question

T/F: Frauds are unintentional misstatements or omissions of accounts or disclosures in financial statements

answer

False

question

T/F: The nature of extended procedures for fraud detection is limited to those listed in the Professional Standards and Practices for Certified Fraud Examiners

answer

False

question

T/F: Fraud consists of knowingly making material misrepresentation of fact with the intent of inducing someone to believe the falsehood and suffer a loss

answer

True

question

T/F: Audit care and attention should be greater where business and inherent risks are judged to be lower

answer

False

question

T/F: Control risk should not be assessed so low that auditors place complete reliance on controls and do not perform any other audit work

answer

True

question

T/F: Audits are not designed to detect material errors and fraud in financial statements

answer

False

question

T/F: Knowledge of the client's business from preliminary analytical procedures can help auditors identify problem areas and make broad risk assessments

answer

True

question

The major emphasis in GAAS related to consideration of fraud in a financial statement audit (AU 240) is on

answer

Management fraud

question

Management fraud generally refers to

answer

Intentional distortions on financial statements

question

External auditors are responsible

answer

For reporting immaterial frauds to a level of management at least one level above the people involved

question

According to auditing standards, external auditors responsibilities for indirect noncompliance include (3)

answer

1. Performing audit procedures when specific information indicates that possible noncompliance may have an indirect material effect on financial statements 2. Considering the qualitative materiality of known and suspected noncompliance 3. Obtaining written management representations concerning the absence of violations of laws and regulations DOES NOT INCLUDE: Designing audit procedures to detect noncompliance in the absence of specific information brought to the auditors' attention

question

Certain conditions and circumstances are often present when management fraud occurs. What are some examples of conditions or circumstances (3)

answer

1. Unfavorable industry conditions 2. Lack of working capital 3. Slow customer collections NOT: High liquidity

question

Independent auditors who consider fraud in the course of financial statement audits are well-advised to quantify "materiality" in terms of

answer

A cumulative amount of misstatement of assets or income over several years past and current that might mislead investors in relation to the latest financial statements under audit

question

What are the independent auditor's responsibilities to detect and report errors and frauds?

answer

1. Assess the risk that errors and frauds may cause a client's financial statements to be materially misstated 2. Design audit to provide reasonable assurance of detecting errors and frauds material to the financial statements 3. Extended procedures should be performed if evidence indicates material errors or frauds might exist

question

Inventory turnover increased substantially from the prior year (3 explanations)

answer

1. Items shipped on consignment during the last month of the year were recorded as sales 2. A significant number of credit memos for returned merchandise that were issued during the last month of the year were not recorded 3. Year-end purchases of inventory were understated by incorrectly excluding items received before the year-end

question

Accounts receivable turnover decreased substantially from the prior year (3 explanations)

answer

1. Items shipped on consignment during the last month of the year were recorded as sales 2. A significant number of credit memos for returned merchandise that were issued during the last month of the year were not recorded 3. A smaller percentage of sales occurred during the last month of the year as compared to the prior year

question

Allowance for doubtful accounts increased from the prior year, but allowance for doubtful accounts as a percentage of accounts receivable decreased from the prior year (3 explanations)

answer

1. Items shipped on consignment during the last month of the year were recorded as sales 2. A significant number of credit memos for returned merchandise that were issued during the last month of the year were not recorded 3. A smaller percentage of sales occurred during the last month of the year as compared to the prior year

question

Long-term debt increased from the prior year, but interest expense increased a larger-than-proportionate amount than long-term debt (1 explanation)

answer

Short-term borrowing was refinanced on a long-term basis at a higher interest rate

question

Operating income increased from the prior year although the entity was less profitable than in the prior year (2 explanations)

answer

1. The effective income tax rate increased as compared to the prior year 2. Short-term borrowing was refinanced on a long-term basis at a higher interest rate

question

Gross margin percentage was unchanged from the prior year although gross margin increased from the prior year (1 explanation)

answer

Sales increased at the same percentage as costs of goods sold as compared to the prior year

question

T/F: The strengths and weaknesses of a control system should be documented in bridge work papers connecting the control evaluation to subsequent audit procedures

answer

True

question

T/F: 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

answer

True

question

T/F: To reduce the final control risk assessment to a low level, auditors need to determine only the required degree of compliance with the control policies and procedures

answer

False

question

T/F: Auditors perform tests of control activities to determine how the company's controls actually functioned during the period under audit

answer

True

question

T/F: Control systems generally provide absolute assurance that the objectives of internal control are satisfied

answer

False

question

T/F: Dual-purpose audit tests are procedures that produce both control and substantive evidence

answer

True

question

T/F: The key person in the internal control system of a small business is the independent auditor

answer

False

question

T/F: Evaluation of internal control systems on a nonpublic entity should not be subject to cost-benefit analysis

answer

False

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T/F: Tests of controls consist of procedures designed to produce evidence regarding how effectively the clients controls work in practice

answer

True

question

T/F: Auditors can stop the assessment of control risk for nonpublic entities for either effectiveness or efficiency reasons

answer

True

question

Proper separation of duties reduces the opportunity for persons to be in positions to both

answer

Perpetrate fraud and then conceal it in the books

question

In an audit of financial statements, an auditor's primary consideration regarding an internal control policy or activity is whether the policy or activity

answer

Affects management's financial statement assertions

question

What is a step in an auditor's decision to assess control risk at below the maximum?

answer

Identify specific internal control policies and activities that are likely to detect or prevent material misstatements

question

What are the objectives of internal controls over financial reporting as defined by SOX (3)

answer

1. Policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant 2. Policies and procedures that provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant 3. Policies and procedures that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,use or disposition of the registrant's assets that could have a material effect inn the financial statements DOES NOT INCLUDE: Policies and procedures that provide reasonable assurance regarding the compliance with applicable laws and regulations

question

What are the 4 inherent limitations of the potential effectiveness of an entity's internal controls?

answer

1. Human error 2. Collusion 3. Management override 4. Cost/benefit analysis

question

As part of understanding the internal control, an auditor is required to (3)

answer

1. Consider factors that affect the risk of material misstatement 2. Ascertain whether internal control policies and activities have been placed in operation 3. Identify the types of potential misstatements that can occur DOES NOT INCLUDE: Obtain knowledge about the operating effectiveness of the client's internal control activities

question

The primary objective of procedures performed to obtain an understanding of the entity's internal control is to provide an auditor

answer

The knowledge necessary for audit planning

question

The overall attitude and awareness of an entity's board of directors concerning the importance of the client's internal control usually is reflected in its

answer

Control environment

question

After obtaining an understanding of internal controls and assessing control risk on the audit of a nonpublic company, an auditor decided to perform tests of controls. The auditor most likely decided that

answer

It would be efficient to perform tests of controls that would result in a reduction in planned substantive testing

question

In an audit of financial statements of a nonpublic company in accordance with GAAS, an auditor is required to

answer

Document his or her understanding of the entity's internal control

question

The COSO report identifies objectives to be achieved by internal control as (3)

answer

1. Effectiveness and efficiency of operations 2. Reliability of financial reporting 3. Compliance with laws and regulations

question

Problems with establishing an internal control system in a small business (3)

answer

1. Hard to separate duties 2. Owner/manager would assume a larger role and more responsibilities 3. Owner/manager must be diligent, competent and have a high degree of integrity

question

Which GAAS principle requires auditors to obtain a sufficient understanding of an entity's control?

answer

Performance

question

What are some of the reasons (purposes) for evaluating an entity's internal control? (2)

answer

1. SOX requires an audit of the effectiveness of internal control that is an integrated part of the financial statement audit for publicly traded companies 2. Comply with the performance principle of GAAS: to assess the risk of material misstatement for each relevant assertion and give auditors a basis for planning the audit

question

What is the impact on substantive testing procedures if the auditor assesses the control risk at the "maximum" level?

answer

1. Extent - perform a number of substantive procedures with large sample sizes 2. Timing - at or near the entity's fiscal year-end 3. Nature - using procedures designed to obtain high quality external evidence

question

What is the impact on substantive testing procedures if the auditor assesses the control is at a low level?

answer

1. Extent - fewer substantive testing with smaller sample sizes 2. Timing - at an interim date before the entity's fiscal year-end 3. Nature - Using a mixture of procedures designed to obtain high-quality external evidence and lower-quality internal evidence

question

Should auditors always try to obtain enough evidence to assess control risk below the "maximum" level?

answer

There are many occasions where the audit team chooses to test everything substantively rather than relying on internal controls to reduce substantive testing (example: testing all fixed assets because there are a small number of material transactions)

question

The probability of fraud is a function of (3)

answer

1. Motive 2. Opportunity 3. Lack of integrity DOES NOT INCLUDE: Predication

question

Fraud prevention (3)

answer

1. Strong control environment 2. Managing people pressures in the workplace 3. Internal control activities and employee monitoring

question

The standard formal for the audit approach to fraud cases includes (3)

answer

1. Audit of balance 2. Test of controls 3. Discovery summary DOES NOT INCLUDE: Paper trail (used once fraud is discovered)

question

Appropriate questions to ask personnel during a regular audit (3)

answer

1. Do you think fraud is a problem for business in general? 2. Do you think this company has any particular problem with fraud? 3. Is there any information you would like to furnish regarding possible fraud within this organization?

question

Positive pay

answer

A cash management service employed to deter check fraud. Banks match the checks a company issues with those it presents for payment. Any check considered to be potentially fraudulent is sent back to the issuer for examination

question

Joint custody

answer

Control that is used when having two people opening mail that includes payments

question

Lapping

answer

An accounting method that involves altering at the A/R section of the B/S when cash that is intended for the payment of a receivable is stolen. The method involves taking the first receivable collected and using that to cover theft, while the second receivable is accounted to the first, and so on

question

Elements of fraud diamond (3)

answer

1. Motive 2. Opportunity 3. Liquidity NOT: Capability

question

Internal controls for receiving cash (4)

answer

1. Two people opening cash receipt mail 2. Restrictively endorse checks 3. Prepare a list of cash receipts 4. Separate actual cash from record keeping documents

question

Select control objective being tested: For a sample of recorded cash receipts, the auditors compared the date of receipt to the recording date

answer

Proper period

question

Select control objective being tested: The auditors traced a sample of daily cash reports to the cash receipts journal

answer

Completion

question

Select control objective being tested: The auditors vouched a sample of recorded cash receipts to the deposits in the bank statement

answer

Existence

question

Select control objective being tested: The auditors recalculate the cash listed on the daily deposit for a sample of recorded cash receipts

answer

Accuracy

question

Select control objective being tested: The auditors traced a sample of recorded cash receipts to postings in the correct customers' accounts

answer

Accounting and posting

question

How does a lockbox work?

answer

Payments are remitted by customers to an external location. A fiduciary (bank) opens the box on a daily basis, lists the receipts, deposits the money, and sends the remittance advices to the company

question

Advantages of a lockbox (2)

answer

1. Checks are retrieved by the bank and never enter the company. Reduces the risk of fraud 2. Money is immediately placed into the bank which allows for immediate access to funds

question

T/F: A comparison of checks listed on a sample of deposit slips to the detail of customer credits posted to customer accounts receivable can be an audit testing for lapping

answer

True

question

T/F: If control risk is assessed very low, the substantive audit procedures on account balances must be expanded

answer

False

question

T/F: A confirmation procedure scheduled on the year-end with a large sample of customer account balances is necessary if tests of controls reveal control weaknesses

answer

True

question

T/F: Auditors should not place total reliance on controls to the exclusion of other substantive testing procedures

answer

False

question

T/F: An objective for an audit is to obtain evidence related to management's financial statement assertions

answer

True

question

T/F: When obtaining evidence about accounts receivable, auditors must put emphasis on the completeness and obligations assertions

answer

False

question

T/F: Inquiries of management usually do not provide very convincing evidence about the existence and rights assertions

answer

True

question

T/F: A company generally cannot be used for scanning large files of accounts receivable for unusual credit balances

answer

False

question

T/F: The use of confirmations to test accounts receivable is considered a generally accepted audit procedure

answer

True

question

T/F: Confirmations yield evidence about existence and the gross valuation of a receivable balance

answer

True

question

To be recognized, revenues must also be realized or realizable and

answer

Earned

question

SEC requirements for revenue to be recognized (4)

answer

1. Persuasive evidence of an arrangement exists 2. Delivery has occurred or services have been rendered 3. The seller's price to the buyer is fixed or determinable 4. Collectibility is reasonably assured

question

Bill and hold refers to an arrangement where

answer

Sales are recorded but not shipped

question

Custody of inventory is transferred to the shipping area upon authorization of

answer

The shipping order

question

The document that generates recording of a sale is the

answer

Invoice

question

The sum of customers' unpaid balances that is compared to the general ledger balance comes from

answer

The A/R trial balance

question

The file that contains sales transactions that were initiated in the system but are not yet completed is the

answer

Pending order master

question

The assertion that auditors will probably emphasize in the revenue and collection cycle is

answer

Occurrence

question

A small business owner can best offset the lack of separation of duties by

answer

Being actively involved in the accounting process

question

Accountants should be under orders to record sales and accounts receivable when

answer

All supporting documentation of shipping is in order

question

Example of a control activity that satisfies that accuracy control objective for sales invoices

answer

Invoice quantities are compared to shipment and customer order quantities

question

Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what assertion?

answer

Completeness

question

Statement concerning the use of negative confirmation requests

answer

Unreturned negative confirmation requests rarely provide significant explicit evidence

question

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because

answer

Customers may not be inclined to report understated errors in their accounts

question

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because

answer

The auditor cannot infer that all nonrespondents have verified their account information

question

What is the most troubling response to an auditor for a confirmation of balances at 12/31?

answer

We returned this amount on 12/28 under our standing agreement with the company

question

Audit documentation often includes a client-prepared, aged trial balance of A/R as of the balance sheet date. The audit team uses this aging primarily to

answer

Estimate credit losses

question

What may be detected by auditors' cutoff review and examination of sales journal entries for several days prior to the balance sheet date?

answer

Inflating sales for the year

question

Confirmation of individual A/R balances directly with debtors will, of itself, normally provide the strongest evidence concerning the

answer

Existence of the balances confirmed

question

What is the best reason for pre-numbering in sequence such documents as sales orders, shipping documents, and sales invoices?

answer

Enables personnel to check the numerical sequence for missing documents and unrecorded transactions

question

Controls for control risk assessment (8)

answer

1. No sales order without customer order 2. Credit approval 3. Restricted access to inventory 4. Restricted access to terminals and invoices 5. All documentation in order to record sales 6. Proper dating 7. Invoices compared to BOLs and orders 8. Pending order files reviewed

question

Revenue Cycle (4)

answer

1. Receiving and processing customer ORDERS, including credit approval 2. DELIVERing goods and services to customers 3. Billing customers and accounting for ACCOUNTS RECEIVABLE 4. COLLECTING and depositing cash received from customers

question

Internal control evaluation (3 phases)

answer

1. Understand and document 2. Assess control risk 3. Identify controls to test and perform test of controls

question

Test of controls (4)

answer

Least persusasive to most: 1. INQUIRY of client personnel 2. OBSERVATION of the control activity being performed 3. INSPECTION of relevant documentation 4. REPERFORMANCE of the control activity

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