Book Multiple Choice Questions Chapter 1 1. Which of the following best describes the relationship between assurance services & attest services? A ttest ttest services are a subset of assurance services services All attest All attest services are assurance services, but not all all assurance assurance services are attest services 2. Which of the following has primary responsibility for the fairness of the representations made in financial statements? management Client¶s management C l l ient¶s ient¶s management is primari ly ly responsibl responsibl e for representations contained in the financial financial statements statements I ndependent ndependent auditors are responsibl responsibl e for performing their audit in accordance with generally generally accepted auditing standards 3. The most important benefit of having an annual audit by a public accounting firm is to: Provide assurance to investors and other outsiders that the f inancial statements are reliable pansion of securities market has tremendously tremendously increased the need for verification v erification of financia financial l statements statements Ex performed by b y competent, independent persons 4. The Sarbanes Oxley A ct created the Public Company A ccounting ccounting Oversight Board (PCA B). B). Which of the following is A ct not one not one of the responsibilities of that board? standards for the auditors of public companies A . Establish independence standards B. Review financial reports filed with the SEC C. Establish auditing standards for audits of public companies D. Sanction registered audit firms P C C AOB ordinari ly ly does not review financial financial reports reports fi l led e d with the S E C²al C²al though though they they may may review such reports to accompl accompl ish ish their other responsibi l lities i ties Other three are e x pl pl icit icit responsibi l lities i ties of the P C C AOB 5. Which of these organizations organizations has the responsibility to perform inspections of auditors of public companies? ccounting Oversight Board Public Company A ccounting 6. Governmental auditing, auditing, in addition to including audits of financial statements, statements, often includes audits of efficiency, effectiveness and Compliance 7. In general, internal auditors¶ independence will be greatest when they report directly to the: A udit udit committee of the board of directors N ormally ormally,, the higher in an organization organization an internal internal auditor auditor reports, the greater the degree of independence Reporting to the audit committee of the board of directors increases thel the l ikel ikel ihood ihood that the internal internal auditor auditor wi ll be ll be abl abl e to act independent independent ly ly of those being audited 8. Which of the following did not precipitate not precipitate the passage of the Sarbanes-Oxley A ct ct of 2002 to regulate public accounting firms? irregularities at Enron & WorldCom A . Disclosures related to accounting irregularities B. Restatements Restatements of financial statements by a number of public companies rthur A ndersen ndersen LLP C. Conviction of the accounting firm of A A rthur D. Ethical scandals at the AICPA establish standards for US government government agencies? 9. Which of the following organizations establish The Federal A ccounting ccounting Standards A dvisory dvisory Board F ederal ederal Accounting Accounting Standards A Standards Advisor dvisory y Board Board estab establ l ishes ishes accounting standards for US governmental governmental agencies G overnmental overnmental Accounting Accounting Standards B Standards Board oard establ establ ishes ishes accounting standards for state & l & l ocal ocal governmental governmental entities entities 10. Which of the following is correct about forensic audits? Forensic audits are usually performed in situations in which fraud has been found or is suspected 11. What best describes the purpose of the auditors¶ consideration of internal control in a financial statement audit for a nonpublic company? To determine the nature, timing, and extent of audit testing Because Because the auditors¶ purpose for considering internal internal contro control l s are to (a) pl pl an an the audit, and (b), to determine the nature, timing and e x tent tent of the tests to be performed 12. Which of the following is an example of a compliance audit? statements (FIN A NCI A L STMT A UDIT) UDIT) A . A n audit of financial statements B. An audit of a company¶s policies and procedures for adhering to environmental laws and regulations control over financial reporting (FIN A NCI A L STMT A UDIT) UDIT) C. A n audit of a company¶s internal control D. A n audit of the efficiency and effectiveness of a company¶s legal department department (OPER A TION TION A L) L) y y
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Chapter 2 1. Which of the following organizations can revoke the right of an individual to practice as a CPA ? i. The PCA OB ii. The A ICPA iii. The SEC iv. The applicable state board of accountancy T he l icense to practice as a C P A is granted by the state, the appl icabl e state, through its state board of accountancy. T herefore the appl icabl e state board of accountancy has the right to revoke the right of an individual to practice as a C P A. 2. The A ICPA over time has played an important role in standards setting. Which of the following standards are currently established by the A ICPA ? A ccounting standards applicable to nonpublic companies i. ii. Auditing standards applicable to audits of nonpublic companies iii. Quality control standards applicable to audits of public companies iv. Standards for reviews of the interim financial information issued by public companies A has authorit y to establ ish auditing standards for nonpubl ic companies T he A I C P T he F A S B has authorit y for accounting standards of both publ ic and nonpubl ic companies has the authorit y to establ ish qual it y control standards and standards of for interim reviews of T he P C AOB publ ic companies 3. Which of the following are not interpretive publications under the A ICPA ¶s hierarchy of generally accepted auditing standards? i. Statements on Auditing Standards A ppendices to Statements on A uditing Standards ii. A uditing guidance in the A ICPA A udit and A ccounting Guides iii. A ICPA auditing Statements of position iv. Statements on Auditing Standards are standards, not inte rpretive publ ications 4. The three A ICPA generally accepted auditing standards classified as standards of fieldwork may be summarized as: i. The need to maintain an independence in mental attitude throughout the audit ii. The criteria for audit planning and evidence gathering iii. The criteria for the content of the auditors¶ report on financial statements iv. The competence, independence and professional care to be exerted while performing the audit (G ENER A L ST A ND A RDS) T he three standards of fiel d work rel ate specifically to criteria of audit pl anning and evidence gathering 5. A basis objective of a CPA firm is to provide professional services that confirm with professional standards. Reasonable assurance of achieving this basic objective is provided through: Compliance with generally accepted reporting standards i. ii. A system of quality control A system of peer review iii. Continuing professional education iv. Qual it y control standards were establ ished to provide reasonabl e assurance that professional services confirm with professional standards 6. Which of the following is not explicitly included in an unqualified standard audit report for a nonpublic company? i. The CPA ¶s opinion that the financial statements comply with G AAP ii. The generally accepted auditing standards were followed during the audit iii. The internal control of the client was satisfactory iv. A n identification of the financial statements audited F or nonpubl ic traded companies, the internal control of the cl ient is not e x pl icit ly mentioned in the unqual ified standard report, al though its impl icit in the reference to generally accepted auditing standards 7. The general group of the A ICPA generally accepted auditing standards that: i. The auditors maintain an independent mental attitude ii. The audit be conducted in conformity with generally accepted accounting principles A ssistants, if any, be properly be supervised (FIELD WORK) iii. iv. The auditors obtain an understanding of internal control (FIELD WORK) An independent mental attitude on the part of the auditor is required by the second general standard of the generally accepted accounting principl es 8. Which A ICPA quality control standard would most l ikely be satisfied when a CPA maintains records indicating which partners or employees of the firm were previously employed by the CPA firm¶s clients? i. Professional relationship ii. Engagement performance iii. Relevant ethical requirements iv. Monitoring y
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Such a qual it y control pol icy is designed to assure that personnel assigned to an engagement are independent to perform the work, an ethical requirement 9. A n audit provides reasonable assurance of detecting material: i. Fraudulent Financial Reporting (YES); Misappropriation of Assets (YES) ii. Fraudulent Financial Reporting (Y ES); Misappropriation of A ssets (NO) iii. Fraudulent Financial Reporting (NO); Misappropriation of A ssets (Y ES) iv. Fraudulent Financial Reporting (NO); Misappropriation of A ssets (NO) An audit provides reasonabl e assurance of detecting misstatements, due to fraud, regard l ess of whether due to fraudul ent financial reporting or misappropriation of assets. 10. Which of the following is not incl uded in an integrated audit report on the financial statements of a public company? i. The report states that the audit was performed in accordance with AICPA standards (publ ic traded company²standards of P C AOB ) ii. The report indicates that the financial statements are the responsibility of management iii. The report indicates that the auditors have also audited the effectiveness of the company¶s internal controls iv. The report is signed in the name of the CPA firm 11. A udit firms that are subject to inspects by the PCA OB staff include: A ll audit firms i. ii. A udit firms that are registered with the SEC iii. Audit firms that are registered with the PCAOB iv. A udit firms that are registered with the state board of accountancy 12. Which of the following is not a difference noted when comparing the A ICPA audit report to the international audit report? i. The international audit report has an expanded discussion of management¶s responsibility for the financial statements and internal controls ii. The international audit report may be singed using the personal name of the audit partner, the audit firm, or both iii. The international audit report contains an enhanced description of the nature of an audit iv. The international audit report includes an opinion on internal control y
y
Chapter 3 1. Which of the following is not a covered member for an attest engagement under Rule 101 of the A ICPA Code of P rofessional Conduct? i. A n individual assigned to the attest engagement ii. A partner in the office of the partner in charge of the attest engagement iii. A manager who is in charge of providing tax services to the attest client iv. A partner in the national office of the firm that performs marketing services A partner in the national office of the firm that performs marketing services is not considered a covered member as it is unl ikely that this partner wi ll be in a position to inf lu ence the attest engagement . 2. Which of the following is not prohibited by the A ICPA Code of P rofessional Conduct? i. Advertising in newspapers Payment of commission to obtain an audit client ii. A cceptance of a contingent fee for a review of financial statements iii. iv. Engaging in discriminatory employment practices Advertising in newspapers is an acceptabl e practice. T he other three are all prohibited by the Code of P rofessional Conduct 3. In which of the following situations, would a public accounting firm have violated the A ICPA Code of P rofessional Conduct in determining its fee? i. A fee based on whether or not the public accounting firm¶s audit report leads to the approval of the client¶s application for bank financing A fee is to be established at a later date by the Bankruptcy Court ii. iii. A fee is based on the nature of the engagement rather than upon the actual time spent on the engagement A fee is based on the fee charged by the client¶s former auditors iv. A fee for audit cl ients which is dependent upon the resul ts achieved by the C P A¶s efforts is a contingent fee and is prohibited by audit cl ients by Rul e 302 4. A public accounting firm would l east l ikely be considered in violation of the A ICPA independence rules in which of the following instances? i. A partner¶s checking account, which is fully insured by the F DIC, is held at a financial institution for which the public accounting firm performs attest services ii. A manager of the firm donates services as V P of a charitable organization that is an audit client of the firm iii. A n attest client owes the firms fees for this and last year¶s annual engagements iv. A covered member¶s dependent son owns stock in the attest client y
y y
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An auditor¶s independence woul d not be considered to be impaired with respect to a financial institution in which the auditor maintains a checking account which is fully insured . 5. Which of the following is implied when a CPA signs the preparer¶s declaration on a federal income tax return? i. The return is not misleading based on all information of which the CPA has knowledge ii. The return is prepared in accordance with G AAP iii. The CPA has audited the return iv. The CPA maintained an impartial mental attitude while preparing the return T he decl aration requires the preparer to acknowl edge that the return is ³true, correct, and compl ete« based on all information of which the preparer has any knowl edge.´ 6. The A ICPA Code of P rofessional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of a client. This rule may preclude a CPA from responding to an inquiry made by: A n investigative body of a state CPA society i. ii. The trial board of the A ICPA iii. A CPA-shareholder of the client corporation A n A ICPA quality review body iv. C P As in publ ic practice are prohibited from discl osing confidential information without the consent of the cl ient, e x cept in certain specified circumstances. T he three circumstances above are situations where discl osure of information is permitted 7. Which of the following is most likely to be a violation of the A ICPA Rules of Conduct by Bill Jones, a sole practitioner with no other employees? i. Jones performs consulting services for a percentage of the client¶s savings; these are the only services provided for the client ii. Jones names his firm Jones and Smith, CPAs iii. Jones advertises the services he provides in an Internet set of telephone ³yellow pages´ iv. Jones, without client consent, makes available working papers for purposes of a peer review of his practice Rul e 505 requires that a firm practice under a firm name that is not misl eading. P As practicing, but it¶s really only I n this situation, the name is misl eading because it impl ies that there are 2 C Bi ll Jones, l one C P A. 8. Bill A dams, CPA , accepted the audit engagement of Kelly Company. During the audit, A dams became aware of his lack of competence required for the engagement. What should A dams do? i. Disclaim an opinion ii. Issue an adverse opinion iii. Suggest that Kelly Company engage another CPA to perform the audit iv. Rely on the competence of the client personnel Rul e 201- A prohibits a publ ic accounting firm from accepting an engagement that the firm is not competent to perform I f technical competence probl ems devel op during the engagement, the C P As shoul d advise the cl ient and withdraw from the engagement 9. Which of the following nonattest services may be performed by the auditors of a public company? i. Internal audit outsourcing ii. Tax planning for all company officers iii. Bookkeeping services iv. Preparation of the company¶s tax return Auditors may current ly prepare the company¶s ta x return prohibits internal audit outsourcing, performing ta x T he Sarbanes O x le y Act as impl emented by the P C AOB pl anning for the company¶s officers, and performing bookkeeping services 10. In providing nonattest services to an attest client, A CPA is allowed to perform which of the following functions? i. Maintain custody of client¶s securities ii. Training client employees iii. Supervising client employees A cting as the third approver of large client expenditures iv. A C P A may hel p train cl ient empl oyees for an attest cl ient Code of P rofessional Conduct prohibits maintaining custod y of cl ient assets, supervising cl ient empl oyees, and authorizing transactions 11. Rule 202²Compliance with Standards, requires CPA s to adhere to all of the following applicable standards except: i. Statements on Standards of Consulting Services ii. Statements on A uditing Standards iii. Statements on Standards for A ttestation Engagements iv. Statements on Responsibilities in Tax Practice Statements on Responsibi li ties in T a x P ractice are meant to provide guidance to C P As, but are not direct ly enforceabl e under the Code of P rofessional Conduct . y
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T he other standards are enforceabl e under Rul e 202 of the Code
12. Which of the following provisions is not incl uded in The Institute of Internal A uditors Code of E thics? i. Performance of work with honesty, diligence, and responsibility ii. Prudence in the use and protection of information acquired in the course of their duties iii. Use of appropriate sampling methods to select arenas for audit iv. Continual improvement in proficiency and effectiveness and the quality of services provided Chapter 6 1.
In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for misappropriation of assets? i. Generous performance-based compensation systems (FR A UDULENT FIN A NCI A L R EPORTING) ii. Management preoccupation with increased financial performance (FR A UDULENT FIN A NCI A L R EPORTING iii. An unreliable accounting system iv. Strained relationship between management and the auditors (FR A UDULENT FIN A NCI A L R EPORTING) An unrel iabl e accounting system provides an opportunit y for an individual to misappropriate assets T he other items create risks of fraudul ent financial reporting The audit committee of a company must be made up of: i. Representatives from the client¶s management, investors, suppliers and customers ii. The audit partner, the chief financial officer, the legal counsel and at least one outsider iii. Representatives of the major equity interests, such as preferred and common stockholders iv. Members of the board directors who are not officers or employees M embers of the audit committee shoul d be independent of management I ndividual s shoul d be board members who are not empl oyees or officers & who do not have rel ationships with management that might impair their objectivit y Which of the following should not normally be included in the engagement letter for an audit? A description of the responsibilities of client personnel to provide assistance i. ii. A n indication of the amount of the audit fee A description of the limitations of an audit iii. iv. A listing of the client¶s branch offices selected for testing M anagement shoul d not be informed about which branches were sel ected for testing at all or at l east not unti l just before testing Which portion of an audit is l east l ikely to be completed before the balance sheet date? i. Tests of controls ii. Issuance of an engagement letter iii. Substantive procedures iv. A ssessment of control risk Substantive procedures substantiate the account bal ances as of the bal ance sheet date and therefore cannot be compl eted prior to that date. Other items pertain to the operation of the system during the year under audit and coul d be compl eted in the interim period Which of the following should the auditors obtain from t he predecessor auditors before accepting an audit engagement? A nalysis of balance sheet accounts i. A nalysis of income statement accounts ii. A ll matters of continuing accounting significance iii. iv. Facts that might bear on the integrity of management Before accepting an engagement, the possibl e successor auditor shoul d ask questions about the integrity of management , disagreements with management, and the reason for the change in auditors T he other entries²represent information that the successor may wish to obtain after accepting the engagement A s one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. This test provides evidence as to whether: i. Each recorded sale represents a bona fide transaction ii. A ll sales have been recorded in the sales journal A ll debit entries in the accounts receivable subsidiary ledger are properly supported by sales journal entries iii. iv. Recorded sales have been properly posted to customer accounts Because entries in the sal es journal represent recorded sal es, tracing entries from its debits in the A/ R l edger provides evidence on whether recorded sal es have been properly posted to customer accounts The primary objective of tests of details of transactions performed as substantive procedures is to: Comply with generally accepted auditing standards i. A ttain assurance about the reliability of the accounting system ii. y y
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Detect material misstatements in the financial statements E valuate whether management¶s policies and procedures are operating effectively T he objective of tests of detai ls of transactions performed as substantive procedures is t o detect material
misstatements in the financial statements. T ransactions are tested to determine whether they have been properly recorded 8. The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does e x ist , is referred to as: i. Business risk Engagement risk ii. Control risk iii. iv. Detection risk Detection risk is the risk that the auditor wi ll concl ude, based on substantive testing / procedures, that material misstatement d oes not exist in an account bal ance, when in fact, such misstatement does e x ist 9. Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? i. A dequate disclosure ii. Quality control iii. Materiality and audit risk iv. Client acceptance M aterial it y and audit risk underl ie the appl ication of generally accepted auditing standards in that so many audit decisions are affected by the amount used as a material it y measure and the l evel of audit risk assumed on the engagement 10. Which of the following best describes what is meant by the term ³fraud risk factor´ ? i. Factors that, when present, indicate that risk exists ii. Factors often observed in circumstances have occurred iii. Factors, that when present, require modification of planned audit procedures iv. Weaknesses in internal control identified during an audit F raud risk factors are factors that h ave been observed in circumstances in which fraud has occurred F raud risk factors were identified by researchers and practitioners through analyses of many past frauds N one of the factors were al ways present in the various individual cases incl uded in the analyses 11. Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions i. Incentive or pressure ii. Opportunity iii. Supervisory position A ttitude iv. 12. Which of the following is most likely to be an overall response to fraud risks identified in an audit? i. Supervise members of the audit team less closely and rely more upon judgment ii. Use less predictable audit procedures iii. Use only CPA s on the engagement Place increased emphasis on the audit of objective transactions rather than subjective transactions. iv. Less predictabl e audit procedures are l ikely to be used when fraud risks are high S A S 99 Auditors have increased skepticism, assign more ski ll ed staff and consider further management¶s sel ection & appl ication of accounting procedures y
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Chapter 7 1. Which of the following would be l east l ikely to be considered an objective of internal control? i. Checking the accuracy and reliability of accounting data ii. Detecting management fraud iii. Encouraging adherence to managerial policies iv. Safeguarding assets Detecting management fraud is generally not considered to be an objective of internal control I nherent l imitations of internal control is that it is subject to override by management All other answers represent val id objectives of internal control 2. A n entity¶s ongoing monitoring activities often include: Periodic audits by internal audits i. ii. The audit of the annual financial statements iii. A pproval of cash disbursements iv. Management review of weekly performance reports M anagement review of weekly performance reports is an ongoing monitoring activit y that may detect errors or fraud y y y
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P eriodic audits by internal audits monitoring activit y, best cl assified as separate reports & not ongoing
monitoring activities A pproval of cash disbursements control activit y 3. A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with: i. Knowledge necessary to determine the nature, timing and extent of audit procedures A udit evidence to use in reducing detection risk ii. iii. A basis of modifying tests of controls A n evaluation of the consistency or application of management policies iv. Auditors¶ purpose for considering internal control s are to obtain the necessary knowl edge to: a) Assess the risk of material misstatement b) to determine the nature, timing and e x tent of the tests to be performed 4. A n auditor may compensate for a weakness in internal control by increasing the extent of: i. Tests of controls ii. Detection risk iii. Substantive tests of details iv. Inherent risk An increase in the substantive procedures wi ll decrease detection risk and thereby compensate for the increased l evel of control risk due to a weakness in internal control 5. Controls over the financial reporting are often classified as preventative, detective or corrective. Which of the following is an example of a detective control? i. Segregation of duties over cash disbursements (PR E V ENT A TIV E) ii. Requiring approval of purchase transactions (PR E V ENT A TIV E) iii. Preparing bank reconciliations iv. Maintaining backup copies of key transactions P reparing bank reconci li ations wi ll detect a variet y of misstatements, rel ated to cash and is a detective control in the sense that it does not prevent the misstatement from occurring, but may detect it 6. When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPA ¶s procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should i. Consider the organizational level to which the internal auditors report the results of their work ii. Review the internal auditors¶ work iii. Consider the qualifications of the internal audit staff iv. Review the training program in effect for the internal audit staff T he internal auditors¶ objectivit y refers to their rel ative independence from the organizational units they have been eval uating 7. Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by: Employment of temporary personnel to aid in the separation of duties i. ii. Direct participation by the owner in key record keeping and control activities of the business Engaging a CPA to perform monthly write-up work iii. iv. Delegation of full, clear-cut responsibility for a separate major transaction cycle to each employee I nvol vement of the owner in key control functions shoul d be a major step toward preventing material errors or defal cations Answer 4 woul d weaken internal control s because one empl oyee is responsibl e for the entire transaction 8. Of the following statements about internal control, which one is not val id? i. No one person should be responsible for the custody and the recording of an asset ii. Transactions should be properly authorized before such transactions are processed iii. Because of the cost/benefit relationship, a client may apply controls on a test basis iv. Controls reasonably ensure that collusion among employees cannot occur A l imitation of internal control is that it may be circumvented through coll usion among empl oyees 9. Proper segregation of functional responsibilities call for the separation of the: i. Authorization, record keeping and custodial functions A uthorization, execution and payment functions ii. iii. Receiving, shipping and custodial functions A uthorization, approval, and execution functions iv. 10. To have an adequate basis to issue a management report on internal control under the Section 404(a) of the SarbanesOxley A ct, management must do all of the following, e x cept i. Establish internal control with no material weakness A ccept responsibility for the effectiveness of internal control ii. iii. E valuate the effectiveness of internal control using suitable control criteria y
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Support the evaluation with sufficient evidence ss of whether it has discovered a material M anagement may issue a report on internal control regard le weakness 11. When the auditors are performing a first time internal control audit in accordance with the Sarbanes-Oxley A ct, and PCA OB standards, they must: i. Modify their report for any significant deficiencies identified ii. Use a bottom up approach to identify controls to test iii. Test controls for all significant accounts iv. Perform a separate assessment of controls over operations y
Chapter 10 1. Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client¶s employees? i. A bank lockbox system ii. Pre-numbered remittance advices iii. Monthly bank reconciliations iv. Daily deposit of cash receipts A bank l ock bo x is a post office bo x controll ed by a company¶s bank at which cash remittances from customers are received T he bank coll ects the remittances, immediately credits the cash to the company¶s bank account and forwards the remittances to the company Use of a bank l ockbo x system makes it e x tremely difficul t for empl oyees to divert cash receipts since those cash receipts are sent direct ly to the post office bo x controll ed by the bank M onthly bank reconci l iations and dai ly deposit of cash receipts are control s, but control s that ordinari ly are not as effective as a bank l ockbo x system 2. To provide assurance that each vouch is submitted and paid only once, the auditors most likely would exam a sample of paid vouchers and determine whether each voucher is: i. Supported by a vendor¶s invoice ii. Stamped ³paid´ by the check signer Pre-numbered and accounted for iii. A pproved for authorized purchases iv. T he auditors wi ll determine whether each voucher is stamped ³paid ´ by the check signer to avoid a situation in which supporting documents are used a second time to el icit a second payment 3. In testing internal controls over cash disbursements, the auditors most likely would determine that the person who signs the checks also: i. Reviews the monthly bank reconciliation ii. Returns the checks to accounts payable iii. Is denied access to the supporting documents iv. Is responsible for mailing the checks W hen checks are signed, they shoul d not be returned to the accounting department²this control is used so as to avoid a situation in which the A/ P department fabricates documents and then coll ects the checks I ndividual s who are otherwise independent of the cash function prepare and review the monthly bank rec I ndividual cannot be denied access to the supporting documents because he or she needs them to determine whether or not the e x penditure is proper 4. To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following e x cept: i. Cutoff bank statement ii. Year end bank statement iii. Bank confirmation iv. General ledger T he general l edger wi ll not have information on the bal ance per bank Cutoff bank statement, year-end bank statement & bank confirmation 5. You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to: Count the cash in advance of the balance sheet date in order to disclose any kiting operations at the end of i. year Coordinate the count of cash with the cutoff of accounts payable ii. iii. Coordinate the count of cash with the count of marketable securities and other negotiable assets Count the cash immediately upon the return of confirmation letters from the f inancial institution iv. y
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y y
y y
Unl ess all negotiabl e assets are verified at one time, an opportunit y e x ists for a dishonest officer or empl oyee to conceal a shortage by transferring it from one asset category to another, a step ahead of the auditors 6. Which of the following procedures would the auditors most likely perform to test controls relating to management¶s assertion about the completeness of cash receipts for cash sales at a retail outlet? i. Observe the consistency of the employees¶ use of cash registers and tapes ii. Inquire about employees¶ access to recorded but un-deposited cash iii. Trace deposits in the cash receipts journal to the cash balance in the general ledger iv. Compare the cash balance in the G/L with the bank confirmation request 7. Reconciliation of the bank account should not be performed by an individual who also: i. Processes cash disbursements ii. Has custody of securities Prepares the cash budget iii. iv. Reviews inventory reports T he individual who reconci le s the bank account shoul d not be invol ved in the processing of cash receipts or disbursements All of the other functions are compatibl e with reconci li ation responsibi li ties 8. The auditors suspect that a client¶s cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. IN attempting to uncover this embezzlement scheme, the auditors most likely would compare the: i. Details of bank deposit slips with details of credits to customer accounts ii. Daily cash summaries with the sums of cash receipts journal entries iii. Individual bank deposit slips with the details of the monthly bank statements iv. Dates uncollectible accounts are authorized to be written off with the dates write-offs are actually recorded Lapping wi ll resul t in a del ay in the recording of specific remittance credits in the financial records, but the checks wi ll be deposited in the bank as they are received Comparison of the checks deposited to the credits to customer accounts wi ll l ikely uncover the scheme 9. In order to guard against the misappropriation of company-owned marketable securities, which of the following is the best course of action that can be taken by a company with a large portfolio of marketable securities? i. Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept ii. Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access iii. Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis iv. Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent H aving the securities hel d in safekeeping by a bank or stockbroker provides strong internal control because they are not avai la bl e to empl oyees responsibl e for maintaining the accounting records of the securities Separation of the custod y of securities from the accounting function is compl ete 10. Hall Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The best person or persons to make periodic reviews of the investment activity would be i. The investment committee of the board of directors ii. The COO iii. The corporate controller iv. The treasurer T he investment committee of the board of directors is not invol ved in the routine of making buy and sell decisions and can therefore review the transactions objectively C OO, corporate controll er and treasurer may be cl osely associated on a dai ly basis with the financial e x ecutive responsibl e for the investment decisions 11. The auditors who physically examine securities should insist that a client representative be present in order to: i. Detect fraudulent securities ii. Lend authority to the auditors¶ directives iii. Acknowledge the receipt of securities returned Coordinate the return of securities to the proper locations iv. Because the l iquidit y of many securities, the auditor shoul d insist that a cl ient representative be present in o rder acknowl edge the receipt of securities returned I n the event of subsequent ³disappearance´ of a securit y, the auditor wi ll not be a suspect 12. The best way to verify the amounts of dividend revenue received during the year is: i. Recomputation ii. Verification by reference to dividend reference books iii. Confirmation with dividend paying companies y
y
y
y
y
y
y
y
y
y
y
iv. y
y
Examination of cash disbursements records
Comparing the recorded amount of dividend revenue with dividend record books (publ ished by investment advisory services) provides evidence of the amount of dividend revenue that shoul d have been recorded throughout the year I mpossibl e to confirm the receipt of dividends with the company paying those dividends
