450 Exam 2 Review

Actions, policies, and procedures that reflect the overall attitude of management, directors, and owners of the entity about internal control relate to which of the following internal control components?

• Control environment

• Information and communication

• Risk assessment

• Monitoring

A material weakness in internal control represents a control deficiency that

• more than remotely adversely affects a company’s ability to initiate, authorize, record, process, or report external financial statements reliably

• results in a reasonable possibility that internal control will not prevent or detect material financial statement misstatements

• exists because a necessary control is missing or not properly designed

• reduces the efficiency and effectiveness of the entity’s operations

The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the

• factors that raise doubts about the auditability of the financial statements

• operating effectiveness of internal control policies and procedures

• risk that material misstatements exist in the financial statements

• possibility that the nature and extent of substantive tests may be reduced

An auditor’s decision either to apply analytical procedures as substantive tests or to perform substantive tests of transactions and account balances usually is determined by the

• availability of data aggregated at a high level

• timing of tests performed after the balance sheet date

• auditor’s familiarity with industry trends.

• relative effectiveness and efficiency of the tests

To support the auditor’s initial assessment of control risk below maximum, the auditor performs procedures to determine that internal controls are operating effectively. Which of the following audit procedures is the auditor performing?

• Tests of controls

• Substantive tests of transactions

• Tests of details of balances

• Tests of trends and ratios

Tests of controls are most likely to be omitted when

• an account balance reflects many transactions

• control risk is assessed at less than the maximum

• the understanding of internal control indicates that evaluating the effectiveness of control policies and procedures is likely to be inefficient.

• the auditor wishes to increase the acceptable level of detection risk.

Which of the following controls would be most effective in detecting a failure to record cash received from customers paying on their accounts?

• A person in accounting reconciles the bank deposit to the cash receipts journal.

• Transactions recorded in the cash receipts journal are posted on a real-time basis to the accounts receivable database file

• Monthly statements are sent to customers and any discrepancies are resolved by someone independent of cash handling and accounting

• Deposits of cash received are made daily

The accounting system automatically obtains the unit price based on scans of bar codes for merchandise sold. This control is most relevant to which transaction-related Objective for sales

• Posting and Summarization

• Occurrence

• Completeness

• Accuracy

An auditor is performing substantive tests of transactions for sales. One step is to trace a sample of debit entries from the accounts receivable database back to the supporting duplicate sales invoices. What will the auditor intend to establish by this step?

• Sales invoices represent existing sales

• All sales have been recorded.

• All sales invoices have been correctly posted to customer accounts.

• Debit entries in the accounts receivable database are correctly supported by sales invoices.

Of the four factors that determine the initial sample size in attributes sampling (population size, tolerable exception rate, acceptable risk of overreliance, and expected population exception rate), which factor has the least effect on sample size?

• Population size

• Expected population exception rate

• Tolerable exception rate

• Acceptable risk of overreliance