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Answer & Explanation:30 MC questionsexam_3_audit__1_.doc
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EXAM 3
Lapping of accounts receivable is generally facilitated most by a lack of segregation of duties
between
Authorization of transactions and custody of the related assets.
Authorization of transactions and record-keeping.
Custody of assets and record-keeping.
Verification of transaction and custody of assets.
Tracing information from a sample of receiving reports backward to purchase orders and
purchase requests provides evidence that
Goods received are for authorized purchases.
Goods ordered were received.
Goods are not ordered more than once.
Goods received are recorded in inventory.
Providing “negative assurance” is applicable to a(n)
Review of interim financial statements.
Report on compliance with contractual agreements.
Report on compliance with regulations.
All of the above.
A report on financial statements prepared on the cash basis of accounting would ordinarily
include a statement
Identifying the basis used.
About the amount by which net income differs from GAAP net income.
Limiting distribution of the report.
All of the above.
Reporting that inventory is fairly stated while the financial statements taken as a whole are not
fairly stated is acceptable if
The distribution of the report is restricted.
The auditor has been engaged to audit only the balance sheet.
Either A or B.
Neither A nor B.
When comparative statements are presented, the predecessor auditor
Is required to reissue the prior year’s report.
Has no further responsibility if he/she believes that sufficient appropriate evidential matter
was obtained while auditing the prior year’s statements.
Should obtain representations from client management regarding changes that might affect
the prior year’s report, as well as representations from the successor auditor.
Need not be involved if he/she issued an unqualified report and the successor auditor will be
issuing an unqualified report due to work performed currently.
A disclaimer of opinion
Requires the addition of a fourth paragraph to the audit report, while retaining the standard
three paragraphs, and substantially modifying the opinion paragraph.
Involves replacing the scope paragraph with an explanatory paragraph and substantially
modifying the paragraph where the opinion is normally placed.
Requires the auditor to not mention known GAAP departures encountered during the field
work that was performed, because an opinion is not being expressed on the financial
statements taken as a whole.
Involves retaining the wording of the normal scope paragraph, with additions to describe
how the work performed differs and is inadequate to express an opinion.
Referring to the work of another auditor
Affects the introductory, scope and opinion paragraphs of the audit report.
Requires the addition of a fourth paragraph to the audit report.
Violates reporting standards because the principal auditor is responsible for the conclusions.
Is always required when another auditing firm assists on a part of the audit.
An audit report does not “guarantee” that the financial statements are free of all misstatements.
This fact is
Explicitly communicated in the introductory paragraph of an audit report.
Implied in the audit report.
Not intended to be construed from the audit report.
Explicitly communicated in the opinion paragraph of the audit report.
A lack of consistency in the use of accounting principles
Is referred to in the opinion paragraph, but does not require the addition of a fourth
paragraph.
Requires the addition of a fourth paragraph to the audit report, placed before the opinion
paragraph.
Requires the addition of a fourth paragraph to the audit report, following the opinion
paragraph.
Refers to the use of different principles for different classes of assets and does not relate to
the audit report.
With regard to disclosures in the financial statements
Inadequate disclosures are a GAAP departure and require the addition of a fourth paragraph
to the audit report.
The audit report should always explicitly discuss whether disclosures are adequate.
The audit report should not mention disclosures because they only provide supplementary
information and investors are primarily interested in the amounts in the statements.
Inadequate disclosures are a GAAP departure and are addressed in the opinion paragraph
without the addition of a fourth paragraph.
The introductory paragraph of the standard audit report explicitly mentions
The auditor’s responsibility related to the financial statements.
Generally accepted accounting principles.
Auditing standards.
A basic description of what an audit includes.
An advantage of electronic data interchange is that
Efficiency is enhanced.
Automation is possible while maintaining an audit trail.
The need for security is lessened.
The need to test controls is reduced.
All of the following are applicable to testing internal controls in an IT environment except
Test data.
Parallel simulation.
Integrated test facility.
Data mining software.
Seifert Company requires a combination of alpha and numeric characters in employee
passwords. An employee accidentally omits the alpha characters when trying to access the
system and access is denied, most likely due to a
Echo check.
Check digit.
Validity check.
Limit test.
When a sales clerk swipes a credit card and the system checks for available credit before the
transaction proceeds, this internal procedure to check credit is most likely an example of a(n)
General control.
Application control.
Output control.
Parity check.
An advantage of a highly-automated accounting system is that
Segregation of duties is made easier.
Documentation is likely to be more readily available.
The audit is simplified.
Transactions are processed in a uniform manner.
Advantages of probability-proportional-to-size over classical variables sampling include all of
the following except
It ensures that individually large items (such as balances) will be selected.
Each physical unit (such as an invoice) has an equal chance of being selected.
It is more efficient if few differences exist between audited and book values.
It works well where overstatements are more expected than are understatements.
In testing a particular key internal control, an auditor finds from a carefully-selected random
sample of transactions that the computed upper deviation rate is 4 percent, with 95% confidence.
The tolerable deviation rate was set at 3 percent. If the true (unknown) population deviation rate
is 3 percent, the auditor will most likely
Inappropriately decide to rely upon the control.
Inappropriately decide not to rely upon the control.
Appropriately increase the level of control risk.
Appropriately decrease the assessed level of control risk.
In which of the following situations would an auditor most likely choose a substantive strategy
and avoid sampling transactions to test controls?
The population size is large.
The expected deviation rate is less than the tolerable deviation rate.
The tolerable deviation rate is less than the expected deviation rate.
The revised materiality level is lower than the planned level.
If you wish to generate a statistical sample to test for proper authorization on a client’s purchase
orders, the required sample size would be associated directly and positively with which of the
following?
Expected error rate.
Tolerable error rate.
The acceptable level of risk of over-reliance.
The acceptable level of risk of under-reliance.
An auditor takes a sample of vendor invoices that is reasonably representative of the population
of purchase transactions for the period covered by the audit, and performs the same series of
audit procedures on each invoice. If the auditor overlooks a key piece of information on one of
the invoices, this oversight occurred primarily due to the existence of
Sampling risk.
Nonsampling risk.
Control risk.
Inherent risk.
Which of the following audit steps is most related to the existence assertion for traditional
securities?
Inquiring about management’s intention to sell or hold a security.
Performing analytical procedures.
Inquiring of management about impairments in the securities.
Confirming with an independent custodian.
Which of the following audit steps is most relevant to the existence assertion for inventory?
Inquire about slow-moving inventory.
Trace quantities from a sample of inventory tags to the client’s inventory listing.
Trace quantities from the inventory listing to inventory tags and to auditor test counts.
Inquire about inventory pledged as collateral.
You are auditing accounts receivable for Fogel Computer Supplies as of December 31, 2011 and
have sent 50 positive confirmations. One customer, for whom Fogel indicated a balance of
$13,000, wrote two exceptions in their response. First, the customer stated that $1,500 of the
balance represented a computer that was not received until January 3, 2012, and that they
therefore did not owe that amount as of December 31. You followed up and found that Fogel
shipped the computer on December 30, 2012, F.O.B. Shipping Point. Another exception was
$500 for a printer that the customer had sent back unopened on December 27, 2011 because
Fogel had sent the wrong model. You followed up and found that Fogel had received the printer
on December 29, 2011, but did not issue a credit memorandum until January 2, 2012 due to a
holiday break. What balance should Fogel show as of December 31, 2011 for this customer?
$13,000.
$12,500.
$11,500.
$11,000.
Which of the following best describes the tradeoff between positive and negative confirmations
of accounts receivable?
Positive confirmations are more reliable; negative confirmations are more efficient.
Positive confirmations are more efficient; negative confirmations are more effective.
Positive confirmations are better for the valuation assertion, while negative confirmations
are better for the existence assertion.
Positive confirmations are better for the existence assertion, while negative confirmations
are better for the valuation assertion.
A company made a transfer between two bank accounts near the end of the year 2011. Which of
the following would generally be consistent with kiting?
The company records the disbursement on the books on 12/30/11 and the receipt on the
books on 12/31/11.
The company records the disbursement on the books on 12/31/11 and the bank records the
disbursement on 1/2/12.
The company records the receipt on the books on 12/31/11 and the disbursement on the
1/2/12.
The company records the disbursement on the books on 12/30/11 and the receipt on 1/2/12.
As a new auditor, you are asked to obtain a copy of the client’s aged trial balance for accounts
receivable. This schedule is used primarily in relation to which of the following assertions?
Existence.
Completeness.
Classification and understandability.
Valuation and allocation.
Rich Company sells household goods and appropriately records its sales upon shipment, because
goods are shipped FOB Shipping Point. The external auditor gathers a sample of shipping
documents and matches them to entries in the sales journal to provide corroborating evidence
that
Recorded sales represent authorized transactions.
Shipments of goods are recorded as sales.
Shipments of goods are for authorized sales.
Recorded sales were for goods that were shipped.
Some procedures are applicable to virtually any audit area. Included in these procedures are all
of the following except
Inquiries of management.
Confirmation.
Scanning journals.
Performing analytical procedures
…
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