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When considering internal control, an auditor must be aware of the concept of reasonable assurance, which recognizes what?
that the cost of internal control should not exceed the benefits
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actions, policies and procedures that reflect the overall attitude of management, directors and owners of the entity relate to what IT component?
Control Environment
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a supervisor who reviews accounts payable to ensure that they are completed is performing which COSO component?
Monitoring
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What is the independent auditors principal purpose for obtaining an understandability of IT and assessing control risk in a FS audit?
to determine the nature, timing, and extent of subsequent audit work
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Which of the following is an example of an operation deficiency in IT?
Clerks who conduct monthly reconciliation of intercompany accounts do not understand the nature of misstatements
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A material weakness in IT represents a control deficiency that, What?
results in reasonable possibility that IT will not prevent or detect material FS misstatements
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An auditor of a public company identifies a material weakness in IT, the auditor does what?
must issue an adverse opinion on internal control over financial reporting
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When a nonpublic company auditors tests of controls identify deficiencies in internal control over financial reporting , the auditor must do What?
Communicate both significant deficiencies and material weaknesses to those charged with governance
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When an audit reveals that many approvals of cash dispursements are missing, the auditor is least likely to do what?
increase planned detection risk
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Why does an auditor use assessed control risk?
to determine the acceptable level of detection risk for FS assertions
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When an auditor decides to increase assessed control risk. To achieve the same level of audit risk and planned audit risk, what will the auditor do?
decrease planned detection risk
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What is incorrect about tests of controls?
they provide persuasive evidence that a material misstatement exists when controls are not being consistantly applied
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because of fraud risk, an audit should be performed with what kind of attitude?
professional skepticism
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What would cause an auditor to consider whether material misstatements due to fraud exist?
transactions tested are not supported by proper documentation
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What is likely to heighten an auditors concern about misstatements due to fraud?
the entity's industry is experiencing a decline in customer demand
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What circumstances are most likely to cause an auditor to increase the assessment of the risk of misstatement due to fraud?
unusual discrepancies exist between an entity's records and confirmation replies
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What documentation should the auditor include when risk factors are identified during an audit?
risk factors identified and a response to the risk factors identified
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What should the auditor do first when an independent audit causes the auditor to believe misstatement due to fraud exists?
make the investigation necessary to determine whether fraud has actually occured
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What should an auditor do when analytical procedures reveal that gross profit increased 30% last year and 40% this year?
increase the assessment of the risk of revenue misstatements, including fraud
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Cash reciepts from sales have been missappropriated. What acts would conceal this embezzelment and be least likely to be detected by the auditor?
Understating the sales journal
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What kind of trend might be evident when the auditors discovers that accounts recievable turnover is substantially lower this period than the prior period?
fictitious credit sales have been recorded during the period
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Which internal controls would be best to detect the theft of valuable items from an inventory that consists of hundreds of different items, some selling for $10 and fewer selling for $100+?
Maintain a perpetual inventory for only the valuable inventory items
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When an auditor looks for an indication on dublicate sales invoices to see whether the accuracy has been verified, what is the auditor doing?
a test of control
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What determines whether an auditor applies analytical procedures as substantive tests or performs substantive tests of transactions and account balances?
relative effectiveness and efficiency of the tests
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In order to minimize the risk that the audit will not detect material misstatements, What will the auditor primarily rely upon?
substantive tests
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What is the order of the 4 steps used by an auditor to evaluate internal controls?
- 1) consider the types of errors and fraud that can occur
- 2) determine the controls that could prevent them
- 3)determine whether the necessary internal control are prescribe and used correctly
- 4)Identify control deficiencies
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Which is true about tests of controls?
include observations of the proper segregation of duties
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to support an assessment of control risk below zero, an auditor performs precedures to determine if the controls are operating effectively, what is the auditor doing?
test of controls
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What is the primary reason for performing a test of controls?
to obtain a reasonable degree of assurance that internal controls are operating effectively and consistently throughout the year
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What types of techniques does an auditor use to test the effectiveness of controls?
reperformance
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The accounting system will not post a sales transaction to the sales journal unless a valid bill of lading number is present. Which transaction related objective is this control most relevent to?
occurance
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The accounting system automatically obtains the unit price based on scans of bar codes. Which transaction related objective is the control relevent to?
accuracy
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Which control would be most effective in detecting a failure to record cash recieved from customers paying on thier accounts?
monthly statements are sent to customers and any discrepancies are resolved by an independent person.
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The objective associated with the separation of duties between cash handling and record keeping is to verify what?
existing cash receipts are recorded
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A substantial sales return in the last month of the year was recieved but the credit memo was not prepared until after auditors performed thier testing and the returns were included as inventory, what control would have prevented the misstatement?
receiving reports are prepared for all materials received
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What control would be most effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of bad debt write offs?
Employees involved in the credit granting function are separated from the sales function
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What control would prevent the sales invoice amount to be different than the accounts recievable amount?
prelistings and predetermined amounts are used to control postings
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What control would prevent shipments occurring in dec to not get recorded until jan?
as goods leave the shipping dock, the system generates a bill of lading
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What is the auditor trying to establish when he traces a sample debit entries from A/R master file back to the duplicate sales invoives?
that debit entries are correctly supported by sales invoices
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To verify that all sales transactions have been recorded, a substantive test of transactions should be completed on a representative sample drawn from what?
the shipping clerks file of duplicate bills of lading
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Which audit procedure is most effective in testing credit sales for overstatment?
vouch a sample of recorded sales from the sales journal to shipping documents
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What is a CPA likely to do after he has determined that A/R have increased as a result of slow collections in a tight money environment?
expand tests of collectability
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What is indicated when A/R increases and no economic changes have happened?
an easing of credit policies
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When is a negative confirmation of A/R not useful?
individual account balances are relatively large
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What does the return of positive confirmation of A/R attest to?
the accuracy of the A/R balance
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When differences that are not misstatements will take a long time to resolve, what will an auditor choose when defining the sampling unit?
individual invoices
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When evaluating the adequecy of the allowance for dougtful accounts, an auditor reviews the entity's aging schdule to support which management assertion?
valuation and allocation
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Which procedure would best uncover an understatement of sales and A/R?
test a sample of sales transactions, selecting the sample from prenumbered shipping documents
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Why does the confirmation of customers A/R rarely provides reliable evidence about the completeness assertion?
customers may not be inclined to report understatement errors in thier balances.
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What is the probable cause when very few of the outstanding checks listed on the dec 31 bank statement did not clear by jan 10?
the client transmitted the checks to the payee after year end
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Why should the auditor ordinarily send confirmation requests to all banks with which the client has conducted business during the year?
the confirmation form also seeks information about indebtedness to the bank
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The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the confirmation may what?
be unaware of all financial relationships that the bank has with the client
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Which of the following is one of the better auditing techniques to detect kiting?
prepare a schedule of bank transfers from the clients books
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a cash shortage may be concealed by transporting funds from one location to another or by converting negotiable assets to cash. because of this, what is vital?
simultaneous surprise cash counts
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