1. For
an internal audit function to be effective, it is essential that the internal
audit staff
a. be
independent of the operating departments.
b. be
independent of the accounting department.
c. report
directly to a high level of authority within the organization.
d. achieve all
of the above.
2. If
evidence was obtained in the prior year's audit that indicates a key control was
operating effectively,
a. it will be
unnecessary to test that control this year.
b. the tests of
that control will be reduced this year.
c. the auditor
would not test this area again this year.
d. the extent
of tests of that control may be reduced this year if the auditor determines
that it is still in place.
3. Internal
controls can never be regarded as completely effective. Even if systems
personnel could design an ideal system, its effectiveness depends on the
a. adequacy of
the computer system.
b. proper
implementation by management.
c. ability of
the internal audit staff to maintain it.
d. competency
and dependability of the people using it.
4. Which
of the following is not a control related to safeguarding IT equipment,
programs, and data files?
a. physical
controls.
b. automated
internal verification procedures.
c. access
controls.
d. backup and
recovery procedures.
5. Which of the following tests would not
be a program control?
a. Completeness
test.
b. Validity
test.
c. Parity test.
d. Limit test.
6. It
is important for the CPA to consider the competence of the audit clients'
employees because their competence bears directly and importantly upon the
a. cost/benefit
relationship of the system of internal control.
b. achievement
of the objectives of the system of internal control.
c. comparison
of recorded accountability with assets.
d. timing of
the tests to be performed.
7. The
Foreign Corrupt Practices Act of 1977
a. amended the
securities acts of 1933 and 1934.
b. defined
"proper record-keeping systems."
c. imposes a
penalty of fine and imprisonment upon the auditor for a violation.
d. provides for
all three of the above.
8. The
procedures for proper recordkeeping should be spelled out in
a. the
corporate bylaws.
b. run manuals.
c. systems
manuals.
d. minutes of
the board of directors.
9. An
auditor's attempt to gain an understanding of the accounting system is
typically accomplished and documented by
a. a narrative
description of the system.
b. a flowchart.
c. either a or
b.
d. a
questionnaire.
10. Control risk is a measure of the
auditor's expectation that the internal controls
a. will prevent
material misstatements from occurring.
b. will detect
and correct material misstatements.
c. will either
prevent material misstatements or detect and correct them.
d. will neither
prevent material misstatements nor detect and correct them.
11. The
auditor can conclude that control risk is low
a. after
obtaining an understanding of the control environment and the accounting system
at a fairly detailed level.
b. after
identifying specific controls that will reduce control risk and making an
assessment of control risk.
c. after
testing the controls for effectiveness.
d. only after
all three steps above are completed.
12. Which
of the following statements regarding audit committees is correct?
a. Both the New
York Stock Exchange and the American Stock Exchange require that listed
companies have an audit committee composed entirely of outside directors.
b. The New York
Stock Exchange recommends, and the American Stock Exchange requires, that
listed companies have an audit committee composed entirely of outside
directors.
c. The New York
Stock Exchange requires, and the American Stock Exchange recommends, that
listed companies have an audit committee composed entirely of outside
directors.
d. Both the New
York Stock Exchange and the American Stock Exchange recommend, but do not
require, that listed companies have an audit committee composed entirely of
outside directors.
13. During
which part of an audit examination is the preparation of flowcharts most
appropriate?
a. When
performing preliminary analytical procedures.
b. When
performing tests of controls.
c. When
evaluating the system of internal administrative control.
d. When
reviewing the system of internal accounting control.
14. Of
the following, the best statement of the CPA's primary objective in reviewing
internal control is that the review is intended to provide
a. reasonable
protection against client fraud and defalcations by client employees.
b. a basis for
reliance on the system and determining the scope of other auditing procedures.
c. a basis for
constructive suggestions to the client for improving the accounting system.
d. a method for
safeguarding assets, checking the accuracy and reliability of accounting data,
promoting operational efficiency, and encouraging adherence to prescribed
managerial policies.
15. Which of the following activities would
be least likely to strengthen a company's internal control?
a. Separating
accounting from other financial operations.
b. Maintaining
insurance for fire and theft.
c. Fixing
responsibility for the performance of employee duties.
d. Carefully
selecting and training employees.
16. There
are major differences between a simple microcomputer-based accounting system
using purchased software for a small service company and a complex IT system
for an international manufacturing business.
a. Therefore,
the transaction-related audit objectives must be different for each.
b. Nevertheless,
the transaction-related audit objectives are the same for each.
c. Therefore,
the transaction-related audit objectives cannot be compared.
d. Nevertheless,
the transaction-related audit objectives, while different, are still
comparable.
17. To
qualify to be an "outside director" on an audit committee, one must
a. not be a
part of management.
b. not own any
stock in client company.
c. not receive
any remuneration or expense reimbursement.
d. be a
state-licensed Certified Public Accountant.
18. The
most important aspect of any system of controls is
a. proper
authorization procedures.
b. competent
trustworthy personnel.
c. separation
of duties.
d. regular
review by top management.
19. Authorizations
can be either general or specific. Which of the following is not an example of
a general authorization?
a. Automatic
reorder points for raw materials inventory.
b. A sales
manager's authorization for a sales return.
c. Credit
limits for various classes of customers.
d. A sales
price list for merchandise.
20. When the auditor identifies
opportunities for the client to make operational improvements in the internal
controls, it will be communicated to client's audit committee in the
a. management
letter.
b. reportable
conditions letter.
c. engagement
letter.
d. audit
report.
21. Which
of the following best describes the inherent limitations that should be
recognized by an auditor when considering the potential effectiveness of a
system of internal accounting control?
a. Procedures
whose effectiveness depends on segregation of duties can be circumvented by
collusion.
b. The
competence and integrity of client personnel provides an environment conducive
to accounting control and provides assurance that effective control will be
achieved.
c. Procedures
designed to assure the execution and recording of transactions in accordance
with proper authorizations are effective against irregularities perpetrated by
management.
d. The benefits
expected to be derived from effective internal accounting control usually do
not exceed the costs of such control.
22. Which of the following statements, if
any, is correct?
a. The NASDAQ
market requires that listed companies have audit committees, and that the
majority of the positions on the audit committee are held by outside directors.
b. The NASDAQ
market requires that listed companies have audit committees, and that a
minority of the positions on the audit committee are held by outside directors.
c. The NASDAQ
market recommends, but does not require, that listed companies have audit
committees, and that the majority of the positions on the audit committee are
held by outside directors.
d. The NASDAQ
market recommends, but does not require, that listed companies have audit
committees, and that a minority of the positions on the audit committee are
held by outside directors.
23. The
independent auditor should acquire an understanding of the internal audit
function as it relates to the independent auditor's study and evaluation of
internal accounting control because
a. the audit
programs, working papers, and reports of internal auditors can often be used as
a substitute for the work of the independent auditor's staff.
b. the procedures
performed by the internal audit staff may eliminate the independent auditor's
need for an extensive study and evaluation of internal control.
c. the work
performed by internal auditors may be a factor in determining the nature,
timing, and extent of the independent auditor's procedures.
d. the
understanding of the internal audit function is an important substantive test
to be performed by the independent auditor.
24. Having
an audit committee composed of outside directors is a requirement of
a. all public
companies.
b. all
companies that must file reports with the SEC.
c. all
companies that are listed on the New York Stock Exchange.
d. all
companies that are audited by members of the AICPA.
25. Which of the following statements
regarding auditor documentation of the client's internal controls is correct?
a. Documentation
must include flow charts.
b. Documentation
must include procedural write-ups.
c. No
documentation is necessary although it is desirable.
d. No one
particular form of documentation is necessary, and the extent of documentation
may vary.
26. The
reliance placed on substantive tests in relation to the reliance placed on
internal control varies in a relationship that is ordinarily
a. parallel.
b. direct.
c. inverse.
d. equal.
27. Which
of the following statements about the internal control questionnaire is not
correct?
a. The primary
advantage of the questionnaire approach is the relative completeness of
coverage of each audit area that a good instrument affords.
b. The
questionnaire can be prepared reasonably quickly, and it can be accomplished at
the beginning of the audit engagement.
c. The primary
disadvantage of the questionnaire approach is that individual parts of the
system are examined without providing an overall view.
d. It is
unacceptable for the auditor to rely on an internal control questionnaire that
has been filled out by client's personnel.
28. Narratives,
flowcharts, and internal control questionnaires are three common methods of
a. testing the
internal controls.
b. documenting
the study of internal controls.
c. designing
the audit manual and procedures.
d. documenting
the auditor's understanding of client's organizational structure.
29. Which
of the following is not a component of an entity's internal control?
a. Control
risk.
b. Control
procedures.
c. The
accounting system.
d. The control
environment.
30. When considering the objectivity of internal
auditors, an independent auditor should
a. evaluate the
quality control program in effect for the internal auditors.
b. examine
documentary evidence of the work performed by the internal auditors.
c. test a
sample of the transactions and balances that the internal auditors examined.
d. determine
the organizational level to which the internal auditors report.
31. The
primary emphasis by auditors is on controls over
a. classes of
transactions.
b. account
balances.
c. both a and
b, because they are equally weighted.
d. both a and
b, because they vary from client to client.
32. When
obtaining an understanding of an entity's control environment, an auditor
should concentrate on the substance of management's policies and procedures
rather than their form because
a. management
may establish appropriate policies and procedures but not act on them.
b. the board of
directors may not be aware of management's attitude toward the control
environment.
c. the auditor
may believe that the policies and procedures are inappropriate for that
particular entity.
d. the policies
and procedures may be so weak that no reliance is contemplated by the auditor.
33. After
considering a client's internal controls, an auditor has concluded that it is
well designed and is functioning as intended. Under these circumstances the
auditor would most likely
a. perform
tests of controls to the extent outlined in the audit program.
b. determine
the control procedures that should prevent or detect errors and irregularities.
c. not increase
the extent of predetermined substantive tests.
d. determine
whether transactions are recorded to permit preparation of financial statements
in conformity with generally accepted accounting principles.
34. To
comply with the second standard of fieldwork, the auditor need not be concerned
with all five areas of internal control that apply to management. The auditor's
primary concerns are with the system's ability to
a. ensure
reliability of financial reporting.
b. provide
reliable data and promote efficiency.
c. promote
efficiency and encourage adherence to policy.
d. provide
reliable data, safeguard assets, and comply with the Foreign Corrupt Practices
Act.
35. Evidential matter concerning proper
segregation of duties ordinarily is best obtained by
a. direct
personal observation of the employee who applies control procedures.
b. making
inquiries of co-workers about the employee who applies control procedures.
c. preparation
of a flowchart of duties performed and available personnel.
d. inspection
of third-party documents containing the initials of who applied control
procedures.
36. A
system of internal accounting control normally would include procedures that
are designed to provide reasonable assurance that
a. employees
act with integrity when performing their assigned tasks.
b. transactions
are executed in accordance with management's general or specific authorization.
c. decision
processes leading to management's authorization of transactions are sound.
d. collusive
activities would be detected by segregation of employee duties.
37. All
of the following are substantive tests except
a. tests of
controls.
b. tests of
details of transactions.
c. tests of
details of balances.
d. analytical
procedures.
38. When
planning an audit, the auditor's assessed level of control risk is
a. determined
by using actuarial tables.
b. calculated
by using the audit risk model.
c. an economic
issue, trading off the costs of testing controls against the cost of testing
balances.
d. calculated
by using the formulas provided in the AICPA's Statements on Auditing Standards.
39. IT
has several significant effects on an organization. Which of the following would
not be important from an auditing perspective?
a. Organizational
changes.
b. The
visibility of information.
c. The
potential for material misstatement.
d. None of the
above; i.e., they are all important.
40. Predesigned formats for audit working
papers and letters can be created and saved using both electronic spreadsheets
and word processors. These are called
a. desktop
publishing.
b. templates.
c. macros.
d. wysiwyg.
41. In
complex IT systems, which of the following factors does not increase the
likelihood of material misstatements in the financial statements?
a. Reduced
human involvement.
b. Uniformity
of processing.
c. Ease of
access to data.
d. Specialists
are needed to write computer programs.
42. Which
of the following is not an input control?
a. Check
digits.
b. Control
totals.
c. Adequate
documents.
d. Proper
authorization of transactions.
43. Generalized
audit software
a. is often
used even when client's data are not computerized.
b. is used when
client's software is not compatible with the auditor's.
c. is a method
of verifying the client's data which is recorded in a machine language.
d. can be used
for all three of the above.
44. If
a control total were to be computed on each of the following data items, which
would best be identified as a hash total for a payroll IT application?
a. Net pay.
b. Department
numbers.
c. Hours
worked.
d. Total debits
and total credits.
45. An independent auditor studies and
evaluates a client's IT system. The auditor's study portion includes two
phases: (1) a review of the system and (2) tests of controls. The latter phase
might include which of the following?
a. Examination
of systems flowcharts to determine whether they reflect the current status of
the system.
b. Examination
of the systems manuals to determine whether existing procedures are
satisfactory.
c. Examination
of the machine room log book to determine whether control information is
properly recorded.
d. Examination
of organization charts to determine whether IT department responsibilities are
properly separated to afford effective control.
46. When
an on-line, real-time (OLRT) system is in use, internal control can be
strengthened by
a. providing
for the separation of duties between key punching and error listing operations.
b. attaching
plastic file protection rings to reels of magnetic tape before new data can be
entered on the file.
c. preparing
batch totals to provide assurance that file updates are made for the entire
input.
d. making a
validity check of an identification number before a user can obtain access to
the computer files.
47. A
company uses the account code 669 for maintenance expense. However, one of the
company clerks often codes maintenance expense as 996. The highest account code
in the system is 750. What would be the best internal control check to build
into the company's computer program to detect this error?
a. A check for
this type of error would have to be made before the information was transmitted
to the IT department.
b. Valid-character
test.
c. Sequence
check.
d. Valid-code
test.
48. An
auditor's investigation of a company's IT control procedures has disclosed the
following four circumstances. Indicate which circumstance constitutes a
weakness in internal control.
a. Machine
operators do not have access to the complete run manual.
b. Machine
operators are closely supervised by programmers.
c. Programmers
do not have the authorization to operate equipment.
d. Only one
generation of back-up files is stored in an off-premises location.
49. Which
of the following is not a processing control?
a. Control
totals.
b. Logic tests.
c. Check
digits.
d. Computations
tests.
50. A control which relates to all parts of
the IT system is called a(n)
a. general
control.
b. systems
control.
c. universal
control.
d. applications
control.
51. To
obtain evidence that user identification and password controls are functioning,
an auditor would most likely
a. attempt to
sign on to the system using invalid user identifications and passwords.
b. write a
computer program that simulates the logic of the client's access control
software.
c. extract a
random sample of processed transactions and ensure that the transactions were
appropriately authorized.
d. examine
statements signed by employees stating that they have not divulged their user
identifications and passwords to any other person.
52. The
accumulation of source documents and records that allows the organization to
trace accounting entries back to their initiation is the
a. audit trail.
b. substantiation
record.
c. out-sourcing
code.
d. initialization
procedure.
53. Should
the auditor feel, after obtaining an understanding of IT internal control, that
control risk cannot be reduced, he or she will
a. issue a
disclaimer.
b. issue an adverse
opinion.
c. increase the
sample size for tests of controls.
d. expand the
substantive testing portion of the audit.
54. An
auditor's flowchart of a client's accounting system is a diagrammatic
representation that depicts the auditor's
a. program for
tests of controls.
b. understanding
of the system.
c. understanding
of the types of irregularities that are probable, given the present system.
d. documentation
of the study and evaluation of the system.
55. Which of the following is not an example
of an applications control?
a. An equipment
failure causes an error message on the monitor.
b. There is a
preprocessing authorization of the sales transactions.
c. There are
reasonableness tests for the unit selling price of a sale.
d. After
processing, all sales transactions are reviewed by the sales department.
56. The
objective of understanding internal control and assessing control risk in an IT
system is
a. to gain an
understanding of the computer hardware and software.
b. to aid in
determining the audit evidence that should be accumulated.
c. to determine
if the CPA firm must have an IT auditor on the team.
d. to evaluate
management's efficiency in designing and using the IT system.
57. Errors in data processed in a batch computer system may not be detected immediately because
a. transaction
trails in a batch system are available only for a limited period of time.
b. there are
time delays in processing transactions in a batch system.
c. errors in
some transactions cause rejection of other transactions in the batch.
d. random
errors are more likely in a batch system than in an on-line system.
58. Data
Corporation has just completely computerized its billing and accounts
receivable record keeping. You want to make maximum use of the new computer in
your audit of Data Corporation. Which of the following audit techniques could
not be performed through a computer program?
a. Tracing
audited cash receipts to accounts receivable credits.
b. Selecting on
a random number basis accounts to be confirmed.
c. Resolving
differences reported by customers on confirmation requests.
d. Examining
sales invoices for completeness, consistency between different items, valid
conditions and reasonable amounts.
59. In
comparing (1) the adequacy of the hardware controls in the system with (2) the
organization's methods of handling the errors that the computer identifies, the
independent auditor is
a. unconcerned
with both (1) and (2).
b. equally
concerned with (1) and (2).
c. less
concerned with (1) than with (2).
d. more
concerned with (1) than with (2).
60. When auditing a computerized system, an
auditor may use the test data approach as an audit tool. This technique
a. is more
applicable to independent audits than internal audits.
b. involves
introducing simulated transactions into the client's actual application
program(s).
c. is a
commonly used audit technique for auditing around the computer.
d. should not
involve the actual application programs the client uses throughout the year,
since use of the actual programs would contaminate the client's accounting
data.
61. It
is common in IT systems to have certain types of transactions initiated
automatically by the computer. Which of the following activities would not be
an appropriate candidate for automatic computer initialization?
a. In a bank,
quarterly calculation of interest on savings accounts.
b. In a
manufacturing facility, the ordering of inventory when pre-specified order
levels are reached.
c. In a
hospital, the ordering of additional tanks of oxygen when pre-specified levels
are achieved.
d. In an
investment brokerage firm, the sale of pharmaceutical stocks when the Dow-Jones
Industrial Average falls a certain level.
62. Which
of the following computer-assisted auditing techniques allows fictitious and
real transactions to be processed together without client operating personnel
being aware of the testing process?
a. Parallel
simulation.
b. Generalized
audit software programming.
c. Integrated
test facility.
d. Test data
approach.
63. When
the auditor considers only the non-IT controls in assessing control risk, it is
commonly referred to as
a. the
single-stage audit.
b. the test
deck approach.
c. auditing
around the computer.
d. generalized
audit software (GAS).
64. Controls
which are built in by the manufacturer to detect equipment failure are called
a. input
controls.
b. fail-safe
controls.
c. hardware
controls.
d. manufacturer's
controls.
65. When the computing function is
apportioned among CPUs spread geographically and connected by a communications
system, it is called
a. on-line
processing.
b. distributed
processing.
c. processing
with a network.
d. off-line
processing.
66. When
the client uses a computer but the auditor chooses to use only the non-IT
segment of internal control to assess control risk, it is referred to as
auditing around the computer. Which one of the following conditions need not be
present in order to audit around the computer?
a. Computer
programs must be available in English.
b. The source
documents must be available in a non-machine language.
c. The
documents must be filed in a manner that makes it possible to locate them.
d. The output
must be listed in sufficient detail to enable the auditor to trace individual
transactions.
67. The
auditor can perform many different kinds of tests and other functions with the auditor's
computer program. Which of the following tests or functions cannot be
performed?
a. Analyze
exception responses returned with confirmations received from customers.
b. Verify
extensions and footings.
c. Compare data
on separate files.
d. Re-sequence
data and perform analyses.
68. Which
of the following is not associated with converting from a manual to an IT
system?
a. It usually
centralizes data.
b. It permits
higher quality controls over operations.
c. It may
eliminate the control provided by division of duties of independent persons who
perform related functions and compare results.
d. It may take
the recordkeeping function and the document preparation function away from
those who have custody of assets and put those functions into the IT center.
69. Controls
which are designed to assure that the information processed by the computer is
authorized, complete, and accurate are called
a. input
controls.
b. processing
controls.
c. output
controls.
d. general
controls.
70. The audit approach in which the auditor
runs his or her own program on a controlled basis in order to verify the
client's data recorded in a machine language is
a. the test
data approach.
b. called
auditing around the computer.
c. the
generalized audit software approach.
d. the
microcomputer-aided auditing approach.
71. In
an IT system, automated equipment controls or hardware controls are designed to
a. correct
errors in the computer programs.
b. monitor and detect
errors in source documents.
c. detect and
control errors arising from use of equipment.
d. arrange data
in a logical sequential manner for processing purposes.
72. Application
controls vary with each application in the IT system. In attempting to review
and gain an understanding of the internal control system, the auditor must
evaluate the application controls for
a. every audit
area.
b. every
material audit area.
c. every audit
area in which the client uses the computer.
d. every audit
area where the auditor plans to reduce assessed control risk.
73. Shown
below (1 through 5) are the five types of tests which auditors use to determine
whether financial statements are fairly stated. Which three are substantive
tests?
1. procedures to obtain an understanding of internal control
2. tests of controls
3. tests of transactions
4. analytical procedures
5. tests of balances
a. 1, 2, and 3.
b. 3, 4, and 5.
c. 2, 3, and 5.
d. 2, 3, and 4.
74. A
procedure designed to test for monetary errors or irregularities directly
affecting the correctness of financial statement balances is a
a. test of
control.
b. substantive
test.
c. test of
attributes.
d. monetary-unit
sampling test.
75. The highest cost audit will be incurred
when the auditor expected that the internal control system would
a. be
effective, but the auditor found extensive control test deviations and
significant errors during tests of transactions.
b. have few
effective controls, but client's personnel were well-trained and knowledgeable.
c. be very
sophisticated, and the tests of controls confirmed this.
d. have few
effective controls, and tests of balances found many errors.
76. Tests
of controls address each of the following questions except
a. How were the
procedures performed?
b. Why were the
procedures performed?
c. Were the
necessary procedures performed?
d. By whom were
the procedures performed?
77. Which
type of evidence can be gathered with every type of audit test?
a. Reperformance
of procedures.
b. Inquiries of
client personnel.
c. Inspection
of documents and records.
d. Observation
of application of policies and procedures.
78. Contingent
liabilities must be
a. recorded on
the balance sheet between current and long-term liabilities.
b. disclosed in
the footnotes.
c. material and
imminent, or they should not even be mentioned.
d. recorded in
the ledger, or no disclosure is required.
79. The
actual operation of an internal control system may be most objectively
evaluated by
a. completing a
questionnaire and flowchart related to the accounting system in the year under
audit.
b. review of
the previous year's audit work papers to update the report of internal control
evaluation.
c. selection of
items processed by the system and determination of the presence or absence of
errors and compliance deviations.
d. substantive
tests of accounts balances based on the auditor's assessment of internal
control strength.
80. Extended performance of tests of
controls is most likely when
a. it is a
first-year audit.
b. the auditor
is doing a "fraud audit."
c. controls are
effective and assessed control risk is low.
d. controls are
ineffective and assessed control risk is high.
81. Which
of the following is not a direct outcome of performing analytical procedures?
a. Assess the
entity's ability to continue as a going concern.
b. Reduce
detailed audit tests.
c. Understand
the client's business.
d. Identify
specific errors in the accounts.
82. In
which stage(s) of an audit can analytical procedures be performed?
a. In the
planning stage.
b. In
conjunction with tests of transactions and tests of details of balances.
c. In the
completion stage.
d. During all
three stages.
83. In
the context of an audit of financial statements, substantive tests are audit
procedures that
a. may be
eliminated under certain conditions.
b. are designed
to discover significant subsequent events.
c. may be
either tests of transactions, direct tests of financial balances, or analytical
tests.
d. will
increase proportionately with the auditor's reliance on internal control.
84. The
primary emphasis in most tests of details of balances is on the
a. balance
sheet accounts.
b. income
statement accounts.
c. cash flow
statement account.
d. three
statements above.
85. Auditing standards require the auditor
to perform analytical procedures, but it is optional for the auditor to perform
analytical procedures during the
a. planning
phase.
b. testing
phase.
c. completion
phase.
d. three phases
listed above.
86. An
auditor evaluates the client's system of internal control in order to
a. determine
the extent of tests of controls which must be performed.
b. determine
the extent of substantive tests which must be performed.
c. ascertain
whether irregularities are probable.
d. ascertain
whether any employees have incompatible functions.
87. Which
of the following documentation is required for an audit in accordance with
generally accepted auditing standards?
a. An internal
control questionnaire.
b. A client
engagement letter.
c. A planning
memorandum or checklist.
d. A client
representation letter.
88. Each
of the following might, in itself, form a valid basis for an auditor to decide
to omit a test except
a. the
difficulty and expense involved in testing a particular item.
b. the relative
risk involved.
c. the degree
of reliance on the relevant internal controls.
d. the
relationship between the cost of obtaining evidence and its usefulness.
89. Which
of the following is ordinarily designed to detect possible material dollar errors
on the financial statements?
a. Tests of
controls.
b. Analytical
review.
c. Computer
controls.
d. Post-audit
working paper review.
90. When planning tests of details of
balances, the auditor forecasts the results of tests of controls, substantive
tests of transactions, and analytical procedures. The prediction for these
three areas is usually that there will be
a. no
exceptions.
b. few or no
exceptions.
c. an average
number of exceptions.
d. many
exceptions.
91. Which
of the following statements is false?
a. Analytical
procedures emphasize the overall reasonableness of transactions and the general
ledger balances.
b. Tests of
controls are concerned with evaluating whether controls are sufficiently
effective to justify reducing control risk and thereby reducing analytical
review procedures.
c. Substantive
tests of transactions emphasize the verification of transactions recorded in
the journals and then posted in the general ledger.
d. Tests of
details of balances emphasize the ending balances in the general ledger.
92. When
using the audit approach known as "continuous auditing," auditors
typically perform
a. tests of
controls and substantive tests of transactions throughout the year.
b. tests of
controls and detailed tests of balances throughout the year.
c. substantive
tests of transactions and detailed tests of balances throughout the year.
d. analytical
procedures and tests of controls throughout the year.
93. Tests
of controls are directed toward the control's
a. efficiency.
b. effectiveness.
c. efficiency
and effectiveness.
d. cost benefit
ratio.
94. Which
of the following audit tests is usually the most costly to perform?
a. Analytical
procedures.
b. Tests of
controls.
c. Tests of
balances.
d. Substantive
tests of transactions.
95. Which of the following statements is not
correct?
a. Tests of
transactions are often performed several months prior to the balance sheet
date.
b. It is common
to use analytical procedures at any time during the audit.
c. Tests of
details of balances are normally the last tests performed.
d. When
controls are not considered effective, or when control deviations are
discovered, substantive tests will be eliminated.
96. Which
combination of the types of evidence would be used for both obtaining an
understanding of internal control and for testing the controls?
a. Making
inquiries of client personnel and examining documents, records, and reports.
b. Examining
documents, records, and reports, and observing control-related activities.
c. Observing
control-related activities and reperforming client procedures.
d. All of the
above procedures could be used for both audit tests.
97. Audit
programs are modified to suit the circumstances on particular engagements. A
complete audit program for an engagement generally should be developed
a. prior to
beginning the actual audit work.
b. after the
auditor has completed an evaluation of the existing internal accounting records
and procedures.
c. after
reviewing the client's accounting records and procedures.
d. when the
audit engagement letter is prepared.
98. The
overall objective of the audit of the sales and collection cycle is to evaluate
whether
a. the sales
account and the accounts receivable account are free of errors.
b. the sales
account and the accounts receivable account are free of material errors.
c. the account
balances affected by the cycle are fairly presented in accordance with generally
accepted accounting principles.
d. the sales
account and the accounts receivable account are presented fairly in accordance
with generally accepted accounting principles.
99. A
document sent to each customer showing his or her beginning accounts receivable
balance and the amount and date of each sale, cash payment received, credit
memo issued, and the ending balance is the
a. accounts
receivable subsidiary ledger.
b. monthly
statement.
c. remittance
advice.
d. sales
invoice.
100. Which one of the following is not
typically included in the sales and collection cycle?
a. Sales
returns and allowances.
b. Bad debt
expense.
c. Allowance
for uncollectible accounts.
d. Cash credits
from the cash disbursements journal.
101. The
auditor's assessment of control risk is a critical one because it affects the
auditor's decisions about
a. tests of
controls.
b. substantive
tests of transactions.
c. tests of
details of balances.
d. all of the
above.
102. The
auditor traces items from the source documents to the journals in order to
satisfy the
a. existence
objective.
b. completeness
objective.
c. ownership
objective.
d. valuation
objective.
103. Which
of the following procedures would ordinarily be expected to best reveal
unrecorded sales at the balance sheet date?
a. Compare
shipping documents with sales records.
b. Apply gross
profit rates to inventory disposed of during the period.
c. Trace payments
received subsequent to the balance sheet date.
d. Send
accounts receivable confirmation requests.
104. Which
of the following would be the best protection for a company that wishes to
prevent the "lapping" of trade accounts receivable?
a. Segregate duties
so that the bookkeeper in charge of the general ledger has no access to
incoming mail.
b. Segregate
duties so that no employee has access to both checks from customers and
currency from daily cash receipts.
c. Have
customers send payments directly to the company's depository bank.
d. Request that
customer's payment checks be made payable to the company and addressed to the
treasurer.
105. A CPA auditing an electric utility wishes
to determine whether all customers are being billed. The CPA's best direction
of test is from the
a. billing
(sales) register to the accounts receivable ledger.
b. billing
(sales) register to the meter department records.
c. accounts
receivable ledger to the billing (sales) register.
d. meter
department records to the billing (sales) register.
106. Assuming
an excellent system of internal control exists, which of the following audit
procedures would be least likely to be performed?
a. Obtain a
client representation letter.
b. Confirmation
of accounts receivable.
c. Physical
inspection of a sample of inventory.
d. Search for
unrecorded cash receipts.
107. To
determine that sales are accurately recorded, the unit prices on the duplicate
sales invoices are normally compared with
a. the original
invoices.
b. an approved
price list.
c. the amounts
recorded in the sales journal for that transaction.
d. the amounts
posted to the customer's account in the accounts receivable master file.
108. After
the auditor has identified the key internal controls and weaknesses and
assessed control risk, it is appropriate to decide whether
a. substantive
tests will be reduced sufficiently to justify the cost of performing tests of
controls.
b. substantive
tests will be increased sufficiently to justify the cost of performing tests of
controls.
c. tests of
controls will be increased sufficiently to justify the cost of performing
substantive tests.
d. tests of
controls will be reduced sufficiently to justify the cost of performing
substantive tests.
109. An
audit procedure which compares the name, amount, and dates shown on remittance
advices with cash receipts journal entries and with related duplicate deposit
slips would be effective in detecting
a. kiting.
b. lapping.
c. illicit
write-offs of customers as uncollectible accounts.
d. sales
without proper credit authorization.
110. The document which supports reductions in
accounts receivable is the
a. bill of
lading.
b. sales
invoice.
c. credit memo.
d. monthly
statement.
111. The
customer's request for merchandise, the customer order, would be in the form of
a. an oral
request.
b. a written
request on customer's letterhead.
c. a written
request on a pre-printed form.
d. any of the
above three formats.
112. Before
goods are shipped on account, a properly authorized person must
a. prepare the
sales invoice.
b. approve the
journal entry.
c. approve
credit.
d. verify that
the unit price is accurate.
113. When
designing audit procedures, the direction of tests is a crucial step in
satisfying the
a. valuation
objective.
b. cutoff
objective.
c. completeness
objective.
d. classification
objective.
114. For
most firms, the function of indicating credit approval is recorded on the
a. sales order.
b. sales
invoice.
c. customer
order.
d. remittance
advice.
115. The appropriate test of controls for
separation of duties is
a. documentation.
b. confirmation.
c. examination.
d. observation.
116. It
is common to test sales for proper classification as part of testing for
a. cutoff.
b. accuracy.
c. valuation.
d. completeness.
117. Smith
Manufacturing Company's accounts receivable clerk has a friend who is also
Smith's customer. The accounts receivable clerk, on occasion, has issued
fictitious credit memorandums to his friend for goods supposedly returned. The
most effective procedure for preventing this activity is to
a. prenumber
and account for all credit memorandums.
b. require
receiving reports to support all credit memorandums before they are approved.
c. have the
sales department independent of the accounts-receivable department.
d. mail monthly
statements.
118. The
cashier diverted cash received over the counter from a customer to his own use
and wrote off the receivable as a bad debt. Select the control that should have
prevented the error.
a. Aging
schedules of accounts receivable are prepared periodically and reviewed by a
responsible official.
b. Journal
entries are approved by a responsible official.
c. Receipts are
given directly to the cashier by the person who opens the mail.
d. Remittance
advices, letters, or envelopes that accompany receipts are separated and given
directly to the accounting department.
119. The
document used to indicate to the customer the amount of a sale and payment due
date is the
a. sales
invoice.
b. bill of
lading.
c. purchase
order.
d. sales order.
120. The process which postpones entries for
the collection of receivables to conceal an existing cash shortage is referred
to as
a. kiting.
b. lapping.
c. computer
fraud.
d. cooking the
books.
121. The
document used as the basis for recording sales transactions and updating the
accounts receivable master file is the
a. sales order.
b. bill of
lading.
c. sales
journal.
d. sales
invoice.
122. Which
one of the following statements is true? In deciding on substantive tests of
transactions,
a. some
procedures are commonly employed on every audit regardless of the
circumstances.
b. all
procedures are dependent on the adequacy of the controls and the results of the
tests of controls.
c. results
obtained in the prior year's audit will not affect the procedures used this
year.
d. the
materiality of the item will not influence the choice of procedures used.
123. If
the controls necessary to satisfy any one of the objectives are inadequate, the
likelihood of errors related to that objective
a. may be
decreased if management is aware of the poor controls.
b. may be
increased if the controls for other objectives don't mitigate it.
c. is
increased, regardless of the controls for the other objectives.
d. is
indeterminate.
124. Proper
separation of duties is useful to prevent various types of misstatements. Which
of the following is not an essential separation of duties?
a. Persons
having access to cash should not have access to marketable securities.
b. Separate the
credit-granting function from the sales function.
c. Personnel
doing internal comparisons should be independent of those entering the original
data.
d. Anyone
responsible for inputting sales and cash receipts transactions information into
the computer should be denied access to cash.
125. Cash receipts from sales on account have
been misappropriated. Which of the following acts would conceal this
defalcation and be least likely to be detected by an auditor?
a. Understating
the sales journal.
b. Overstating
the accounts receivable control account.
c. Overstating
the accounts receivable subsidiary ledger.
d. Understating
the cash receipts journal.
126. After
the appropriate audit procedures for a given set of circumstances have been
designed, they must be performed. To do the audit procedures as they are stated
in the design format is likely to be
a. easy.
b. efficient.
c. inefficient.
d. difficult.
127. An
effective procedure to test for unbilled shipments is to trace from the
a. sales
journal to the shipping documents.
b. shipping
documents to the sales journal.
c. sales
journal to the accounts receivable ledger.
d. sales
journal to the general ledger sales account.
128. The
document which is used to permit the immediate deposit of cash and to improve
the control over the custody of assets is the
a. sales
invoice.
b. credit memo.
c. remittance
advice.
d. cash
receipts journal.
129. The
total of the individual account balances in the accounts receivable master file
equals the
a. total sales
for the period.
b. balance of
the sales account in the general ledger.
c. total sales
less the total cash received for the period.
d. balance of
the accounts receivable account in the general ledger.
130. Many companies engage a bank to assist in
the processing of cash receipts from customers. A system in which receipts are
submitted via computer from customers' bank accounts to a company bank account
is called
a. receipt
transfer protocol (RTP).
b. automated
receipts transfer (ART).
c. electronic
funds transfer (EFT).
d. funds
transfer protocol (FTP).
131. One
of the causes of nonsampling error is
a. the use of
inappropriate or ineffective audit procedures.
b. failure to
draw a random sample.
c. failure to
draw a representative sample.
d. the use of
attributes sampling instead of variables sampling.
132. A one-sided
interval specifies
a. a CLER
(computed lower exception rate) only.
b. a CUER
(computed upper exception rate) only.
c. both CLER
and CUER.
d. neither CLER
nor CUER.
133. Nonsampling
errors occur when audit tests do not uncover existing exceptions in the
a. population.
b. sample.
c. planning
stage.
d. financial
statements.
134. Which
of the following statements regarding replacement and nonreplacement sampling
is not true?
a. Auditors
rarely use replacement sampling.
b. In
nonreplacement sampling, an element in the population can be included in the
sample only once.
c. In
replacement sampling, an element in the population will not be included in the
sample more than once.
d. If the
random number corresponding to an element is selected more than once in
nonreplacement sampling, it is treated as a discard the second time.
135. Establishing the tolerable exception rate
(TER) requires
a. statistical
frequency probability tables.
b. random number
tables.
c. a computer
program.
d. auditor
judgment.
136. Which
of the following statements is not true?
a. Random
selection is statistical measurement.
b. It is
acceptable to use random selection procedures without drawing statistical conclusions.
c. It would be
inappropriate to draw a statistical conclusion unless the sample were randomly
selected.
d. Random
selection is a part of statistical sampling.
137. Which
of the following statements is not correct regarding probabilistic and
nonprobabilistic sample selection?
a. In
probabilistic selection, every population item has a known chance of being
selected.
b. It is not
acceptable to make nonstatistical evaluations using probabilistic selection.
c. Probabilistic
selection is required for all statistical sampling methods.
d. Both methods
are acceptable and commonly used.
138. Which
of the following statements regarding block sampling is not true?
a. Block
sampling is the selection of several items in sequence.
b. It is
acceptable to use block sampling for tests of transactions only if a reasonable
number of blocks are used.
c. A
"reasonable number" for most situations is probably at least six
blocks from six different months.
d. Once the
first item in the block is selected, the remainder of the block is chosen
automatically.
139. An
example of sampling for attributes would be estimating the
a. quantity of
specific inventory items.
b. probability
of losing a patent infringement case.
c. percentage
of overdue accounts receivable.
d. dollar value
of accounts receivable.
140. The acceptable risk of accessing control
risk too low (ARACR) has a significant effect on sample size. The relationship
of ARACR to sample size is
a. variable
(sometimes larger, sometimes smaller).
b. direct
(larger ARACR = larger sample).
c. inverse
(larger ARACR = smaller sample).
d. nonexistent.
141. The
advantage of systematic sample selection is that
a. it is easy
to use.
b. there is limited
possibility of it being biased.
c. it is
unnecessary to determine if the population is arranged randomly.
d. all three of
the above.
142. Which
of the following statements is not correct?
a. It is
acceptable for auditors to use statistical sampling methods.
b. It is
acceptable for auditors to use non-statistical sampling methods.
c. The primary
benefit of statistical sampling methods is the quantification of sampling risk.
d. An advantage
of using statistical sampling is that the cost/benefit ratio is always
positive.
143. The
exception rate the auditor will permit in the population and still be willing
to reduce the assessed level of control risk is called the
a. tolerable
exception rate.
b. estimated
population exception rate.
c. acceptable
risk of overreliance.
d. sample
exception rate.
144. Sampling
risk (sampling error) is an inherent part of sampling that results from
a. testing less
than the entire population.
b. weaknesses
in client's internal control system.
c. failure to
recognize exceptions.
d. inappropriate
audit procedures.
145. When the auditor intends to evaluate a
sample statistically, the only acceptable selection method is
a. probabilistic
selection.
b. judgmental selection.
c. haphazard
selection.
d. block sample
selection.
146. If
the auditor decides to assess control risk at the maximum level, tests of
controls are
a. increased in
number.
b. reduced in
number.
c. not
performed.
d. unchanged
from prior planned settings.
147. Which
one is not a sample selection method commonly associated with nonstatistical
audit sampling?
a. Block sample
selection.
b. Directed
sample selection.
c. Haphazard
sample selection.
d. Probability
proportional to size sample selection.
148. Since
auditors are interested in the occurrence of exceptions in populations, they
refer to the occurrence rate as
a. the
probability rate.
b. the
populations rate.
c. the
exception rate.
d. the
confidence level.
149. In
attributes sampling, an advance estimate of the expected population exception
rate is necessary to plan the appropriate sample size. The relationship of
expected population exception rate (EPER) to sample size is
a. direct
(small EPER = small sample).
b. inverse
(small EPER = large sample).
c. a variable
(sometimes small, sometimes large) dependent on other factors present.
d. indeterminate.
150. When using statistical sampling, the auditor
would probably require a smaller sample if the
a. population
increases.
b. desired
reliability decreases.
c. desired
precision interval narrows.
d. expected
exception rate increases.
151. Unless
a precise statement of what constitutes an attribute is made in advance, the
staff person who performs the audit procedure will have no guidelines
a. to use when
evaluating the results of analytical review procedures.
b. to determine
what documents to obtain and review for the observation tests.
c. for
identifying deviations.
d. for
performing all three of the above.
152. The
finite correction factor has the effect of significantly changing the sample
size only when
a. less than
10% of the population is included in the sample.
b. 5% or more
of the population is included in the sample.
c. greater than
5% but less than 10% of the population is included in the sample.
d. more than
10% of the population is included in the sample.
153. A
principal advantage of statistical methods of attributes sampling over
nonstatistical methods is that they provide a scientific basis for planning the
a. risk of
assessing control risk too low.
b. tolerable
exception rate.
c. expected
population exception rate.
d. sample size.
154. Statistical
theory proves that in most types of populations to which attributes sampling
applies, the population size is
a. not a
consideration in determining sample size.
b. a minor
consideration in determining sample size.
c. a major
consideration in determining sample size.
d. the
determining factor in establishing sample size.
155. The auditor's best estimate of the
population exception rate is the
a. sample
exception rate.
b. tolerable
exception rate (TER).
c. experience
of the previous year.
d. computed
upper exception rate (CUER).
156. Numbers
drawn from a random number table which are outside the range of the population
are
a. set aside
and used to examine items of the population with a non-sampling method.
b. used only if
they represent high-dollar-value items.
c. recycled
into the population of random numbers to be used again should they appear a
second time.
d. discarded.
157. The
most time-consuming part of attributes sampling is
a. planning.
b. sample
selection.
c. performing
the audit procedures.
d. evaluating
the results.
158. The
process which requires the calculation of an interval and then selects the
items based on the size of the interval is
a. statistical
sampling.
b. random
sample selection.
c. systematic
sample selection.
d. computerized
sample selection.
159. There
are many situations in auditing where it is advantageous to select samples that
emphasize population items that have larger recorded amounts. Which of the
following would not be a way to obtain such a sample?
a. Use block
sample selection.
b. Use
stratified sampling.
c. Use
probability-proportional-to-size sampling.
d. Take a
sample where the probability of selecting any individual population item is
proportional to its recorded amount.
160. If all other factors specified in a
sampling plan remain constant, changing the estimated population exception rate
from 2% to 4% would cause the required sample size to
a. increase.
b. remain the
same.
c. decrease.
d. become
indeterminate.
161. Which
of the following is not one of the types of computer tools used to generate
random samples?
a. Electronic
spreadsheet programs.
b. Random
number generators.
c. Generalized
audit software.
d. Random
application search software.
162. A
frequency distribution of the results of all possible samples of a specified
size that could be obtained from a population containing some specific
parameter is the
a. sample size.
b. sample exception
rate.
c. sampling
distribution.
d. population
distribution.
163. Before
the population can be considered acceptable based on the acceptable risk of
assessing control risk too low (ARACR), the computed upper exception rate
(CUER) must be
a. greater than
or equal to the TER.
b. greater than
the TER.
c. less than or
equal to the TER.
d. less than
the tolerable exception rate (TER).
164. Which
of the following need not be known to evaluate the results of a sample for a
particular attribute?
a. Exception
rate in the sample.
b. Size of the
sample.
c. Acceptable
risk of assessing control risk too low.
d. Actual
number of exceptions in the sample.
165. Which of the following statements is true?
a. The audit
procedures will vary as a result of using either statistical or nonstatistical
sampling.
b. The audit
procedures will be the same for either statistical or nonstatistical sampling,
but they must be performed differently for each.
c. Statistical
sampling requires quantitative audit procedures, whereas nonstatistical
sampling requires judgmental audit procedures.
d. The same
audit procedures are performed in the same manner for either statistical or
nonstatistical sampling.
166. In
the evaluation of the results of an attributes sample, the fact that the
exception rate in the sample was 2% rather than the estimated population
exception rate of 4% would cause the computed upper exception rate to
a. be less than
the tolerable exception rate.
b. equal the
tolerable exception rate.
c. exceed the
tolerable exception rate.
d. cannot be
determined from the information given.
167. Which
of the following is an advantage of systematic sample selection over random
number sampling?
a. It provides
a stronger basis for statistical conclusions.
b. It enables
the auditor to use the more efficient "sampling with replacement"
tables.
c. There may be
correlation between the location of items in the population, the feature of
sampling interest, and the sampling interval.
d. It does not
require establishment of correspondence between random numbers and items in the
population.
168. An
advantage of using statistical sampling techniques is that such techniques
a. mathematically
measure risk.
b. eliminate the
need for judgmental decisions.
c. define the
values of precision and reliability required to provide audit satisfaction.
d. have been
established in the courts to be superior to judgmental sampling.
169. If
the result obtained from a particular sample will be critical (that is, the
auditor would not be able to render an unqualified opinion unless every item in
the population were examined), which of the following is the most important to
the auditor?
a. Acceptable
risk of assessing control risk too low.
b. Estimated
population exception rate.
c. Tolerable
exception rate.
d. Size of the
population.
170. A CPA examining inventory may
appropriately apply sampling for attributes in order to estimate the
a. average
price of inventory items.
b. percentage
of slow-moving inventory items.
c. dollar value
of inventory.
d. physical
quantity of inventory items.
171. There are 14 steps to attributes sampling,
divided into three sections: plan the sample, select the sample and perform the
audit procedures, and evaluate the results. Discuss each of the steps that
comprise the "plan the sample" section.
172. State
the six specific transaction-related audit objectives for cash receipts and
describe one common substantive test of transactions for each objective.
173. State the six specific transaction-related
audit objectives for sales. For each objective, identify one key internal
control. Then, for each internal control, describe one common test of controls.
174. Discuss
the four business functions that result in sales transactions in a typical
sales and collection cycle and, for each function, state the key documents and
records involved.
175. The
sales and collections cycle is comprised of eight business functions. The first
four functions result in sales transactions. Discuss each of the remaining four
business functions that occur after sales transactions, and identify the key
documents and records involved in each of those four functions.
176. List the nine balance-related audit
objectives in the verification of the ending balance in accounts receivable,
and provide one specific useful audit procedure for each of the objectives.
177. Discuss
the purposes of (1) substantive tests of transactions, (2) tests of controls,
and (3) tests of details of balances. Give an example of each.
178. Identify
the six categories of general controls, and give one example of each.
1 - 10. d,
d, d, b, c, b, a, c, c, d
11
- 20. d, c, d, b, b, b,
a, b, b, a
21
- 30. a, a, c, c, d, c,
d, b, a, d
31
- 40. a, a, c, a, a, b,
a, c, d, b
41
- 50. d, b, c, b, c, d,
d, b, c, a
51
- 60. a, a, d, b, a, b,
b, c, c, b
61
- 70. d, c, c, c, b, a,
a, d, a, c
71
- 80. c, d, b, b, a, b,
b, b, c, c
81
- 90. d, d, c, a, b, b,
d, a, b, b
91
- 100. b, a, b, c, d, a,
c, c, b, d
101
- 110. d, b, a, c, d, d,
b, a, b, c
111
- 120. d, c, c, a, d, b,
b, b, a, b
121
- 130. d, a, c, a, a, c,
b, c, d, c
131
- 140. a, b, b, c, d, a,
b, c, c, c
141
- 150. a, d, a, a, a, c,
d, c, a, b
151
- 160. c, d, d, b, a, d,
c, c, a, a
161
- 170. d, c, c, a, d, a,
d, a, a, b
171. The
steps that comprise the "plan the sample" section in attributes
sampling are:
1. State the
objectives of the audit test. Typically, in attributes sampling, the
overall objective is to test the application of controls and determine whether
transactions contain monetary misstatements.
2. Decide if
audit sampling applies. Audit procedures involving documentation normally
can be performed using sampling, whereas procedures involving observation,
inquiry of the client, and analytical procedures are not suited to audit
sampling.
3. Define
attributes and exception conditions. In this step, the auditor carefully
defines the attributes of interest and the conditions that constitute
exceptions or errors.
4. Define the
population. The population is the body of data about which the auditor
wished to generalize, from which the sample must be drawn.
5. Define the
sampling unit. In attributes sampling, the sampling unit is normally a
document, identified by document numbers, or a transaction recorded in a
journal.
6. Specify
tolerable exception rate. This is the exception rate that the auditor will permit
in the population and still be willing to rely on internal controls.
7. Specify
acceptable risk of assessing control risk too low. This is the risk that
the auditor is willing to take of accepting a control as effective when the
true population exception rate is greater than the tolerable exception rate.
8. Estimate
the population exception rate. This is the exception rate the auditor
expects to find in the population before testing begins.
9. Determine
the initial sample size. The initial sample size is determined from tables,
based on values for the tolerable exception rate, acceptable risk of assessing
control risk too low, and the estimated exception rate.
172. The
six specific transaction-related audit objectives for sales and one common
substantive test of transactions are as follows.
ú Recorded
cash receipts are for funds actually received by the company (existence).
Trace from cash receipts journal to bank statements.
ú Cash
received is recorded in the cash receipts journal (completeness). Trace
from remittance advices or prelisting to cash receipts journal.
ú Cash
receipts are deposited and recorded at the amounts received (accuracy).
Proof of cash receipts.
ú Cash
receipts transactions are properly classified (classification). Examine
documents supporting cash receipts for proper classification.
ú Cash
receipts are recorded on the correct dates (timing). Compare dates of
deposits with dates in the cash receipts journal and prelisting of cash
receipts.
ú Cash
receipts are properly included in the accounts receivable master file and are
correctly summarized (posting and summarization). Foot journals and trace
postings to general ledger and accounts receivable master file.
173. The
six specific transaction-related audit objectives for sales are as follows.
(Students' answers will vary for the key internal controls and tests of
controls. See page 370 of text for acceptable answers.)
ú Recorded sales are for shipments actually made to nonfictitious customers (existence).
ú Existing sales transactions are recorded (completeness).
ú Recorded sales are for the amount of goods shipped and are correctly billed and recorded (accuracy).
ú Sales transactions are properly classified (classification).
ú Sales are recorded on the correct dates (timing).
ú Sales transactions are properly included in the accounts receivable master file and are correctly summarized (posting and summarization).
174. The
four business functions that result in sales transactions, and related
documents and records, are:
ú Processing customer orders. Key documents include customer order and sales order.
ú Granting credit. Customer order or sales order.
ú Shipping goods. Shipping document (bill of lading).
ú Billing customers and recording sales. Sales invoice, sales journal, summary sales report, accounts receivable master file, accounts receivable trial balance, and monthly statements.
175. The
four business functions that occur after sales transactions, and related key
documents and records, are:
ú Processing and recording cash receipts. Key documents and records include remittance advice, prelisting of cash receipts, and cash receipts journal.
ú Processing and recording sales returns and allowances. Credit memo, sales returns and allowances journal.
ú Charging off uncollectible accounts receivable. Uncollectible account authorization form.
ú Providing for bad debts.
176. The
nine balance-related audit objectives are:
ú Detail tie-in. Obtain an aged list of accounts receivable, foot the schedule, and trace total to general ledger. Also trace individual accounts to the master file.
ú Existence. Obtain direct confirmation of accounts receivable.
ú Completeness. Obtain an analysis of the allowance for doubtful accounts and examine authorization for write-offs.
ú Accuracy. Obtain direct confirmation of accounts receivable.
ú Classification. Review lists of balances for credit balances and for notes receivable due after one year.
ú Cutoff. Determine that proper cutoff procedures were applied to ensure that sales, cash receipts, and credit memos have been recorded in the proper period.
ú Realizable value. Investigate collectibility of account balances.
ú Rights. Review receivables for any that have been assigned or discounted.
ú Presentation and disclosure. Review list of balances for amounts due from related parties or employees.
177. The
purpose of substantive tests of transactions is to determine whether all six
transaction-related audit objectives have been satisfied for each class of
transactions. For example, as part of the auditor's test of the accuracy
objective for sales, the auditor would compare the amount recorded in the sales
journal for a sample of sales transactions with the total on the corresponding
sales invoices.
The purpose of tests of controls is to determine the effectiveness of both the design and operations of specific internal controls. For example, the auditor might observe for a month whether statements are mailed to all customers.
The purpose of tests of details of balances is to determine the monetary correctness of the accounts they relate to. The confirmation of accounts receivable is an example.
178. General
controls fall into the following six categories:
ú Administration of the IT function. For example, the chief information officer (CIO) should report to senior management and board of directors.
ú Segregation of IT duties. For example, there should be separation of duties between the computer programmers, operators, and the data control group.
ú Systems development. Users, analysts, and programmers develop and test software.
ú Physical and on-line security. For example, passwords should be required for access to computer systems.
ú Backup and contingency planning. Written backup plans should be prepared and tested on a regular basis throughout the year.
ú Hardware controls. For example, uninterruptable power supplies should be used to avoid loss of data in the event of a power blackout.