The use of the negative (as opposed to the positive) form of receivables confirmation is
indicated when
A) internal control surrounding accounts receivable is considered to be ineffective.
B) there is reason to believe that a substantial number of accounts may be in dispute.
C) a large number of small balances are involved.
D) accounts receivable consists of current balances only.
Last year the materiality for the client was $590,000. This year it is $400,000. All things
being equal, how will the change in materiality affect the extent of tests of details?
A) increase
B) decrease
C) no effect as the tests of controls will be increased
D) no effect as the tests of controls will be decreased
An example of an external document is
A) a cancelled cheque.
B) employees’ time reports.
C) inventory receiving reports.
D) the minutes of the Board of Directors’ meetings.
Which of the following internal controls over notes payable address risks associated
with the accuracy, allocation and completeness audit assertions?
A) renewals or new notes should be approved by the Board of Directors (as evidenced
in the minutes) or by senior management
B) authorized employees should perform independent recalculations of interest and
reconciliation of the notes payable balance to the general ledger
C) subsidiary records should be maintained for each note, and there should be control
over blank and paid notes
D) paid notes should be cancelled and retained under the custody of an authorized
official
Radio Supplies Limited sells parts and components to organizations that repair radios
and other forms of audio equipment. It has many parts on its inventory listing at cost
that were purchased up to fifteen years ago. Some of these parts have not seen any
movement in the last ten years. The general balance-related audit objective affected by
this activity is
A) completeness.
B) accuracy.
C) valuation.
D) existence.
Sarbanes-Oxley in the U.S. and regulatory reporting requirements in Canada provide
the clout to make management directly responsible for the financial statements. What is
one of the ways that this is implemented in the CASs (Canadian Auditing Standards)?
A) all listed company management must certify the accuracy of the evidence provided
B) management must provide evidence to support financial statement data
C) management must implement and carry out development of high quality internal
controls
D) companies must use internal auditors to assess the quality of the financial statements
CAS 570 – Going Concern, requires that the auditor evaluates management’s assessment
of the ability of the entity to continue as a going concern based on
A) inquiry with management.
B) the opinion of the legal counsel of the company.
C) the liquidity and solvency ratios of the firm.
D) the evidence collected throughout the audit.
Analytical procedures are those that
A) evaluate the accuracy of the account balances.
B) assess the overall reasonableness of account balances or other data.
C) review the effectiveness of internal controls.
D) analyze the effect of management procedures on the accounting system.
Fraud risk factors are examples of factors that increase the risk of fraud. Which of the
following is an example of a management “incentives or pressures” risk factor?
A) Customer demand for a new product line was significantly less than expected.
B) Management and the auditors disagree upon how to value a large contract in
progress.
C) There is only one board member who understands financial statements, and she has
suffered a heart attack.
D) There has been significant turnover in the accounting department in the last year.
Inquiry is a valuable technique during the planning phase of the audit because it
A) involves the rechecking of controls to ensure that they are conducted accurately.
B) is a type of audit evidence that provides a very high level of assurance.
C) is conclusive evidence from an independent source.
D) helps obtain information about how procedures and internal controls operate.
Nonsampling errors occur when audit tests do not uncover existing exceptions in the
A) population.
B) sample.
C) planning stage.
D) financial statements.
Which of the following is an example of accounting rather than auditing?
A) gathering evidence about the quality of accounts receivable
B) entering sales transactions into the sales order system
C) reviewing sales invoices to see if they have been calculated correctly
D) comparing bank deposit documents to the recorded cash received
Receipt of ordered materials by the receiving department will generate the completion
of a form called the
A) receiving report.
B) materials requisition.
C) bill of lading.
D) inventory acquisition summary.
Before a new supplier is added into the supplier master file (or the purchasing master
file), the company should
A) conduct a credit check on the new supplier.
B) have the supplier detail matched against the invoice detail.
C) ask the purchasing manager to verify the authenticity of the supplier.
D) have the accounting department enter the necessary detail about the supplier.
Certain types of misstatements that affect cash may be detected in the audit of tests of
controls. Which of the following misstatements would be detected in the audit of the
acquisition and payment cycle?
A) Failure to bill a customer for goods shipped
B) Billing a customer at the incorrect price
C) Improper reimbursement of an officers’ personal expenses
D) Paying an employee at the incorrect wage rate
Once an understanding of internal controls is obtained that is sufficient for audit
planning, then the auditor must first assess
A) whether a lower level of control risk could be supported.
B) whether the financial statements are auditable.
C) the level of control risk supported by the understanding obtained.
D) the level of control risk to use.
Which one of the following forms of evidence would be least reliable?
A) monthly bank statement
B) positive confirmation of customer’s balance
C) a letter from client’s lawyer stating that there are no known lawsuits pending against
client
D) client’s file copy of a purchase requisition
Kyle is performing a test of detail using a non-statistical sample.
A) Can Kyle formally measure sampling error?
B) What should Kyle consider in determining the sampling error?
Tests of details are designed based upon planned results of analytical review and
planned results of tests of controls. Should the planned results differ materially from the
actual results of analytical review and tests of controls then
A) audit risk will be revised.
B) the planned audit program will require revision.
C) inherent risk will be revised.
D) tests of controls will not be considered for overall risk assessment processes.
The most common method used for performing statistical tests of controls is
A) variables sampling.
B) attribute sampling.
C) judgment sampling.
D) random selection of samples.
For how many years will assurance engagements be required by individuals or
organizations?
A) usually only when organizations obtain debt or other loans
B) for five years from the start of an organization until debt is retired
C) only when historical such as financial information needs to be audited
D) on an ongoing basis, as organizations and society’s needs evolve
As part of the conduct of a review engagement, which of the following procedures
would be appropriate for assessing the ending value of inventory?
A) discussion with management with respect to the costing method used
B) observation of the inventory count
C) observation of the warehouse, paying particular attention to dusty and damaged
goods
D) confirmation with customers that are holding consignment inventory with respect to
quantity and condition of the inventory
In addition to including on each working paper the name of the client, the period
covered, the date of preparation and an index code, each working paper should clearly
include
A) the name of the preparer and a description of the contents.
B) symbols used and a reconciliation to the general ledger balance.
C) audit working paper steps that were completed.
D) the nature of the transaction-based risk that is being audited.
A client is suing a PA firm claiming that they are responsible for the losses suffered
from a fraud in the payroll department that was not uncovered during the year end
testing done by the auditor. The auditors did indicate to management that controls over
payroll calculations and payments were weak as there was improper segregation of
duties. The auditor’s best defence is
A) contributory negligence.
B) absence of negligence.
C) absence of causal connection.
D) no damages.
Which of the following statements best describes the position of cash on the balance
sheet at most organizations that utilize effective cash management practices? It is
usually
A) immaterial.
B) highly material.
C) dispersed among many different accounts.
D) affected by many different capital asset accounts.
Audit risk is ordinarily set by the auditor during planning and
A) held constant for each major cycle and account.
B) held constant for each major cycle but varies by account.
C) varies by each major cycle and by each account.
D) varies by each major cycle but is constant by account.
A) List the three types of general computer control systems.
B) Adequate segregation of duties is an important control procedure. Describe the
specific functions that should be separated for segregation of duties to prevent both
intentional and unintentional misstatements that are of significance to auditors.
C) Adequate documents and records are important for effective internal control. Five
principles dictate the proper design and use of documents and records. One principle is
that documents and records should be prenumbered consecutively to facilitate control
over missing documents, and to aid in locating documents when they are needed at a
later date. Discuss each of the other four principles of adequate documents and records.
The Big Insurance Company implemented a new computer system to track and record
insurance premiums receivable. The program automatically prints invoices and sends
them to customers when premiums are due. Due to a program error, a whole series of
invoices were included in sales but not in accounts receivable. The general
balance-related audit objective affected by this activity is
A) completeness.
B) accuracy.
C) classification.
D) existence.
Which of the following controls pertains to audit trails in the batch processing of sales
transactions?
A) groups of documents are totalled
B) audit trail is available in electronic form
C) the focus is on preventing incorrect transactions
D) remittance advice information is matched to sales invoice numbers
The emphasis for the audit of sales return and allowances is often placed on testing the
existence of recorded transactions. However, the most important objective to consider is
A) cut-off.
B) valuation.
C) accuracy.
D) completeness.
The process of transferring money from one bank account to another and improperly
recording the transaction in both accounts is called
A) lapping.
B) embezzling.
C) kiting.
D) a scam.
Michum Inc. has related parties with a company owned by the CEO’s brother that
comprise about $500,000. There are also related party transactions with the owner
(about $250) and with two of the officers ($750 and $1,000) respectively. Which related
parties should be identified and included in audit documentation?
A) those with material transactions only
B) those that had transactions in the current year only
C) all related parties
D) only those that could lead to a conflict of interest