37
MATERIALITY
1. Which of the following concepts is most useful in assessing the scope of an auditor's
program relating to -various accounts?
a. Attribute sampling
b. Materiality.
c. The reliability information
d. Management fraud
Answer: b
2. In developing the preliminary level of materiality in an audit, the auditor will
a. Look to audit standards for specific materiality guidelines
b. Increase the level of materiality if fraud is suspected
c. Rely primarily on professional judgment to determine the materiality level
d. Use the same materiality level as that used for different clients in the same industry
Answer: c
3. Preliminary estimates of materiality should be made by the auditor because
a. Materiality guidelines cannot be adjusted after the audit procedures are conducted.
b. There is a direct relationship between the amount the auditor considers to be
material in the financial statements and the amount of audit work necessary to attest
to the fairness of the financial statements.
c.
There is an inverse relationship between the amount the auditor considers to be
material in the financial statements and the amount of audit work necessary to attest
to the fairness of the financial statements.
d. d. Estimate of materiality eliminates audit risk
Answer: c
4. The auditors must consider materiality in planning an audit engagement. Materiality for
planning purposes is a
a.
The auditor's preliminary estimate of the largest amount of error that would be
material to any one of the client's financial statements.
b. The auditor's preliminary estimate of the smallest amount of error that would be
material to any one of the client's financial statements.
c. The auditor preliminary estimate of the amount of error that would be material to
the balance sheet.
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d. The auditor preliminary estimate of the amount of error that would be material to
the income statement.
Answer: b
9. Regardless of how the allocation of the preliminary judgment about materiality was
done, when the audit is complete the auditor must be confident that the combined errors in
all accounts are
a. less than the preliminary judgment.
b. more than the preliminary judgment.
c. equal to the preliminary judgment
d. less than or equal to the preliminary judgment.
Answer: d
10. Holding other planning considerations equal, a decrease in the amount of
misstatements in a class of transactions that an auditor could tolerate most likely would
cause the auditor to
a.
Apply the planned substantive tests prior to the balance sheet date.
b. Perform the planned auditing procedures closer to the balance sheet date.
c.
Increase the assessed level of control risk for relevant financial statement
assertions.
d. Decrease the extent of auditing procedures to be applied to the class • of
transactions.
Answer: b
11. In the course of the examination of the financial statements for the purpose of
expressing an opinion thereon, the auditor will normally prepare a schedule of unadjusted
differences for which the auditor did not propose adjustment when they were uncovered.
What is the primary purpose served by this schedule?
a. To point out to the company officials the errors made by various company
personnel.
b. To summarize the adjustment that must be made before a company can prepare and
submit its tax returns.
c. To summarize the errors made by the company so that corrections can be made
after the financial statements are release&
d. To identify the potential financial statement effects of errors or disputed items that
were considered immaterial when uncovered.
Answer: d
12. In determining the type of opinion to express, an auditor assesses the nature of the
39
reporting qualifications and the materiality of their effects. Materiality will be the primary
factor to be considered in the choice between
a. an "except for opinion" and an adverse opinion
b. an adverse opinion and a disclaimer of opinion
c. an "except for" opinion and a "subject to" opinion
d. a qualified opinion and "piecemeal of opinion"
Answer: a
13. Which of the following underlies the application of generally accepted auditing
standards, particularly the standards of field work and reporting?
a. The element of materiality and relative risk
b. The element of corroborating evidence
c. The element of internal control structure
d. The element of reasonable assurance
Answer: a
14. Why should the auditor plan more work on individual accounts as lower acceptable
levels of both audit risk and materiality are established?
a. To find smaller errors
b. To find larger errors
c. To increase the tolerable error in the accounts
d. To decrease the risk of overreliance
Answer: a
15. The concept of materiality- with respect to the attest function
a.
Applies only to publicly held firms
b. Has greater application to the standards of reporting than the other generally
accepted auditing standards
c. Requires that relatively more effort be directed to those assertions that are more
susceptible to misstatement
d. Requires the auditor to make judgments as to whether misstatements affect the
fairness of the financial statements.
Answer: d
40
RISK ASSESSMENT
1. The term "audit risk" refers to the risk that
a. of legal exposure and related costs should the auditor be charged with negligence
in conducting the audit
b. that the auditor may unknowingly fail to modify his or her opinion on the financial
statements that are materially misleading.
c. That the auditor's substantive procedures might not detect misstatements in the
financial statements.
d. That client's internal control structure might not prevent or detect misstatements in
the financial statements.
Answer: b
2. Risk in auditing means that the auditor accepts some level of uncertainty in performing
the audit function. An effective auditor will
a. take any means available to reduce the risk to the lowest possible level.
b. set the risk level between 5% and 10%.
c. Perform the audit procedures first and quantitatively set the risk level before
forming an opinion and writing the report.
d. Recognize that risk exists and deal with them in an appropriate manner.
Answer: d
3. The audit risk model is used primarily
a. for planning purposes, in determining how much evidence to -- accumulate.
b. while doing tests of controls.
c. to determine the type of opinion to express.
d. to evaluate the evidence which has been gathered.
Answer: a
4. Which of the following audit risk components may be assessed in quantitative and nonquantitative terms?
Control
risk
Detection
risk
Inherent
risk
Control
risk
Detection
risk
Inherent
risk
a. Yes
Yes
No
c.
Yes
Yes
Yes
b. Yes
No
Yes
d.
No
Yes
Yes
Answer: c
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5. Inherent risk and control risk differ from detection risk in that they
a. Arise from the misapplication of auditing procedures.
b. May be assessed in either quantitative or nonquantitative terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditor's discretion.
Answer: c
6. Which of the following is an incorrect statement?
a. Detection risk is a function of the effectiveness of an auditing procedure and its
application.
b. Detection risk arises partly from uncertainties that exist when the auditor does not
examine 100 percent of the population.
c. Detection risk arises partly because of other uncertainties that exist even if the
auditor were to examine 100 percent of the population.
d. Detection risk exists independently of the audit of the fmancial statements.
Answer: d
7. Failure to detect material peso errors in the FS is a risk which the auditor primarily
mitigates by
a. performing substantive tests
b. performing tests of controls
c. understanding internal control structure
d. obtaining a client representation letter
Answer: a
8. The risk that an auditor will conclude, based on audit tests, that a material misstatement
does not exist in an account balance when, in fact, such misstatement does exist is referred
to as
a. Sampling risk.
b, Detection risk.
c. Nonsampling risk.
d. Inherent risk.
Answer: b
9. As the acceptable level of detection risk decreases, an auditor may
a. Reduce substantive testing by relying on the assessments of inherent risk and
42
control risk.
b. Postpone the planned timing of substantive tests from interim dates to the year-end.
c. Eliminate the assessed level of inherent risk from consideration as a planning factor.
d. Lower the assessed level of control risk from the maximum level to below the
maximum.
Answer: b
10. On the basis of the audit evidence gathered and evaluated, an auditor decides to increase
the assessed level of control risk from that originally planned. To achieve an overall audit
risk level that is substantially the same as the planned audit risk level, the auditor would
a. Decrease substantive testing.
b. Increase inherent risk.
c. Decrease detection risk.
d. Increase materiality levels.
Answer: c
11. An auditor may compensate for a weakness in the internal control by increasing the
a. Level of detection risk.
b. Preliminary judgment about audit risk.
c. Extent of tests of controls (compliance tests).
d. Extent of analytical procedures.
Answer: d
12. When discussing Planned Detection Risk (PDR) and the Audit Risk Model, which one
of he following statements is not true?
a.
PDR is dependent on the other three factors in the model; i.e., it will change only
if another changes.
b. PDR determines the amount of evidence the auditor plans to accumulate, inversely
with the size of planned detection risk.
c.
When PDR is changed from .05 to .10, the require'd accumulation of evidence
would be increased.
d. PDR is a measure of the risk that audit evidence will fail to detect errors exceeding
a tolerable amount, should such errors exist.
Answer: c
13. When discussing Control Risk (CR) & the Audit Risk Model; which one of the
following statements is not true?
43
a. If the auditor concludes that an internal control structure is completely ineffective
to prevent or detect errors, he/she would assign a 0% to CR,
b. CR is a measure of the auditor's assessments of the likelihood that errors will not
be prevented or detected by the client's internal control structure.
c. The relationship between Control Risk and Detection Risk is inverse.
d. The relationship between Control Risk and evidence is direct.
Answer: a
14. Regardless of the assessed level of control risk, the auditor would perform some
a.
Substantive tests to determine the effectiveness of internal control policies
b. analytical review procedures to verify the design of internal control procedures
c. substantive tests to restrict detection risk for significant transaction classes
d. dual-purpose tests to evaluate both the risk of monetary misstatement and
preliminary control risk
Answer: c
15. For a particular assertion, control risk is the risk that.
a.
a material misstatement will occur in the accounting process.
b. Controls will not detect a material misstatement that occurs.
c. Audit procedures will fail to detect a weak control system
d. The prescribed control procedures will not be applied uniformly.
e. An immaterial misstatement will occur in the accounting process.
16. which following would be considered the most conservative settings for inherent risk
and control risk?
Inherent Risk
Control Risk
Inherent Risk
Control Risk
a. 1.0
1.0
d.
0.0
1.0
b. 1.0
0.0
e.
0.5
0.5
c.
0.0
0.0
Answer: a
17. Audit risk consists of all but the following components:
a Inherent risk
b. Detection risk
c. Substantive risk
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d. Control risk
Answer: c
18. Inherent risk is defined as the susceptibility of an account balance or class of
transactions to error that could be material assuming that there were no related internal
controls. Of the following conditions which one does not increase inherent risk?
a. The client has entered numerous related party transactions during the year under
audit
b. Internal control over shipping, billing, and recording of sales revenue is weak
c. The client has lost a major customer accounting for approximately 30% of annual
revenue
d. The board of directors approved a substantial bonus for the president and chief
executive office and also approved an attractive stock option plan for themselves.
Answer: b
19. The audit risk against which the auditor and those who rely on his/her opinion require
reasonable protection is a combination of three separate risks at the account-balance or
class-of-transactions level. The first risk is inherent risk. The second risk is that material
misstatements will not be prevented, or detected by internal control. The third risk is that
a. The auditor will reject a correct account balance as incorrect
b. Material misstatements that occur will not be detected by the audit
c. The auditor will apply an inappropriate audit procedure
d. The auditor will apply an inappropriate measure of audit materiality.
Answer: b
20. Some account balances, such as those for pensions or leases, are the results of complex
calculations. The susceptibility to material misstatements in these types of accounts is
defined, as
a. Audit risk
b. Detection risk
c. Sampling risk
d. Inherent risk
Answer: d
21. As the acceptable level of detection risk decreases, an auditor may change the
a.
Timing of substantive tests by performing them at an interim date rather than at
year-end
b. Nature of substantive tests from a less effective to a more effective procedure
45
c.
Timing of tests of controls by performing them at several dates rather than at one
time
d. Assessed level of inherent risk to a higher amount
Answer: b
22. According to auditing standards, the auditor uses the assessed level of control risk
(together with the assessed level of inherent risk) to determine the acceptable level of
detection risk for financial statement assertions. As the acceptable level of detection risk
decreases, the auditor may do one or more of the ff. except change the
a.
Nature of substantive tests to more effective procedures
b. Timing of substantive tests, such as performing them at year-end rather than at an
interim date
c. Extent of substantive tests, such as using larger sample sizes
d. Assurances provided by substantive tests to a lower level
Answer: d
23. Which of the following models expresses the general relationship of the auditor's
assessments of control risk (CR) and inherent risk (IR), the detection risk associated with
analytical procedures and other relevant substantive tests (DR), and overall allowable audit
risk (AR) that would lead the auditor to conclude that a substantive test of details of an
account balance is not necessary?
DR
CR
AR
IR
DR
a.
20%
40%
8%
100%
c.
b.
20%
60%
5%
100%
d.
Answer: a
10%
30%
CR
AR
IR
70%
4.5%
100%
40%
5.5%
40%
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REVENUE CYCLE
1. The overall objective in 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 sales account and the accounts receivable account are presented fairly in
accordance with GAAP.
d. The accounts balances affected by the cycle are fairly presented in accordance with
GAAP.
Answer: b
2. The document used to indicate to the customer the amount of a sale and due date of the
payment is the
a. Sales order.
b. Shipping document.
c. Bill of lading.
d. Sales invoice.
Answer: d
3. The document which supports reductions in accounts receivable is the
a. Remittance advice.
b. Credit memo.
c. Sales invoice.
d. Monthly statement.
Answer: b
4. The document which accompanies the customer's payment is the
a. Credit memo.
b. Remittance advice.
c. Sales invoice.
d. Monthly statement.
Answer: b
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5. A listing of the amount owed by each customer which shows how long each component
part has been due is the
a. Trial balance.
b. Working trial balance.
c. Accounts receivable trial balance.
d. Aged accounts receivable trial balance.
Answer: d
6. For most firms, the function of indicating credit approval is recorded on the
a. Customer order.
b. Sales order.
c. Remittance advice.
d. Sales invoice.
Answer: b
7. A document for recording the description, quantity, & related info. for goods ordered by
a customer is the
a. Customer order.
b. Sales order.
c. Shipping document
d. Remittance advice
Answer: b
8. The document used as the basis for recording sales transactions and updating the AR
master file is the
a. Sales order.
b. Bill of lading.
c. Sales journal
d. Sales invoice
Answer: d
9. A document prepared to initiate shipment of the goods sold is the
48
a.
a. Sales order
b. Bill of lading
c. c. Sales invoice
d. d. Customer order
Answer: b
10. Which of the following forms may serve as the shipping document?
a. Bill of lading
b. Sales order
c. Material requisition
d. Sales invoice
Answer: a
11. The daily entries in the cash receipts journal are supported by the
a. Sales invoices.
b. Shipping documents
c. Remittance advice
d. Credit memos
Answer: c
12. A file for recording individual sales, cash receipts, and sales returns and allowances for
each customer is the
a. Sales journal.
b. Cash receipts journal
c. General ledger
d. Accounts receivable subsidiary ledger
Answer: d
13. A document sent to each customer showing their beginning accounts receivable balance
and the amount and date of each sale, cash payment received, credit memo issued, and the
ending accounts receivable balance is the
a. Accounts receivable subsidiary ledger
49
b. Monthly statement
c. Remittance advice
d. Sales invoice
Answer: b
14. 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.
Answer: c
15. In a credit merchandising organization, the best place to vest credit approval is in:
a. Accounts receivable
b. The sales department.
c. A completely separate department.
d. The cashier area where receipts will eventually be sent.
Answer: c
16. Most companies recognize sales when
a. A customer order is received.
b. The merchandise is shipped.
c. The merchandise is received by the customer.
d. Cash is received on account.
Answer: c
17. If the internal control structure is deemed to be effective during the obtaining an
understanding phase, the tests of transactions will usually be planned to be performed
a. At the balance sheet date.
b. At an interim date.
c. At the beginning of client's fiscal period.
50
d. After the tests of balances are completed.
Answer: b
18. 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.
Answer: a
19. To test for recorded sales for which there were no actual shipments, the auditor traces
from the
a. Bill of lading to the sales journal.
b. Sales journal to the bill of lading
c. Sales journal to the accounts receivable subsidiary ledger.
d. Bill of lading to the supporting customer order and sales order
Answer: b
20. The auditor traces items from the journals back to the source documents in order to
satisfy the
a. Validity objective
b. Completeness objective
c. Ownership objective
d. Valuation objective
Answer: a
21. When designing audit procedures, the direction of test is a crucial step in satisfying the
a. Valuation objective
b. Cutoff objective
c. Completeness objective
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d. Classification objective
Answer: c
22. An auditor tests an entity's policy of obtaining credit approval before shipping goods
to customers in support of management's financial statement assertion of
a. Valuation or allocation
b. Completeness
c. Existence or occurrence
d. Rights and obligations
Answer: a
23. Tracing copies of sales invoices to shipping documents will provide evidence that all
a. Billed sales were shipped.
b. Shipments to customers were billed.
c. Shipments to customers were recorded as receivables.
d. Debits to the subsidiary accounts receivable ledger are for sales shipped.
Answer: a
24. To test for the possibility of a shipment to a fictitious customer, the auditor traces from
the
a. Bill of lading to the credit authorization.
b. Credit authorization to the bill of lading.
c. Accounts receivable ledger to the bill of lading.
d. Sales journal to the accounts receivable ledger.
Answer: a
25. The auditor traces items from the source documents to the journal order to satisfy the
a. Validity objective
b. Completeness objective
c. Ownership objective
d. Valuation objective
Answer: b
52
26. Which of the following controls most likely would be effective offsetting the tendency
of sales personnel to maximize sales volume at the expense of high bad debt write-offs?
a. Employees responsible for authorizing sales and bad debt write-offs are denied
access to cash.
b. Shipping- documents and sales invoices are matched by an employee who does not
have authority to write-off bad debts.
c. Employees involved in the credit granting function are separated from sales
function.
d. Subsidiary accounts receivable records are reconciled to the control account by an
employee independent of the authorization of credit.
Answer: c
27. Which of the following audit procedures would an auditor most likely perform to test
control relating to management's assertion concerning the completeness of sales
transactions?
a. Verify that extensions and footings on the entity's sales invoices and monthly
customer statements have been recomputed.
b. Compare the invoiced prices on sales invoices to the entity's authorized price list.
c. Inspect the entity's reports of pre-numbered shipping documents that have not been
recorded in the sales journal.
d. Inquire about entity's credit granting policies and the consistent application of credit
checks.
Answer: c
28. Tracing bills of lading to sales invoices provides evidence that
a. Shipments to customers were recorded as sales.
b. Recorded sales were shipped.
c. Invoiced sales were shipped.
d. Shipments to customers were invoiced.
Answer: d
29. Sales invoices may be recorded in the incorrect accounting period. A computer
comparison of the invoice date with the accounting period when the goods were shipped
relates to the
a. Existence or occurrence assertion.
53
b. Completeness assertion.
c. Valuation or allocation assertion.
d. Existence or occurrence assertion and to the completeness assertion.
Answer: d
30. When a customer fails to include a remittance advice with a payment, it is a common
practice for the person opening the mail to prepare one. Consequently, mail should be
opened by which of the following four company employees?
a. Credit manager
b. Receptionist
c. Sales manager
d. Accounts receivable clerk
Answer: b
31. The purpose of tests of controls over billing is to
a. Determine whether billed goods have been shipped.
b. Determine whether shipments are billed.
c. Determine whether billing department personnel are competent.
d. Determine whether credit is approved before goods are billed.
Answer: b
32. To achieve good internal control, which department should perform the activities of
matching shipping documents with sales orders and preparing daily sales summaries?
a. Billing
b. Shipping
c. Credit
d. Sales order
Answer: a
33. Which of the ff. control procedures may prevent the failure to bill customers for some
shipments?
a. Each shipment should be supported by a pre-numbered sales invoice that is
accounted for.
b. Each sales order should be approved by authorized personnel.
c. Sales journal entries should be reconciled to daily sales summaries.
d. Each sales invoice should be supported by a shipping document.
54
Answer: a
34. To verify that all sales transactions have been recorded, a test of transactions should be
completed on a representative sample drawn from
a. Entries in the sales journal.
b. The billing clerk's file of sales orders.
c. A file of:duplicate copies of sales invoices for which all pre-numbered forms in the
series have been accounted for.
d. The shipping clerk's file of duplicate copies of shipping documents.
Answer: d
35. To gather audit evidence about the proper credit approval of sales, the auditor would
select a sample of documents from the population represented by the
a. Customer order file
b. Bill of lading file
c. Subsidiary customers' accounts ledger
d. Sales invoice file
Answer: a
36. To test for unsupported entries in the ledger, the direction of audit testing should be
from the
a. Journal entries
b. Ledger entries
c. Original source documents
d. Externally generated documents
Answer: b
37. Which one of the following would the auditor consider to be an incompatible operation
if the cashier receives remittances from the mailroom?
a. The cashier prepares the daily deposit.
b. The cashier makes the daily deposit at a local bank.
c. The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
d. The cashier endorses the checks.
55
Answer: c
38. 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. Meter department records to the billing (sales) register.
b. Billing (sales) register to the meter department records.
c. Accounts receivable ledger to the billing (sales) register.
d. Billing (sales) register to the accounts receivable ledger.
Answer: a
39. The use of pre-numbered invoices, then accounting for their numeric sequence, meets
primarily the:
a. Completeness assertion.
b. Valuation or allocation assertion.
c. Existence or occurrence assertion.
d. Rights and obligations assertion.
Answer: a
40. Which of the following would best protect a company that wishes to prevent lapping?
a. Segregate duties so that accounting has no access to incoming mail.
b. Segregate duties so that no employee has access both to checks from customers and
to currency from daily cash receipts.
c. Have customers send payments directly to the company's bank.
d. Request that customers checks be made payable to the company ressed to the
treasurer.
Answer: c
41. 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 invoice.
c. Sales journal to the accounts receivable ledger.
d. Sales journal to the general ledger sales account.
Answer: b
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42. To determine whether internal control effectively minimizes errors of failure to bill a
customer for a shipment, the auditor would select a sample of transactions from the
population represented by the
a. Customer order file
b. Shipping records file
c. Subsidiary customer accounts ledger
d. Sales invoice
Answer: b
43. Which of the following control procedures will likely prevent the concealment of a
cash shortage that was perpetrated by improperly writing off a trade account receivable?
a. Write-offs must be approved by a responsible officer after reviewing credit
department recommendations and supporting evidence.
b. Write-offs must be supported by an aging schedule showing that only receivables
months overdue have been written off.
c. Write-offs must be approved by the cashier.
d. Write-offs must be authorized by field sales representatives.
Answer: a
44. A large university has relatively ineffective internal control. The university's auditor
seeks assurance that all tuition revenue has been recorded. The auditor could best obtain
the desired assurance by
a. Confirming a sample of tuition payments with the students.
b. Observing tuition payment procedures on a surprise basis.
c. Comparing business office revenue records with registrar's office records of
students enrolled.
d. Preparing a year-end bank reconciliation.
Answer: c
45. To gather audit evidence concerning the proper credit approval of sales, the auditor
would select a sample of transaction documents from the population represented by the
a. Customer order file.
b. Bill of lading file.
c. Subsidiary customers' accounts ledger.
57
d. Sales invoice file.
Answer: a
46. To determine whether internal control operated effectively to minimize errors of failure
to post invoices to the customers' accounts ledger, the auditor should select a sample of
transactions from the population represented by the
a. Customer order file
b. Bill of lading file
c. Subsidiary customers' accounts ledger
d. Sales invoice file
Answer: d
47. To determine whether internal control operated effectively to minimize errors of failure
to invoice a shipment, the auditor should select a sample of transactions from the
population represented by the
a. Customer order file
b. Bill of lading file
c. Subsidiary customers' accounts ledger
d. Sales invoice file
Answer: b
48. During the review of a smallowner-managed company'sinternal controls, the auditors
discovers that the accounts receivable clerk approves credit memos and has access to cash.
Which of the following controls woud offset this deficiency?
a. The owner reviews errors in billing to customers and postings to subsidiary records.
b. the controller receives the monthly bank statement directly and reconciles the
checking accounts.
c. The owner reviewscredit memos after they are recorded.
d. The controller reconciles the detailed receivables records to the general ledger
Answer: c
49. Which of the following fraudulent activities most likely could be perpetrated due tot he
lack of effective control in the revenue cycle?
a. Claims received from customers for goods returned may be intentionally recorded
in the other customer's account.
58
b. Fictitious transactions may be recorded that may cause an understatement of
revenues and overstatement of receivables.
c. Authorization of credit memos by personnel who receives cash may permit the
misappropriation of cash.
d. the failure to prepare shipping documents may cause an overstatement of inventory
balances.
Answer: c
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EXPENDITURE CYCLE
1. The primary audit objective regarding the purchasing of materials by the client is to
a. Ascertain that materials paid for are on hand.
b. Observe the annual physical count
c. Investigate the recording of unusual transactions regarding materials
d. Determine the reliability of financial reporting by the purchasing function
Answer: d
2. A request by an authorized employee for goods or services is made on the
a. Purchase order.
b. Purchase requisition.
c.
Debit memo.
d. Acquisition transaction file.
Answer: b
3. The document which specifies the amount of money owed to the vendor for an
acquisition is the
a. Receiving report.
b. Purchase order.
c. Vendor's invoice.
d. Accounts payable trial balance.
Answer: c
4. If internal control is well-designed, employees in the same department most likely would
approve purchase orders and also
a. Reconcile the open invoice file
b. Inspect goods upon receipt
c. Authorize requisitions of goods
d. Negotiate terms with vendors
Answer: d
5. For good internal control, the purchasing department should not be responsible for
60
a. Finding the lowest cost vendor.
b. Reviewing vendors catalog descriptions and prices for standardized items.
c. Designing the purchase order form.
d. Authorizing the acquisition of goods.
Answer: d
6. The accounts payable department usually has responsibility for verifying the propriety
of acquisitions by comparing the details on the
a. Vendor's invoice and the purchase requisition.
b. Vendor's invoice and the receiving report.
c. Purchase requisition, purchase order, and receiving report.
d. Purchase order, receiving report, and vendor's invoice.
Answer: d
7. Which of the following controls is not usually performed in the treasurer's department?
a. Verifying the accuracy of checks and vouchers
b. Controlling the mailing of checks to vendors
c. Approving vendo& invoices for payment
d. Canceling payment vouchers when paid
Answer: c
8. When processing and recording cash disbursements, it is important to have a method of
canceling the supporting documents to prevent their reuse as support for another check at
a later time A common method is to
a. Shred the documents so they can't be reused.
b. Transfer possession of the documents to a bank vault such as a safety deposit box.
c. Move the documents to a permanent off-site facility such as a warehouse.
d. Write the check number on the supporting documents.
Answer: d
9. The internal control objective to determine that "existing acquisition transactions are
recorded" satisfies the objective of
a. Validity
b. Authorization
c. Completeness
d. Valuation
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Answer: c
10. The internal control which requires that "purchase orders, receiving reports, and
vouchers are prenumbered and accounted for " satisfies the objective of
a. Validity
b. Authorization
c. Completeness
d. Valuation
Answer: c
11. The internal control which requires "examination of supporting documentation before
signing of checks by an authorized person" satisfies the objective of
a. Validity
b. Completeness Purchase
c. Valuation
d. Posting and summarization
Answer: a
12. When goods are received, the receiving clerk should match the goods with the
a. Purchase order and the requisition form
b. Vendor's invoice and the receiving report
c. Vendor's shipping document and the purchase order
d. Receiving report and the vendor's shipping document
Answer: c
13. For effective internal control purposes, the vouchers payable department generally
should
a. Stamp, perforate, or otherwise cancel supporting documentation after payment is
mailed.
b. Ascertain that each requisition is approved as to price, quantity and quality by an
authorized employee.
c. Obliterate the quantity ordered on the receiving department copy of the purchase
order.
d. Establish the agreement of the vendor's invoice with the receiving report and
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purchase order
Answer: d
14. Which of the following is the most effective control procedure to detect vouchers that
were prepared for the payment of goods that were not received?
a. Count goods upon receipt in storeroom.
b. Match purchase order, receiving report, and vendor's invoice each voucher in
accounts payable department.
c. Correlate goods received with goods requisitioned in receiving department.
d. Verify vouchers for accuracy and approval in internal audit department.
Answer: b
15. An auditor performs a test to determine whether all merchandise for which of the client
was billed was received. The population for this test consists of all
a. Merchandise received
b. Vendor's invoices
c. Canceled checks
d. Receiving reports
Answer: b
16. The auditor will most likely perform extensive tests for possible understatement of
a. Revenues
b. Assets
c. Liabilities
d. Capital
Answer: c
17. An auditor usually examines receiving reports to support entries in the
a. Voucher register and sales returns journal.
b. Sales journal and sales returns journal.
c. Voucher register and sales journal.
d. Check register and sales journal.
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Answer: a
18. An internal control questionnaire indicates that an approved receiving report is required
to accompany every check request for payment of merchandise. Which of the following
procedures provides the greatest assurance that this control is operating effectively? a. .
a. Select and examine canceled cSelect and examine receiving reports and ascertain
that the related canceled checks are dated not earlier than the receiving reports.
b. Select and examine receiving reports and ascertain that the related canceled check
are dated not later than the receiving reports.
c. Select and examine canceled checks and ascertain that the related receiving reports
are dated not earlier than the checks
d. Select and examine canceled checks and ascertain that the related receiving reports
are dated not later than the checks.
Answer: d
19. For good internal control, the person who should sign checks is the
a. Person preparing the checks
b. Purchasing agent
c. Accounts payable clerk
d. Treasurer
Answer: d
20. Bell's account-payable clerk has a brother who is one of Bell's vendors. The brother
will often invoice Bell twice for the same delivery. The accounts-payable clerk removes
the receiving report for the first invoice from the paid-voucher file and uses it for support
of payment for the duplicate invoice. The most effective procedure for preventing this
activity is to
a. Use prenumbered receiving reports.
b. Mail signed checks without allowing them to be returned to the accounts-payable
clerk.
c. Cancel vouchers and supporting papers when payment is made.
d. Use dual signatures.
Answer: c
21. In assessing control risk for purchases, an auditor vouches a sample of entries in the
voucher register to the supporting documents. Which assertion would this test of controls
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most likely support?
a. Completeness
b. Existence or occurrence
c. Valuation or allocation
d. Rights and obligations
Answer: a
22. An auditor traced a sample of purchase orders and the related receiving reports to the
purchases journal and the cash disbursements journal. The purpose of this substantive audit
procedures most likely was to
a. Identify unusually large purchases that should be investigated further
b. Verify that cash disbursements were for goods actually received
c. Determine that purchases were properly recorded
d. Test whether payments were for goods actually ordered
Answer: c
23. Your objective is to determine that non-recurring purchases, initiated by serious user
organizations, have been properly authorized. If all purchases are made through the
purchasing department, to which of the following documents would you vouch purchases?
a. Purchase requisitions
b. Purchase orders
c.
Invoices
d. Receiving reports
Answer: a
24. Which of the following controls most likely addresses the completeness assertion for
inventory?
a. Work in process account is periodically reconciled with subsidiary records
b. Employees responsible for custody of finished goods do not perform the receiving
function
c. Receiving reports are prenumbered and periodically reconciled
d. There is a separation of duties between payroll department and inventory
accounting personnel
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Answer: c
25. Which of the following questions would be inappropriate on an internal control
questionnaire concerning purchase transactions?
a.
Are an approved purchase requisition and a signed purchase order required for
each purchase?
b. Are prenumbered purchase orders and receiving reports used and accounted for?
c. Are all goods received in a centralized receiving department and counted,
inspected, and compared with purchase orders on receipt?
d. Are intact cash receipts deposited daily in the bank
Answer: d
26. If internal control is well-designed, the same employee may be permitted to
a. Mail signed checks and also cancel supporting documents
b. Prepare receiving reports and also approve purchase orders
c. Approve vouchers for payment and also have access to unused purchase orders
d. Mail signed checks and also prepare bank reconciliations
Answer: a
27. Which of the following is a standard control over cash disbursements?
a. Checks should be signed by the controller and at 'least one other employee of the
company
b. Checks should be sequentially numbered and the numerical sequence should be
accounted for by the person preparing bank reconciliations
c. Checks and supporting documents should be marked "Paid" immediately after the
check is returned with the bank statement
d. Checks should be sent directly to the payee by the employee who prepares
documents that authorize check preparation
Answer: b
28. Which of the following controls is not usually performed with regard to vouchers
payable in the accounting department?
a. Determining the mathematical accuracy of the vendor's invoice
b. Having an authorized person approve the voucher
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c. Controlling the mailing of the check and remittance advice
d. Matching the receiving report with the purchase order
Answer: c
29. The receipt of goods and services in the normal course of business represents the date
clients normally recognize
a. Income
b. liability
c. Warranty
d. Expenses
Answer: b
30. Which of these functions is not a test of acquisitions?
a. Processing purchase orders.
b. Receiving goods and services.
c. Recognizing the liability.
d. Processing cash disbursements.
Answer: d
31. Failure to record the acquisition of goods received and services received directly affects
the balance in
a.
Inventory
b. Property, plant, and equipment
c.
Accounts payable
d. Capital
Answer: c
32. The main focus taken by the auditor in verifying liability balances is on the discovery
of
a. Understated liabilities
b. Overstated liabilities
c. Understated or omitted liabilities
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d. Overstated or extraneous liabilities
Answer: c
33. The mailing of disbursement checks and remittance advices should be controlled by
the employee who
a. Signed the checks last
b. Approved the vouchers for payment
c. Matched the receiving reports, purchase orders, and vendor's invoices
d. Verified the mathematical accuracy of the vouchers and remittance advices
Answer: a
34. Internal control is strengthened when the quantity of merchandise ordered is omitted
from the copy of the purchase order sent to the
a. Department that initiated the requisition
b. Receiving department
c.
Purchasing agent
d. Accounts payable department
Answer: b
35. Which of the following controls is most effective in assuring that recorded purchases
are free of material errors?
a. The receiving department compares the quantity ordered on purchase orders with
the quantity received on receiving reports
b. Vendors' invoices are compared with purchase orders by an employee who is
independent of the receiving department
c. Receiving reports require the signature of the individual who authorized the
purchase
d. Purchase orders, receiving reports, and vendors' invoices are independently
matched in preparing vouchers
Answer: d
36. The "procedure that would discourage the resubmission of vendor invoices after they
have been paid is
a.
A requirement for double endorsement of checks
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b. The cancellation of vouchers by accounting personnel
c. The cancellation of vouchers by treasurer personnel
d. The mailing of payments directly to payees by accounting personnel
Answer: c
37. Operating control of the check-signing machine normally should be the responsibility
of the
a. General accounting function
c. Legal counsel
b. Treasury function
function
d. Internal audit
Answer: b
38. Matching the supplier's invoice, the purchase order, and the receiving report normally
should be the responsibility of the
a. Warehouse receiving function
b. Purchasing function
c. Accounting function
d. Treasury function
Answer: c
39. Which of the following controls is not usually performed in the vouchers payable
department?
a. Matching the vendor's invoice with the related receiving report
b. Approving vouchers for payment by having an authorized employee sign the
vouchers
c. Indicating the asset and expense accounts to be debited
d. Accounting for unused prenumbered purchase orders and receiving
Answer: d
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ANALYTICAL REVIEW PROCEDURES
1. An assumption underlying analytical procedures is that
a. These procedures cannot replace tests of balances and transactions.
b. Statistical tests of financial information may lead to the discovery of material errors
in the financial statements.
c.
The study of financial ratios is an acceptable alternative to the investigation of
unusual fluctuations.
d. Relationships among data may reasonably be expected to exist and continue in the
absence of known conditions to the contrary.
Answer: d
2. 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 assessment of control risk.
Answer: c
3. Analytical review procedures are
a. substantive tests designed to evaluate the client's system of internal control
b. compliance tests designed to evaluate the validity of management assertions
c. substantive tests designed to evaluate the reasonableness of the client's financial
information
d. Compliance tests designed to evaluate the reasonableness of the client's financial
information
Answer: c
4. Auditors apply analytical procedures to the client's operations in order to identify
a. Improper separation of accounting and other financial duties.
b. Weaknesses of a material nature in the client's internal control.
c. Unusual transactions.
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d. Noncompliance with prescribed control procedures.
Answer: c
5. Which of the following statements regarding analytical procedures is not correct?
a. The definition of analytical tests places the emphasis on the comparison of client's
recorded data to PFRS.
b. Analytical procedures are required on all audits.
c. Analytical procedures are required on all review service engagements.
d. For certain accounts with small balances, analytical procedures alone may be
sufficient evidence
Answer: d
6. Which of the following statements concerning analytical procedures is correct
a. Analytical review may be omitted entirely for some financial statement audits.
b. Analytical procedures used in planning an audit should not use non-financial
information.
c.
Analytical procedures are usually effective and efficient for tests of controls
d. Analytical procedures alone may provide the appropriate level of assurance for
some assertions.
Answer: d
7. Analytical procedures are used for the following purpose
a. To assist the auditor in planning the nature, timing and extent of other auditing
procedures.
b. As a substantive test to obtain evidential matter about particular assertion related to
account balances or classes of transactions.
c. As an overall review of financial information in the final review stage of the audit.
d. All of the above.
Answer: d
8. For all audits of financial statements made in accordance with PSA, the use of analytical
procedures is required to some extent
In the planning stage
a. Yes
As a substantive test
No
In the review stage
Yes
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b. No
Yes
No
c. No
Yes
Yes
d. Yes
No
No
Answer: a
9. "Unusual fluctuations" occur when
a. significant differences are not expected but do exist.
b. significant differences are expected but do not exist.
c. there is a material accounting error or irregularity.
d. any one of the above three situations may occur.
Answer: d
10. As a result of analytical procedures, the independent auditor determines that 'the gross
profit percentage has declined form 30% in the preceding year to 20% in the current year.
the auditor should
a. Document management's intentions with respect to plans for reversing this trend
b. Evaluate management's performance in causing this decline
c. Require footnote disclosure
d. Consider the possibility of a misstatement in the financial statements.
Answer: d
11. Analytical procedures used in planning an audit should focus on identifying:
a. Material weaknesses in the internal control structure
b. The predictability of financial data from individual transactions
c.
The various assertions that are embodied in the financial statements
d. Areas that may represent specific risk relevant to the audit
Answer: d
12. Which of the ff. tends to be most predictable for purposes of analytical procedures
applied as substantive tests?
a. Relationships involving balance sheet accounts.
b. Transactions subject to management discretion.
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c. Relationships involving income statement accounts.
d. Data subject to audit testing in the prior year.
Answer: c
13. An auditor uses analytical review during the course of an audit. The most important
phase of this review is the
a. computation of key ratios such as inventory turnover and gross profit percentages.
b. investigation of significant variations and unusual relationships.
c. Comparisons of client-computed statistics that are analyzed.
d. Examinations of the client data that generated the statistics that are analyzed.
Answer: b
14. Analytical procedures enable the auditor to predict the balance or quantity of an item
under audit. information to develop this estimate can be obtained from all of the following
except
a. Tracing transactions through the system to determine whether procedures are being
applied as prescribed
b. Comparison of financial data with data for comparable prior periods, anticipated
results (e.g., budgets and forecasts), and similar data for the industry in which the
entity operates
c. Study of the relationships of elements of financial data that would be expected to
conform to a predictable pattern based upon the entity's experience
d. Study of the relationships of financial data with relevant nonfinancial data
Answer: a
15. An example of an analytical procedure is the comparison of:
a. Financial information with similar information regarding the industry in which the
entity operates
b. Recorded amounts of major disbursements with appropriate invoices
c.
Results of statistical sample with the expected characteristics of the actual
population
d. EDP-generated data with similar data generated by a manual accounting system
Answer: a
16. Of the following procedures, which does not produce analytical evidence?
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a. Compare revenue, cost of sales, and gross profit with the prior year and investigate
significant variations.
b. Examine monthly performance reports and investigate significant revenue and
expense variances.
c. Confirm customers' accounts receivable and clear all material exceptions.
d. Compare sales trends and profit margins with industry averages and investigate
significant differences.
Answer: c
17. Which of the following is not a typical analytical review procedure?
a.
Study of relationships of the financial information with relevant non-financial
information.
b. Comparison of the financial info. w/ similar information regarding the industry in
w/c the entity operates.
c. Comparisons of recorded amounts of major disbursements with appropriate
invoices.
d. Comparisons of the financial information with budgeted amounts.
Answer: c
18. Which of the ff. comparisons is most useful to an auditor in evaluating the results of an
entity's operations?
a. Prior year accounts payable to, current year accounts payable.
b. Prior year payroll expense to budgeted current year payroll expense.
c. Current year revenue to budgeted current year revenue.
d. Current year warranty expense to current year contingent liabilities.
Answer: d
19. Auditors try to identify predictable relationships when using analytical procedures.
Relationships involving transactions from which of the following accounts most likely
would yield the highest level of evidence?
a.
Accounts payable
b. Accounts receivable
c.
Advertising expense
d. Interest expense
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Answer: d
20. Analytical procedures performed in the overall review stage of an audit suggest that
several accounts have unexpected relationships. The results of these procedures most likely
indicate that
a. I.C. activities are not operating effectively
b. Additional tests of details are required
c. Irregularities exist among the relevant account balances
d. Communication with the audit committee should be revised
Answer: b
21. Analytical procedures are usually
a. less expensive to perform than tests of details.
b. more expensive to perform than tests of details.
c. just as expensive as tests of details.
d. An indeterminable cost.
Answer: a
22. Auditors sometimes use comparison of ratios as audit evidence. For example, an
unexplained decrease in the ratio of gross profit to sales may suggest which of the following
possibilities?
a. Unrecorded purchases
b. Unrecorded sales
c. Merchandise purchases being charged to selling and general expense
d. Fictitious sales
Answer: b
23. Which result of an analytical procedure suggests the existence of obsolete
merchandise?
a. Decrease in the inventory turnover rate
b. Decrease in the ratio of gross profit to sales
c. Decrease in the ratio of inventory to accounts payable
d. Decrease in the ratio of inventory to accounts receivable
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Answer: a
24. An auditor's analytical procedures most likely would be facilitated if the entity
a. Corrects material internal control weaknesses before the beginning of the audit.
b. Develops its data from sources solely within the entity
c. Segregates obsolete inventory before the physical inventory count
d. Uses a standard cost system that produces variance reports.
Answer: d
25. Analytical procedures used in the overall review stage of an audit generally include
a. Considering unusual or unexpected account balances that were not previously
identified.
b. Performing test of transactions to corroborate management's financial statement
assertions.
c. Gathering evidence concerning account balances that have not changed from the
prior year.
d. Re-testing control procedures that appeared to be ineffective during tl assessment
of control risk.
Answer: a