answer 21

directly from the bank to the auditor

Question 22

What is a Financial Statement Risk?

Answer 22

overstatement of revenue and receivables

Question 23

What are the assertions for Revenue and Accounts Receivable?

Answer 23

Revenue = occurrence
A/R = existence (shown at NRV)

Question 24

TRUE OR FALSE: Write-offs of accounts or notes receivables should be in writing and approved by management, specifically the treasurer

Answer 24

TRUE

Question 25

What does confirming accounts receivables with debtors test?

Answer 25

existence

Question 26

What is a Positive Confirmation asking for and what balances is it used for?

Answer 26

request addressed to debtor asking for a REPLY

used for LARGE balances

*Most often form used

Question 27

What is a Negative Confirmation asking for and what balances is it used for?

Answer 27

ask debtor to ADVISE the auditors only if the balance shown is incorrect

used for large number of SMALL balances

Question 28

When is a 3-way match used in the Acquisition and Expenditure Cycle?

Answer 28

recording the asset or expense and related liability

3-way match = “voucher package” (PO, receiving report, and vendor invoice)

Question 29

How is payment authorized?

Answer 29

by complete voucher package (STAMPED)

Paid to minimize duplicate payment

Question 30

When is most audit work on A/P performed?

Answer 30

after Balance Sheet date

Question 31

What is the primary audit objective, other evidence available, and if a confirmation is required for A/P and A/R

Answer 31

A/P = Completeness; External; No
A/R = Existence; Internal; Yes

Question 32

What is the auditor REQUIRED to communicate with a client’s attorney through?

Answer 32

attorney letter

Question 33

Why must attorney invoices be reviewed?

Answer 33

for potential contingencies/litigation

Question 34

Why must Board of Director minutes be reviewed?

Answer 34

for potential contingencies/litigation

Question 35

What are some risks associated with payroll?

Answer 35

paying fictitious employees
overpaying for time or production
incorrect accounting for costs or expenses

Question 36

What is the most effective timing of the audit of liabilities?

Answer 36

when performed immediately after the balance sheet date (because concern is with understatements)