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WorksheetsBUS169A FINAL
Total questions: 135
Worksheet time: 1hrs 8mins
In testing the existence assertion for an asset, an auditor ordinarily works from the:
accounting records to the supporting documents.
financial statements to the potentially unrecorded items.
supporting documents to the accounting records.
potentially unrecorded items to the financial statements.
Which of the following statements concerning audit evidence is correct?
An entity’s general ledger may be sufficient audit evidence to support the financial statements.
To be appropriate, audit evidence should be either persuasive or relevant but need not be both.
The difficulty and expense of obtaining audit evidence concerning an account balance are a valid basis for omitting the test.
The measure of the reliability of audit evidence lies in the auditor’s judgment.
Which of the following presumptions is least likely to relate to the reliability of audit evidence?
An auditor’s opinion is formed within a reasonable time to achieve a balance between benefit and cost.
The independent auditor’s direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly.
The more effective internal control, the more assurance it provides about the accounting data and financial statements.
Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.
Which of the following types of audit evidence is the least reliable?
bank statements obtained from the entity
correspondence from the entity’s attorney about litigation
test counts of inventory performed by the auditor
prenumbered purchase order forms prepared by the entity
Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence?
computations made by the auditor
bank statements obtained from the entity
vendors’ invoices included in the entity’s files
prenumbered entity sales invoices
Which of the following primary assertions is satisfied when an auditor observes the entity’s physical count of inventory?
Accuracy, Valuation and Allocation.
Completeness
Existence.
Rights and obligations.
Confirmations would normally be most likely used as a type of audit evidence in connection with which of the following?
Goodwill.
Deferred Taxes.
Machinery and Equipment.
Accounts Receivable.
One of the main objectives of performing analytical procedures during the planning phase of the audit is to identify:
Transactions that have not been properly authorized.
Illegal acts undetected as a result of poor internal controls.
Inefficient operations.
Unusual changes that may signal possible account misstatements.
Which of the following presumptions is correct regarding the reliability of audit evidence?
To be reliable, evidence should be convincing rather than simply persuasive.
Information obtained directly from the company is considered to be the most reliable type of evidence.
An effective internal control system provides increased assurance with regard to the reliability of audit evidence.
Reliability generally refers to the amount and relevance of corroborative audit evidence obtained.
Audit evidence includes only written information used by the auditor in arriving at an opinion about the fairness of financial statements.
True
False
The auditor gathers audit evidence to test management's assertions.
True
False
The classification assertion refers to transactions and events being recorded in the correct accounting period.
True
False
The completeness assertion refers to ensuring that transactions and events that should have been recorded actually have been recorded.
True
False
The cutoff assertion relates to whether transactions and events have been recorded in the correct accounting period.
True
False
Audit procedures are designed to test management assertions.
True
False
A confirmation is used to:
verify the inventory count is correct.
verify that a control is being observed.
verify a representation using information from a third party.
verify that a specific trend is correct.
In testing plant and equipment balances, an auditor may physically inspect new additions listed on the summary of plant and equipment transactions for the year. This procedure is designed to obtain evidence concerning management's assertions about account balances, and specifically, which assertion?
existence
rights and obligations
completeness
classification
Which assertions may be tested for the “account balances, and related disclosures” category of management assertions?
existence, cutoff, rights and obligations, completeness
existence, rights and obligations, completeness, accuracy, valuation and allocation, classification, and presentation
occurrence, rights and obligations, completeness, valuation and allocation
occurrence, accuracy, rights and obligations, completeness
Which assertions may be tested for the “transactions and events, and related disclosures” category of management assertions?
occurrence, completeness, accuracy, cutoff, classification, and presentation
occurrence, completeness, rights and obligations, accuracy, cutoff, and classification
existence, completeness, rights and obligations, accuracy, cutoff, classification, and presentation
existence, rights and obligations, accuracy, authorization, and completeness
Tracing is used primarily to test which of the following assertions about classes of transactions?
occurrence
completeness
cutoff
classification
Vouching is used primarily to test which of the following assertions about classes of transaction?
occurrence
completeness
authorization
classification
Footing is an example of:
recalculation
confirmation
inquiries
analytical procedures.
In determining whether transactions have been recorded, the direction of the audit testing should start from the:
general ledger balances.
adjusted trial balance.
original source documents.
general journal entries.
To test for unsupported entries in the ledger, the direction of audit testing should start from the
ledger entries.
sales invoices or shipping documents.
externally generated documents.
original source documents.
Which of the following presumptions does not relate to the appropriateness of audit evidence?
The more effective the internal control system, the more assurance it provides about the accounting data and financial statements.
An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost.
Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.
The independent auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly.
Of the following, which is the least reliable type of audit evidence?
documents mailed by knowledgeable persons outside the entity to the auditor
correspondence between the auditor and third party vendors
asking the controller about an end of period adjustment
computations made by the auditor
Which of the following show the detailed general ledger accounts that make up a financial statement category on the auditor's working trial balance?
account analyses
supporting schedules
control accounts
lead schedules
The permanent (continuing) file of an auditor's working papers most likely would include copies of the
bank statements.
organizational chart.
lead schedules.
audit plan.
Audit documentation prepared on audits of public entities is the property of the:
shareholders.
auditor.
management of the entity being audited.
securities and exchange commission.
All of the following are typically in the current file except:
adjusting journal entries.
copies of the audit report.
chart of accounts.
lead schedules.
You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Which account balance assertion for inventory should you be most concerned about verifying?
existence
completeness
rights and obligations
accuracy, valuation, and allocation
Which of the following presumptions is correct about the reliability of audit evidence?
Information obtained indirectly from knowledgeable outside sources is the most reliable audit evidence.
Sufficiency and appropriateness of audit evidence are interrelated and they affect the persuasiveness of audit evidence.
Reliability of audit evidence refers to the amount of corroborative evidence obtained.
An effective internal control system provides more reliable audit evidence than a system with ineffective controls.
Which of the following types of documentary evidence should the auditor consider to be the most reliable?
a sales invoice issued by the entity and supported by a delivery receipt from an outside trucker
confirmation of an account payable balance mailed by and returned directly to the auditor
a check issued by the company and bearing the payee's endorsement that is included with the bank statement mailed directly to the auditor
a working paper prepared by the entity's controller and reviewed by the entity's treasurer
Which of the following types of audit evidence is the most persuasive?
prenumbered internal purchase order forms
auditee worksheets supporting cost allocations
bank statements obtained from the auditee
auditee personnel responses to auditor inquiries
Audit documents record the results of the auditor's evidence-gathering procedures. When preparing audit documents, the auditor should remember that:
audit documents should be kept on the client's premises so that the client can have access to them for reference purposes.
audit documents should be the primary support for the financial statements being examined.
audit documents should be considered as a substitute for the company's accounting records.
audit documents should be designed to facilitate the review and supervision of work done by auditors assigned to the engagement.
Based on conversations with the owner-manager of an audit client, the auditor ascertained that the company's primary motivation is to avoid paying income taxes. Based on this motivation, which account balance assertion for ending inventory will the auditor be most concerned about verifying?
existence or occurrence
completeness
rights and obligations
observation
Your audit client is under intense pressure to meet an earnings target. Which assertion related to classes of transactions are you most concerned with for transactions within the purchasing process?
existence or occurrence
completeness
accuracy
presentation
The permanent audit file usually includes:
working trial balance.
organizational chart.
audit plan.
audit programs.
The current audit file usually includes:
working trial balance.
organizational chart.
documentation of internal control (e.g., flowcharts).
copies of important contracts.
An auditor’s primary consideration regarding an entity’s internal controls is whether they:
relate to the control environment.
affect the financial statement assertions.
prevent management override.
reflect management’s philosophy and operating style.
Which of the following statements about internal control is correct?
An exceptionally strong internal control system is enough for the auditor to eliminate substantive procedures on a significant account balance.
The establishment and maintenance of internal control is an important responsibility of the internal auditor.
The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system.
A properly maintained internal control system reasonably ensures that collusion among employees cannot occur.
Internal control is a process designed to provide reasonable assurance regarding the achievement of which objective?
effectiveness and efficiency of operations
reliability of financial reporting
compliance with applicable laws and regulations
all of these are correct.
After obtaining an understanding of an entity’s internal control system, an auditor may set control risk at high for some assertions because the auditor:
performs tests of controls to restrict detection risk to an acceptable level.
believes the internal controls are unlikely to be effective.
determines that the pertinent internal control components are not well documented.
identifies internal controls that are likely to prevent material misstatements.
Assessing control risk below high involves all of the following except:
analyzing the achieved level of control risk after performing tests of controls.
performing tests of controls.
identifying specific controls to rely on.
concluding that controls are ineffective.
Which of the following audit techniques would most likely provide an auditor with the least assurance about the effectiveness of the operation of a control?
observation of entity personnel
reperformance of the control by the auditor
inquiry of entity personnel
walkthrough
The highest-quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by:
inquiries of employees who apply control activities.
observation by the auditor of the employees performing control activities.
inspection of documents prepared by a third party but which contain the initials of those applying entity controls.
inspection of a flowchart of duties performed and available personnel.
An auditor’s flowchart of an entity’s accounting system is a diagrammatic representation that depicts the auditor’s:
understanding of the system.
documentation of the study and evaluation of the system.
program for tests of controls.
understanding of the types of fraud that are probable, given the present system.
The basic concept of internal control that recognizes the cost of internal control should not exceed the benefits expected to be derived is known as:
reasonable assurance.
management responsibility.
limited liability.
management by exception.
An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about the:
efficiency of management’s decision-making process.
appropriate prices that the entity should charge for its products.
methods of assigning production tasks to employees.
entity’s ability to accurately process and summarize financial data.
Management’s attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity’s control environment when:
external policies established by parties outside the entity affect its accounting practices.
management is dominated by one individual.
internal audit personnel have direct access to the board of directors and the entity’s management.
the audit committee is active in overseeing the entity’s financial reporting policies.
Proper monitoring within an internal control framework may include all of the following except:
an external auditor.
an effective audit committee.
an internal audit function.
the internal revenue service.
An entity’s control activities include all of the following except:
performance reviews.
information processing.
external auditor’s tests of controls.
segregation of duties.
Potential benefits of an entity’s controls in an IT environment include all of the following except:
reduction in the risk that controls will be circumvented.
eliminate human errors or mistakes.
consistent application of predefined business rules.
more timely information.
Auditors are most likely to gather audit evidence solely using substantive procedures:
if transactions are recurring.
if the implemented controls are assessed as ineffective.
if control risk is very low.
if the entity has a well-designed automated system.
Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of:
authorization, execution, and payment.
authorization, recording, and custody.
custody, execution, and reporting.
authorization, payment, and recording.
Factors that the auditor should consider as increasing the effectiveness of the audit committee include all of the following except:
It is independent of management.
It is comprised almost exclusively of members of management, ensuring detailed knowledge of the company’s operations.
It asks management difficult questions.
It interacts regularly with internal audit personnel.
The documentation of an auditor’s understanding of internal controls:
is optional.
must be exclusively in narrative, questionnaires, or flowchart form.
must include flowcharts.
can include any combination of narratives, questionnaires, or flowcharts.
A flowchart is most frequently used by an auditor in connection with the:
preparation of generalized computer audit programs.
review of the entity’s internal controls.
use of statistical sampling use of statistical sampling in performing an audit.
performance of analytical procedures of account balances.
An advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaires is that systems flowcharts:
identify whether segregation of duties prevent collusion.
provide a visual depiction of the entity’s activities.
indicate whether controls are operating effectively.
reduce the need to observe the entity’s employees performing routine tasks.
Which of the following audit tests would be regarded as a test of controls?
Tests of the specific items making up the balance in a given general ledger account.
Tests comparing inventory pricing to vendors’ invoices.
Tests of the signatures on canceled checks to the board of directors’ authorizations.
Tests of the additions to property, plant, and equipment by physical inspections.
The independent auditor selects several transactions in each functional area and traces them through the entire system, paying special attention to evidence about whether or not the control activities are in operation. This is an example of a(n):
analytical procedure.
test of controls.
substantive procedure.
functional test.
In evaluating internal control, the auditor is basically concerned that the system provides reasonable assurance that:
operational efficiency has been achieved in accordance with management plans.
material misstatements have been prevented, or detected and corrected.
controls have not been circumvented by collusion.
management cannot override the system.
An effective control environment:
identifies and responds to all business risks.
creates a commitment to competence.
guarantees that all controls are followed as prescribed.
does not need an effective board of directors or internal audit function.
The risk assessment component of internal control refers to
the auditor’s assessment of control risk.
the auditor’s assessment of client risk.
the entity’s identification and analysis of risks relevant to achievement of its objectives.
the entity’s monitoring of the potential for material misstatements.
A substantive strategy differs from a reliance strategy in that a substantive strategy includes:
increased implementation of detailed tests of transactions and balances.
extra tests of controls.
increased emphasis on verbal representations from management.
setting control risk at a minimum level.
Assessing control risk at a lower level most likely would involve:
changing the timing of substantive procedures by omitting interim testing and performing the tests at year-end.
identifying specific internal controls relevant to specific assertions.
performing more extensive substantive procedures with larger sample sizes than originally planned.
reducing inherent risk for most of the assertions relevant to significant account balances.
Assessing control risk at a lower level involves all of the following except:
identifying specific controls to rely on.
concluding that controls are ineffective.
performing tests of controls.
analyzing the achieved level of control risk after performing tests of controls.
When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the:
extent of tests of details.
level of inherent risk.
extent of tests of controls.
level of detection risk.
Which of the following procedures most likely would be included as part of an auditor's tests of controls?
inspection
reconciliation
confirmation
analytical procedures
For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by:
reperformance and corroboration.
observation and inquiry.
inspection and vouching.
confirmation and recomputation.
In order for an external auditor to complete an audit of a public company, the entity’s management must comply with all of the following except:
accept responsibility for the effectiveness of the entity’s internal control over financial reporting.
evaluate the effectiveness of the entity’s internal control over financial reporting using suitable control criteria.
support its evaluation with sufficient evidence, including documentation.
present an oral assessment of the effectiveness of the entity’s internal control over financial reporting as of the end of the entity’s most recent fiscal year.
An “integrated audit” as stated in Section 404 of the Sarbanes-Oxley Act means:
the auditor must consider the integrated thoughts and ideas of everyone on the audit staff.
the auditor must conduct two audits, one on the effectiveness of internal control and one on the financial statements, in an integrated way.
the auditor must integrate the same objectives whether auditing internal control or auditing the financial statements.
two independent CPA firms must work together on the audit.
The PCAOB Auditing Standards require the auditor to provide which of the following when performing an integrated audit?
reasonable assurance on the financial statements, absolute assurance on internal control
reasonable assurance on internal control, absolute assurance on the financial statements
absolute assurance on both the financial statements and internal control
reasonable assurance on both the financial statements and internal control
According to the PCAOB, who is responsible for certifying the reliability of the internal controls over financial reporting process of an entity?
the entity’s CEO and/or CFO
the entity’s board of directors
an internal control specialist
the external auditor
The person in charge of authorizing credit to customers does not properly understand what constitutes a credit risk. This is an example of:
a material misstatement.
a design deficiency.
a deficiency in operation.
this is not an internal control deficiency.
A deficiency that implies that there is a reasonable possibility of misstatement in the financial statements that is significant but not material is:
a material weakness.
a significant deficiency.
an insignificant deficiency.
a probable deficiency.
Which of the following is not a topic that requires special consideration by management during management’s internal control assessment process and by the auditor during the audit of internal control?
multiple locations and business units
service organizations
the role of the auditor in internal control
safeguarding assets
Management documentation of the ICFR assessment should include all of the following except:
documentation regarding every control in a process.
documentation regarding reasonable support for the basis for management’s assessment and conclusion.
documentation regarding the design of controls management has placed in operation.
documentation on the controls management concludes are adequate to address the entity’s financial reporting risks.
Which of the following is not a primary objective of internal control as established by COSO?
efficiency and effectiveness of operations
effective purchasing systems
compliance with laws and regulations
reliable financial reporting
An auditor performing an audit of internal control over financial reporting would be required to:
rely on the work of internal auditors.
test all of the entity’s internal controls.
form an opinion on the effectiveness of internal control.
randomly identify accounts for an audit of internal control.
In determining the extent to which the auditor may use the work of others in the audit of ICFR, the auditor should do all of the following except:
be ready to document the extent to which he or she relied on the work.
evaluate the risks associated with the controls subjected to the work of others.
evaluate the competence and objectivity of the individuals who performed the work.
All of these are required.
Which of the following is least likely to represent a material weakness in internal control for Flynt Corporation?
Flynt Corporation’s computer systems were not working properly for two days; consequently, employees needed to do all reconciliations manually.
Flynt Corporation’s CFO was arrested last year for embezzling money from the entity.
For the current year, the auditor found a material misstatement in Flynt’s sales recognition that was undetected by the internal controls.
Flynt’s audit committee is deemed to be ineffective.
S&H Associates has just performed an audit of Bob’s Bikes. S&H was unable to obtain a written representation from management about internal control. Which of the following is true?
S&H must still assume that management has assessed the effectiveness of internal control.
Depending on other factors in the audit, S&H can still issue an unqualified opinion.
S&H should consider this situation a limitation on the scope of the audit.
Management does not need to give S&H a letter if it has disclosed all known internal control deficiencies.
Public reporting on the effectiveness of internal control over financial reporting, as required by the Sarbanes-Oxley Act, includes:
a statement that the public accounting firm that audited the financial statements has provided input on the design of internal controls.
the auditor provides an opinion on whether the entity maintained, in all material respects, effective ICFR as of the specified date, based on the control criteria.
an explicit statement as to whether management agrees with the public accounting firm’s assessment of internal controls.
a detailed statement describing changes or additions to the internal control environment that occurred in the current year.
Which of the following concerning the auditor’s report on internal control over financial reporting is correct?
The auditor’s report contains an opinion on the effectiveness of internal control over financial reporting based on the auditor’s independent work.
In the report on internal control over financial reporting, the auditor can issue only a qualified or an unqualified opinion.
The auditor needs to state management’s assessment of internal control over financial reporting, but does not necessarily need to comment on whether he or she agrees.
An unqualified opinion is required if a material weakness is identified.
Prior to issuing a report on internal controls over financial reporting, an auditor is required to:
perform procedures sufficient to identify all control deficiencies.
communicate to management, in writing, all control deficiencies previously included in written communication from the internal auditors.
communicate to management, in writing, all control deficiencies identified during the audit and inform the audit committee when such a communication has been made.
represent that no significant deficiencies were noted during the audit of internal control.
Which of the following is not true?
The auditor should not communicate with management until the audit of internal control over financial reporting is finished.
Written communication between the auditor and management about internal control over financial reporting should include the definitions of control deficiencies, significant deficiencies, and material weaknesses.
The auditor should not include in the audit report that no significant deficiencies were noted during an audit of internal control over financial reporting.
If fraud is discovered, the auditor must report it to the appropriate level of management.
An “integrated audit”:
will, in most cases, lead to a substantive audit strategy.
denies the auditor access to information about the entity’s controls.
may be performed by two separate audit firms.
is comprised of audits of internal control over financial reporting and of financial statements.
Which of the following is not an element of management’s assessment process for the effectiveness of internal control?
identifying financial reporting risks and related controls
determining the locations and business units to include in the evaluation
evaluating evidence about the operating effectiveness of ICFR
obtaining the auditor’s assessment of the internal control effectiveness
Which of the following is true regarding management's documentation of internal controls?
Some documentation should focus on controls management has placed in operation to adequately address identified financial reporting risks.
Documentation should focus on controls over the interim financial reporting process.
Documentation must be done on paper.
Inadequate documentation is usually considered an insignificant deficiency in internal control.
Management’s written representations concerning internal control are:
addressed to the users of the financial statements.
normally drafted by management.
included in the auditor’s final report.
signed by the CEO and CFO.
In the context of an audit of internal controls, the auditor must document all of the following except:
the extent to which he or she relied upon work performed by others.
the auditor’s understanding and evaluation of the design of each of the components of the entity’s internal control over financial reporting.
transcripts of the auditor’s discussion with management concerning the points at which misstatements could occur.
the evaluation of any deficiencies discovered that could result in a modification of the auditor’s report.
Which of the following statements included in management’s assessment of the effectiveness of internal control over financial reporting would not cause the auditor to disclaim an opinion?
Management includes disclosures about corrective actions taken by the entity after the date of management’s assessment.
The entity plans to implement new controls before the end of the reporting period.
Management believes the cost of correcting a material weakness would exceed the benefits derived from implementing the new controls.
Disclosure of material weaknesses corrected during the period.
A modification of the standard report is required for all of the following conditions except:
there is a restriction on the scope of the engagement.
the presence of a material weakness at the end of the period.
management has concluded that internal controls are effective.
the auditor was not able to apply all the procedures necessary.
AAA & Associates recently finished auditing LinktheEarth Corporation’s internal control over financial reporting. AAA found a number of material weaknesses in the entity’s internal control. LinktheEarth’s management remediated all of the weaknesses that AAA found. However, the auditors did not have sufficient time to retest the controls. What report should AAA issue with regards to internal control over financial reporting at year-end?
unqualified report
adverse report
qualified report
disclaimer on opinion
According to the COSO definition of safeguarding of assets, effective controls over financial reporting will provide reasonable assurance that:
asset losses are properly reflected in the financial statements.
asset losses will not occur.
asset losses will not occur and that losses are properly reflected in the financial statements.
asset losses will not negatively impact the company.
Section 404 of the Sarbanes-Oxley Act includes which of the following?
a requirement that management of a privately held company issues an assessment of internal control that covers the entire year
specific guidance on what constitutes adequate internal control
a requirement that management of a publicly traded company accepts responsibility for establishing and maintaining adequate internal controls
a requirement that management of a publicly traded company issues an assessment regarding the efficiency of internal control for the year
Which of the following is false?
Regardless of the achieved level of control risk in connection with the audit of the financial statements, auditing standards require the auditor to perform some substantive procedures for all significant accounts and disclosures.
The absence of misstatements in financial statements is considered convincing evidence that existing controls are effective.
The audit of internal control is intended to draw conclusions about the effectiveness of internal control over financial reporting as of a specific date.
The auditor is required to evaluate the implications of the financial statement audit for the effectiveness of internal control over financial reporting.
A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to:
trace a transaction from every class of transactions from origination through the entity's information system.
trace a transaction from each major class of transactions from origination through the entity’s information system until it is reflected in the entity’s financial reports.
tour the organization’s facilities and locations before beginning any audit work.
trace a transaction from each major class of transactions from origination through the entity’s information system.
In auditing a public company, Natalie, an auditor for N. M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue?
a disclaimer of opinion
an exculpatory opinion
an unqualified report
an adverse report
In general, revenue is recognized when:
goods are shipped.
an entity satisfies a performance obligation.
it is recorded in the sales journal.
it is received in cash.
According to FASB ASC 606, which of the following is not part of the five-step approach for revenue recognition?
identify the contract(s) with a customer
determine the transaction price
determine whether the buyer will take a discount
identify the performance obligations in the contract
What is channel stuffing?
A company records revenue before delivery terms can be arranged.
A company records revenue on goods that will be shipped overseas.
A company induces distributors to buy substantially more inventory than they can promptly resell.
A company alters the terms and conditions of recorded sales to entice customers to accept delivery of goods.
At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization be of least concern to the auditor?
granting of credit
shipment of goods
determination of discounts
selling of goods for cash
Tracing copies of sales invoices to shipping documents will provide evidence that all:
shipments to customers were recorded as receivables.
billed sales were shipped.
accounts receivable ledger is complete.
shipments to customers were billed.
An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's assertion about account balances’:
accuracy, valuation and allocation.
completeness.
existence or occurrence.
rights and obligations.
Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?
scan the sales journal for sequential and unusual entries
examine shipping documents for matching sales invoices
compare the accounts receivable ledger to daily sales summaries
inspect unused sales invoices for consecutive prenumbering
Tracing shipping documents to prenumbered sales invoices provides evidence that:
no duplicate shipments or billings occurred.
shipments to customers were properly billed.
all goods ordered by customers were shipped.
all prenumbered sales invoices were accounted for.
Tests designed to detect credit sales made after the end of the year that have been recorded in the current year provide assurance about management's assertion of:
classification.
cutoff.
occurrence.
accuracy.
Which of the following is not an inherent risk factor for the revenue process?
complexity of revenue recognition issues
difficulty of auditing transactions
special industry practices
the entity does not follow its stated policies for sales order approvals
In auditing accounts receivable, the negative form of confirmation request most likely would be used when:
recipients are likely to return positive confirmation requests without verifying the accuracy of the information.
the combined assessed level of inherent and control risk relative to accounts receivable is low.
a small number of accounts receivable are involved but a relatively large number of errors are expected.
the auditor performs a dual purpose test that assesses control risk and obtains substantive evidence.
Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Which of the following statements is true regarding the auditor's use of confirmations?
The positive confirmation form must always be used to confirm all balances regardless of size.
A combination of the two confirmation types can be used, with the positive form used for large balances and the negative form used for small balances.
A combination of the two confirmation types can be used, with the positive form used for trade receivables and the negative form for other receivables.
The positive confirmation form should be used when controls related to receivables are satisfactory and the negative confirmation form should be used when controls related to receivables are unsatisfactory.
In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following?
the credit manager's opinion
an aging schedule of past due accounts
subsequent year collections of amounts in accounts receivable at the balance sheet date
ratios calculated showing the past relationship of the valuation allowance to net credit sales
Audit documents often include an aged trial balance of accounts receivable as of the balance sheet date. This aging is used by the auditor to:
evaluate internal control over credit sales.
test the accuracy of recorded credit sales.
evaluate the allowance for doubtful accounts.
verify the existence of the recorded receivables.
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:
accuracy, valuation and allocation.
completeness.
existence.
rights and obligations.
Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?
Employees responsible for authorizing sales and bad debt write-offs are denied access to cash.
Shipping documents and sales invoices are matched by an employee who does not have authority to write-off bad debts.
Employees involved in the credit-granting function are separated from the sales function.
Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.
Alpha Company uses its sales invoices to record revenue and update perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be shipped that are not invoiced. The inadequate control activities could cause an:
understatement of revenues, receivables, and inventory.
overstatement of revenues and receivables and an understatement of inventory.
understatement of revenues and receivables and an overstatement of inventory.
overstatement of revenues, receivables, and inventory.
Alpha Company uses its sales invoices to record revenue and update perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be invoiced that are not shipped. The inadequate control activities could cause an:
understatement of revenues, receivables, and inventory.
overstatement of revenues and receivables and an understatement of inventory.
understatement of revenues and receivables and an overstatement of inventory.
overstatement of revenues, receivables, and inventory.
Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?
The cashier prepares the daily deposit.
The cashier makes the daily deposit at a local bank.
The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
The cashier endorses the checks.
Which is not a key segregation of duties for the revenue process?
Different parties should prepare shipping orders and prepare bills of lading.
Different parties should perform the credit and billing functions.
Different parties should perform the shipping and billing functions.
Different parties should receive cash and adjust accounts receivable.
All of the following are important controls over credit memos except:
proper segregation of duties to ensure that sales discounts taken were earned.
credit memos should be approved by someone other than whoever initiated it.
credit memos should be supported by a receiving document for returned goods.
proper segregation of duties between access to customer records and authorizing credit memos.
Auditors are more concerned with the occurrence assertion for revenues than the completeness assertion because:
entities are more likely to overstate than understate revenues.
entities are more likely to understate than overstate revenues.
it is difficult to determine when services have been performed.
the allowance for doubtful accounts often is understated.
An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to assess the assertion of:
authorization and accuracy.
completeness.
cutoff.
occurrence.
Which of the following control activities may prevent the failure to bill customers for some shipments?
Each shipment should be supported by a prenumbered sales invoice that is accounted for.
Each sales order should be approved by authorized personnel.
Sales journal entries should be reconciled to daily sales summaries.
Each sales invoice should be supported by a shipping document.
Which of the following internal control activities most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger?
Daily sales summaries are compared to daily postings to the accounts receivable ledger.
Each sales invoice is supported by a prenumbered shipping document.
The accounts receivable ledger is reconciled daily to the control account in the general ledger.
Each shipment on credit is supported by a prenumbered sales invoice.
Which of the following procedures would ordinarily be expected to best reveal improper cutoff of sales at the balance sheet date?
compare shipping documents with sales records
apply gross profit rates to inventory disposed of during the period
trace payments received subsequent to the balance sheet date
send accounts receivable confirmation requests
If the objective of a test of details is to detect the overstatement of sales, the auditor should:
vouch transactions from the cash receipts journal to the sales journal.
trace transactions from the sales journal to the cash receipts journal.
trace transactions from the shipping documents to the accounting records.
vouch transactions from the accounting records to the shipping documents.
Which of the following misstatements is not related to the completeness assertion for current year revenue?
Goods are shipped, but revenue is not recorded.
This year's revenue is recorded next year.
Next year's revenue is recorded this year.
Revenue is not recognized for services that have been performed.
Which of the following is a test of controls for the transaction assertion of completeness for revenue?
Test a sample of sales invoices for authorized customer orders.
Review sales orders for proper credit approval.
Trace shipping documents to sales invoices and the sales journal.
Examine reconciliation of subsidiary ledger to general ledger control account.
To achieve good internal control, which department should perform the activities of matching shipping documents with sales orders?
billing
shipping
credit
sales Order
Cooper, CPA is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely:
send positive confirmation requests.
send negative confirmation requests.
examine evidence of subsequent cash receipts.
inspect the internal records, such as copies of the tax invoices that were mailed to the residents.
Auditors sometimes use ratios as audit evidence. For example, an unexplained increase in the ratio of gross profit to sales may suggest which of the following possibilities?
fictitious purchases
fictitious sales
selling and general expenses erroneously being recorded as merchandise purchases
unrecorded sales
An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31. By this procedure, the auditor would be most likely to learn about which of the following?
An October invoice was improperly computed.
An October check from a customer was posted in error to the account of another customer with a similar name.
An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.
An account balance is past due and should be written-off.
Once an auditor has determined that the accounts receivable account balance has increased because of slow collection in a “tight money” environment, the auditor would be likely to:
increase the balance in the allowance for bad debts account.
review the going concern ramifications.
require the entity to tighten its credit policy.
expand tests regarding the collectability of receivables.
Which of the following most likely would give the most assurance concerning the valuation assertion for accounts receivable?
tracing amounts in the subsidiary ledger to details on shipping documents
comparing receivable turnover ratios to industry statistics for reasonableness
inquiring about receivables pledged under loan agreements
assessing the allowance for uncollectible accounts for reasonableness
