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ACCT 422 – Auditing Theory and Practice
Exam #2
Due: 4 hours after the Private Message containing the Exam is opened
and no later than Sunday, February 23, 2014 at 11:00 p.m. EST
Instructions: You have four (4) hours to complete and submit this Exam in your assignment
folder. This is an open book, open notes Exam, however you should work independently. This
Exam consists of 4 parts and 65 questions. Your answers to the Exam should be submitted on a
separate answer sheet. Your answer sheet should be submitted as an attachment in your
assignment folder under the “Exam 2” folder in Microsoft Word, WordPerfect or PDF format.
Please write your name on your answer sheet. Please do not write your answers directly in
the narrative portion of your assignment folder.
Part 1: (worth total of 64 points)
For Part 1, please number your answer sheet from 1 to 40 and provide the letter corresponding to
the best answer (eg, 1. A, 2. B, etc.).
1.
Which of the following is not a likely source of information to assess fraud
risks?
A. Communications among audit team members
B. Inquiries of management
C. Analytical procedures
D. Consideration of fraud risks discovered during recent audits of other clients
2.
Which of the following audit tests is usually the least costly to perform?
A. Analytical procedures
B. Tests of controls
C. Tests of balances
D. Substantive tests of transactions
3.
When should auditors not perform alternative procedures in testing the accounts
receivable balance?
A. When customers do not return positive confirmation requests
B. When customers do not return negative confirmation requests
C. When confirmations are deemed to be ineffective as an audit procedure
D. When confirmations are too costly to use
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4.
To test for recorded sales for which there were no actual shipments, the auditor
vouches from the:
A. bill of lading to the sales journal.
B. sales journal to the shipping documents.
C. sales journal to the accounts receivable subsidiary ledger.
D. bill of lading to the supporting customer order and sales order.
5.
Misstatements in the financial statement may not be detected with the increased
use of IT due to:
I. the loss of a visible audit trail.
II. reduced human involvement.
A. I only
B. II only
C. both I and II
D. neither I or II
6.
When assessing whether the financial statements are auditable, the auditor must
consider:
A. that the integrity of management and the adequacy of accounting records are
the two primary factors determining auditability.
B. that the integrity of management and the adequacy of risk management are
the two primary factors determining auditability.
C. that if all of the transaction information is available only in electronic form
without a visible audit trail, the company cannot be audited.
D. the control risk before determining if the entity is auditable.
7.
Which of the following is most correct with respect to the use of analytical
procedures?
A. Analytical procedures may be used in evaluating balances in the testing
phase as long as the auditor also uses them in assessing the going concern
assumption.
B. Analytical procedures must be used throughout the audit.
C. Analytical procedures used in the testing phase of the audit are primarily
used to direct an auditor's attention so that the auditor's understanding of the
business is improved.
D. Analytical procedures are performed by studying plausible relationships
between financial and nonfinancial data.
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8.
The most reliable evidence from confirmations is obtained when they are sent:
A. as close to the balance sheet date as possible.
B. at various times throughout the year to different segments of the sample, so
that the entire sample is representative of account balances scattered
throughout the year.
C. several months before the year-end, so the auditor will have adequate time
to perform alternate procedures if they are required.
D. at various times throughout the year to the same group in the sample, so that
the sample will not have a time bias.
9.
Prenumbered documents will only be useful for control purposes if:
A. a different numerical sequence is used for each company.
B. the sequence is accounted for periodically.
C. employees are allowed to use documents out of numerical sequence.
D. the same numerical sequence is used each accounting period.
10.
Which audit tests involve physical examination and confirmation?
A. Tests of controls
B. Tests of transactions
C. Tests of balances
D. Analytical procedures
11.
Controls that are designed for each software application and are intended to
help a company satisfy the transaction-related audit objectives are:
A. user controls.
B. general controls.
C. audit controls.
D. application controls.
12.
Which of the following parties is responsible for implementing internal controls
to minimize the likelihood of fraud?
A. External auditors
B. Audit committee members
C. Management
D. Committee of Sponsoring Organizations
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13.
When determining what type of report to issue on internal control under Section
404:
A. an adverse opinion on internal control must be given if any weaknesses in a
key internal control is discovered.
B. a scope limitation requires the auditor to disclaim an opinion on internal
controls.
C. if the auditor gives a qualified opinion on the financial statements, they must
give a qualified opinion on internal controls.
D. a scope limitation requires the auditor to express a qualified opinion or a
disclaimer of opinion on internal controls.
14.
Inherent risk is ________ related to detection risk and ________ related to the
amount of audit evidence.
A. directly, inversely
B. directly, directly
C. inversely, inversely
D. inversely, directly
15.
Which is a liquidity activity ratio?
A. Profit margin
B. Inventory turnover
C. Return on assets
D. Times interest earned
16.
If an auditor believes the chance of financial failure is high and there is a
corresponding increase in business risk for the auditor, acceptable audit risk
would likely:
A. be reduced.
B. be increased.
C. remain the same.
D. be calculated using a computerized statistical package.
17.
Which of the following may represent the biggest challenge smaller public
companies face in implementing effective internal control?
A. A lack of expertise
B. Reduced importance
C. Limited resources
D. Limited available guidance
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18.
Auditing standards specifically require auditors to identify ________ as a fraud
risk in most audits.
A. overstated assets
B. understated liabilities
C. improper revenue recognition
D. overstated expenses
19.
Which of the following statements is correct regarding the costs involved in
obtaining evidence?
A.
Physical examination is usually the
least expensive type of audit
evidence
Cost of obtaining evidence may be a
factor in deciding whether to
obtain that evidence
Yes Yes
B.
Physical examination is usually the
least expensive type of audit
evidence
Cost of obtaining evidence may be a
factor in deciding whether to
obtain that evidence
No No
C.
Physical examination is usually the
least expensive type of audit
evidence
Cost of obtaining evidence may be a
factor in deciding whether to
obtain that evidence
Yes No
D.
Physical examination is usually the
least expensive type of audit
evidence
Cost of obtaining evidence may be a
factor in deciding whether to
obtain that evidence
No Yes
20.
Which of the following audit tests would be regarded as a test of controls?
A. Comparison of the inventory pricing to vendors' invoices
B. Tests of the signatures on canceled checks to board of directors'
authorizations
C. Tests of the additions to property, plant, and equipment by physical
inspections
D. Review of the specific items making up the balance in a given general
ledger account
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21.
Two determinants of the persuasiveness of evidence are:
A. competence and sufficiency.
B. relevance and reliability.
C. appropriateness and sufficiency.
D. independence and effectiveness.
22.
When setting a preliminary judgment about materiality:
A. more evidence is required for a low dollar amount than for a high dollar
amount.
B. less evidence is required for a low dollar amount than for a high dollar
amount.
C. the same amount of evidence is required for either low or high dollar
amounts.
D. there is no relationship between it and the dollar amount of evidence
needed.
23.
Misappropriation of assets is normally perpetrated by:
A. members of the board of directors.
B. employees at lower levels of the organization.
C. management of the company.
D. the internal auditors.
24.
Which of the following statements is not true?
A. Analytical procedures emphasize the overall reasonableness of transactions
and 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.
25.
Sales should be recorded, at the earliest, when:
A. the order is received.
B. the order is received and credit is approved.
C. credit is approved and it is verified that there is enough inventory to fill the
order.
D. the shipment takes place.
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26.
Which of the following is not a general control?
A. Computer performed validation tests of input accuracy.
B. Equipment failure causes error messages on monitor.
C. There is a separation of duties between programmer and operators.
D. There are adequate program run instructions for operating the computer.
27.
The auditors primary purpose in auditing the client's system of internal control
over financial reporting is:
A. to prevent fraudulent financial statements from being issued to the public.
B. to evaluate the effectiveness of the company's internal controls over all
relevant assertions in the financial statements.
C. to report to management that the internal controls are effective in preventing
misstatements from appearing on the financial statements.
D. to efficiently conduct the Audit of Financial Statements.
28.
The predecessor auditor is required to respond to the request of the successor
auditor for information, but the response can be limited to stating that no
information will be provided when:
A. the predecessor auditor has poor relations with the successor auditor.
B. the client is dissatisfied with the predecessor's work.
C. there are actual or potential legal problems between the client and the
predecessor.
D. the predecessor believes that the client lacks integrity.
29.
Which of the following statements is not correct?
A. It is possible to vary the sample size from one unit to 100% of the items in
the population.
B. The decision of how many items to test should not be influenced by the
increased costs of performing the additional tests.
C. The decision of how many items to test must be made by the auditor for
each audit procedure.
D. The sample size for any given procedure is likely to vary from audit to
audit.
30.
An auditor is performing a credit analysis of customers with balances over 60
days due. She is most likely obtaining evidence for which audit related
objective?
A. Realizable value
B. Existence
C. Completeness
D. Occurrence
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31.
An auditor who accepts an audit engagement and does not possess the industry
expertise of the business entity should:
A. engage financial experts familiar with the nature of the business entity.
B. obtain a knowledge of matters that relate to the nature of the entity's
business.
C. refer a substantial portion of the audit to another CPA who will act as the
principal auditor.
D. first inform management that an unqualified opinion cannot be issued.
32.
When designing audit procedures, tracing of source documents to the
customer’s subsidiary ledger and subsequently to the general ledger is done to
satisfy what assertion?
A. Valuation
B. Cutoff
C. Completeness
D. Classification
33.
When allocating materiality, most practitioners choose to allocate to:
A. the income statement accounts because they are more important.
B. the balance sheet accounts because most audits focus on the balance sheet.
C. both balance sheet and income statement accounts because there could be
errors on either.
D. all of the financial statements because it is required by GAAS.
34.
When controls are deemed ineffective and assessed control risk is at the
maximum for a private company, which of the following would normally be
true?
A. No emphasis is placed on the controls.
B. Relatively little emphasis is placed on the controls.
C. Moderate emphasis is placed on the controls.
D. Heavy emphasis is placed on the controls.
35.
Proper segregation of functional responsibilities calls for separation of:
A. authorization, execution, and payment.
B. authorization, recording, and custody.
C. custody, execution, and reporting.
D. authorization, payment, and recording.
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36.
A customer mails and records a check to a client for payment of an unpaid
account on December 30. The client receives and records the amount on
January 2. The records of the two organizations will be different on December
31. This represents:
A.
A cutoff misstatement A timing difference
Yes Yes
B.
A cutoff misstatement A timing difference
No No
C.
A cutoff misstatement A timing difference
Yes No
D.
A cutoff misstatement A timing difference
No Yes
37.
The most important output control is:
A. distribution control, which assures that only authorized personnel receive
the reports generated by the system.
B. review of data for reasonableness by someone who knows what the output
should look like.
C. control totals, which are used to verify that the computer's results are
correct.
D. logic tests, which verify that no mistakes were made in processing.
38.
Which of the following is not a factor that relates to opportunities to commit
fraudulent financial reporting?
A. Lack of controls related to the calculation and approval of accounting
estimates
B. Ineffective oversight of financial reporting by the board of directors
C. Management's practice of making overly aggressive forecasts
D. High turnover of accounting, internal audit, and information technology
staff
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39.
You are auditing the company's purchasing process for goods and services. You
are primarily concerned with the company not recording all purchase
transactions. Which audit procedure below would be the most effective audit
procedure in this case?
A. Vouching from the accounts payable account to the vendor invoices
B. Tracing vendor invoices to recorded amounts in the accounts payable
account
C. Confirmation accounts payable recorded amounts
D. Reconciling the accounts payable subsidiary ledger to the accounts payable
account
40.
Based on 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. increase materiality levels.
B. decrease detection risk.
C. decrease substantive testing.
D. increase inherent risk.
Part 2: (worth total of 16 points)
For Part 2, please number your answer sheet from 41 to 50 and provide the letter corresponding
to the best answer (eg, 41. A, 42. B, etc.).
41. It is common to use a combination of positive and negative confirmations by
sending the latter to accounts with large balances and the former to those with
small balances.
A. True
B. False
42. The two most important factors when determining the appropriate sample size
in an audit are the auditor's expectation of misstatements and the objectivity of
the evidence.
A. True
B. False
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43. Violations of the existence objective for sales are of greater concern to the
auditor than violations of the completeness objective.
A. True
B. False
44. An engagement letter establishes a clear understanding of the terms of the
engagement between the client and the auditor, but it is optional for private
companies.
A. True
B. False
45. Most practitioners allocate the preliminary judgment about materiality to both
the balance sheet and income statement accounts.
A. True
B. False
46. The auditor's understanding of internal control performed as part of risk
assessment procedures provides the basis for the auditor's initial assessment of
control risk.
A. True
B. False
47. In IT systems, if general controls are effective, it increases the auditor's ability
to rely on application controls to reduce control risk.
A. True
B. False
48. An ineffective board of director oversight over financial reporting is an example
of an incentives/pressures risk factor.
A. True
B. False
49. Control risk is generally set at minimum for most private companies.
A. True
B. False
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50. Recording a sale that did not occur violates the occurrence transaction-related
audit objective and the existence balance-related audit objective.
A. True
B. False
Part 3: (worth total of 10 points)
For Part 3, please number your answer sheet from 51 to 60 and provide the letter corresponding
to the best answer (eg, 51. A, 52. B, etc.).
Below are 10 audit procedures. Classify each audit procedure using one of the following types
of audit evidence: (A) physical examination, (B) confirmation, (C) documentation, (D)
observation, (E) inquiry of the client, (F) reperformance, (G) recalculation, and (H) analytical
procedure.
Type of
Evidence Audit Procedures
51. Review the total of repairs and maintenance for each month to determine
whether any month’s total was unusually large.
52. Compare vendor names and amounts on purchases invoices with entries in
the purchases journal.
53. Foot entries in the sales journal to determine whether they were correctly
totaled by the client.
54. Make a surprise count of petty cash to verify that the amount of the petty
cash fund is intact.
55. Obtain a written statement from the client’s bank stating the client’s year-
end balance on deposit.
56. Watch client employees count inventory to determine whether company
procedures are being followed.
57. Count inventory items and record the amount in the audit files.
58. Calculate the ratio of cost of goods sold to sales as a test of overall
reasonableness of gross margin relative to the preceding year.
59. Obtain information about the client’s internal controls by asking questions
of client personnel.
60. Examine a piece of equipment to make sure a recent purchase of equipment
was actually received and is in operation.
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Part 4: (worth total of 10 points)
Below are five audit procedures, all of which are tests of transactions associated with the
audit of the sales and collection cycle. Also below are the six general transaction-related
audit objectives and the five management assertions. For each audit procedure, indicate
(1) its audit objective, and (2) the management assertion being tested.
Audit Objectives Assertions
A. Occurrence V. Occurrence
B. Completeness W. Completeness
C. Accuracy X. Accuracy
D. Posting and summarization Y. Classification
E. Classification Z. Cutoff
F. Timing
61. Account for the sequence of prenumbered bills of lading and sales invoices.
(1) .
(2) .
62. Trace from a sample of prelistings of cash receipts to the cash receipts journal,
testing for names, amounts, and dates.
(1) .
(2) .
63. Examine customer order forms for credit approval by the credit manager.
(1) .
(2) .
64. Vouch recorded sales from the sales journal to the file of bills of lading.
(1) .
(2) .
65. Compare dates on the bill of lading, sales invoices, and sales journal to test for
delays in recording sales transactions.
(1) .
(2) .
