Audit 1 Final Exam

Front 1

When auditing with "fraud awareness," auditors should especially notice and follow up employee activities under which of these conditions?
a. The company always estimates the inventory but never takes a complete physical count.
b. The petty cash box is always locked in the desk of the custodian.
c. Management has published a company code of ethics and sends frequent communication newsletters about it.
d. The board of directors reviews and approves all investment transactions.

Back 1

a. The company always estimates the inventory but never takes a complete physical count.

Front 2

The best way to enact a broad fraud-prevention program is to
a. Install airtight control systems of checks and supervision.
b. Name an "ethics officer" who is responsible for receiving and acting upon fraud tips.
c. Place dedicated "hot line" telephones on walls around the workplace with direct communication to the company ethics officer.
d. Practice management of "of the people and for the people" to help them share personal and professional problems.

Back 2

d. practice management "of the people and for the people" to help them share personal and professional problems.

Front 3

Which of the following is LEAST indicative of fraudulent activity?
a. Numerous cash refunds have been made to different people at the same post office box address.
b. Internal auditors cannot locate several credit memos to support reductions of customers' balances.
c. Bank reconciliation has no outstanding checks or deposits older than 15 days.
d. Three people were absent the day the auditors handed out the paychecks and have not picked them up four weeks later.

Back 3

c. Bank reconciliation has no outstanding checks or deposits older than 15 days.

Front 4

Which of these arrangements of duties could most likely lead to an embezzlement or theft?
a. Inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records.

b. Cashier prepared the bank deposit, endorsed the checks with a company stamp, and delivered the cash and checks to the bank for deposit (no other bookkeeping duties).

c. Accounts receivable clerk received a list of payments received by the cashier so she could make entries in the customers' accts receivable subsidiary accts.

d. Financial vice president received checks made out to suppliers and the supporting invoices, signed the checks, and mailed the checks.

Back 4

a. Inventory warehouse manager has responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records.

The two duties that ought to be separated that were given to the same person were Recording & Custody.

the three that should always be separated is ARC: A..... Recording and Custody

Front 5

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?

a. Understating the sales journal.

b. Overstating accounts receivable control account.

c. Overstating the accounts receivable subsidiary ledger.

d. Overstating the sales journal.

Back 5

a. Understating the sales journal.

Front 6

Which of the following is a control procedure that could prevent a paid disbursement voucher from being presented for payment a second time?
a. Vouchers should be prepared by individuals who are responsible for signing disbursement checks.

b. Disbursement vouchers should be approved by at least two responsible management officials.

c. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.

d. The official signing the check should compare the check with the voucher and should stamp "paid" on the voucher documents.

Back 6

d. The official signing the check should compare the check with the voucher and should stamp "paid" on the voucher documents.

I think this is also known as "cancelling the doc"

Front 7

A code of ethics is an important element of a fraud prevention program. Which of the following would diminish the effectiveness of a company's code of conduct?

a. The establishment of a chief ethics officer.

b. The establishment of a "hot line" for reporting unethical behavior.

c. The violation of the code of ethics by senior management.

d. The posting of the code of ethics in the company workplace.

Back 7

c. The violation of the code of ethics by senior management.

Front 8

Which of the following combinations is a good means of concealing employee fraud but a poor means of perpetrating management fraud (financial reporting fraud)?

a. Overstating sales revenue and overstating customer accounts receivable balances.

b. Overstating sales revenue and overstating bad debt expense.

c. Understating interest expense and understating accrued interest payable.

d. Omitting the disclosure information about related-party sales to the president's relatives at below-market prices.

Back 8

b. overstating sales revenue and overstating bad debt expense.

Front 9

Allison, an employee in accounts payable, believes she can run a fictitious invoice through the accounts payable system and collect the money. She knows payments are subject to an audit. Which account would be the best place to hide the fraud?

a. Inventory

b. Wage expense

c. Consulting service expense

d. Property tax expense

Back 9

c. consulting service expense

Front 10

Which of the following is an effective audit procedure that might be used by an auditor to detect kiting between intercompany banks?

a. review composition of authenticated deposit slips.

b. Review subsequent bank statements.

c. Prepare a schedule of bank transfers.

d. prepare a year-end bank reconciliation.

Back 10

c. prepare a schedule of bank transfers.

Front 11

Define Kiting

Back 11

1. The act of misrepresenting the value of a financial instrument for the purpose of extending credit obligations or increasing financial leverage.

2. A fraudulent act involving the alteration or issuance of a check or draft with insufficient funds

Front 12

Upon receipt of customers' checks in the mail room, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the

a. Internal auditor to investigate the listing for unusual transactions.

b. Treasurer to compare the listing for unusual transactions

c. Accounts receivable bookkeeper to update the subsidiary-accounts/receivable-records

d. Entity's bank to compare the listing with the cashier's deposit slip.

Back 12

c. Accounts receivable bookkeeper to update the subsidiary A/R records.

Front 13

The main purpose of management representation is to

a. Shift responsibility for financial statements from the management to the auditors.

b. Provide a substitute source of audit evidence for substantive procedures that auditors would otherwise perform.

c. Provide management an opportunity to make assertions about the quantity and valuation of the physical inventory.

d. Impress on management its ultimate responsibility for the financial statements and disclosures.

Back 13

d. impress on management its ultimate responsibility for the financial statements and disclosures.

Front 14

A Type 1 subsequent event involves subsequent information about a condition that existed at the balance sheet date. Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements.

a. Sale of an issue of new stock for $500,000 on January 30.

b. Settlement of a damage lawsuit for a customer's injury sustained February 15 for $10,000.

c. Settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements.

d. Storm damage of $1 million to the entity's building on march 1.

Back 14

c. Settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements.

Front 15

A. Griffin audited the financial statements of Dodger Magnificent Corporation for the year ended December 31, 2008. She completed gathering sufficient appropriate evidence on January 30 and later learned of a stock split voted by the board of directors on February 5. The financial statements were changed to reflect the stock split, and she now needs to dual date the report on the company's financial statements before sending it to the company. Which of the following is the proper form?

a. December 31, 2008, except as to Note X, which is dated January 30, 2009.

b. January 30, 2009, except as to Note X, which is dated February 5, 2009.

c. December 31, 2008, except as to Note X, which is dated February 5, 2009.

d. February 5, 2009, except for the audit completion date, for which the date is January 30, 2009.

Back 15

b. January 30, 2009, except as to Note X, which is dated February 5, 2009.

Front 16

Prior to the audit release date, auditors have a responsibility related to management's disclosure of subsequent events until

a. The year-end balance sheet date.

b. The auditor's report date.

c. The audit report release date.

d. The following year's balance sheet date.

Back 16

c. The audit report release date.

Front 17

11.34
Which of the following is NOT required by generally accepted auditing standards?

a. Management representations.

b. Attorney letter

c. Management letter.

d. Engagement letter.

Back 17

c. management letter.

note:
The management letter (from auditor) is a value-added service.

Management representations letter is from the client.

management letter is from the auditor.

and TECHNICALLY the Engagement letter isn't REQUIRED by generally accepted auditing standards, however a contract that specifies the nature of the engagement IS required and that requirement is usually met by means of an engagement letter.

Front 18

11.36
Which of the following is ordinarily performed LAST in the audit examination?
a. Securing a signed engagement letter from the client.

b. Performing tests of controls.

c. Performing a review for subsequent events.

d. Obtaining signed management representations.

Back 18

d. Obtaining signed management representations.

Note: Management representations letter is from the client.

Front 19

11.37
Which of the following normally occurs earliest in the audit examination?

a. Discovery of an omitted audit procedure.

b. Dual dating the auditors' report on the entity's financial statements for subsequent events that exist at the balance sheet date.

c. Preparation of the management letter.

d. Review of audit documentation.

Back 19

d. Review of audit documentation.

Note: management letter is from the auditors.

Front 20

11.40
If, after the audit report release date, auditors determine that an important auditing procedure was omitted, which of the following initial courses of action is most appropriate?

a. perform the omitted procedure or an alternative procedure.

b. Notify the board of directors and regulatory agencies that are currently relying on auditors' reports.

c. Determine whether the omitted procedure is important in supporting the auditors' opinion on the entity's financial statements.

d. Engage another accounting firm to conduct a quality assurance review.

Back 20

c. Determine whether the omitted procedure is important in supporting the auditors' opinion on the entity's financial statements.

Front 21

11.41
Which of the following statements is NOT true with respect to management representations?

a. The failure of management to furnish representations is a significant scope limitation, resulting in either an adverse opinion or disclaimer of opinion.

b. Management representations must address the disclosure of all significant deficiencies in internal control, regardless of materiality.

c. Management representations are used by auditors to corroborate information received during the audit from the client and its employees.

d. Management representations are dated the same date as the auditors' reports.

Back 21

a. The failure of management to furnish representations is a significant scope limitation, resulting in either an adverse opinion or disclaimer to opinion.

Note: management representations letter is From client

management letter is from auditor.

Front 22

11.42
Hall accepted an engagement to audit the Year 1 financial statements of XYZ Co. XYZ completed the preparation of the Year 1 financial statements on February 13, Year 2, and Hall began the field work on February 17, Year 2. Hall completed gathering sufficient appropriate evidence on March 24, Year 2, and completed the report on March 28, Year 2. The management representations normally would be dated

a. February 13, Year 2 (completion date of preparation of the fin. statements)

b. February 17, Year 2. (first day of field work)

c. march 24, year 2 (last day of field work)

d. march 28, year 2 (completion of auditors' report date)

Back 22

c. march 24, year 2 (last day of field work)

Front 23

11.44
Which of the following substantive procedures should auditors ordinarily perform regarding subsequent events?

a. compare the latest available interim financial statements with the financial statements being audited.

b. Send second requests to client's customers who failed to respond to initial accounts receivable confirmation requests.

c. Communicate material weaknesses in internal control to the client's audit committee.

d. Review the cutoff bank statements for several months after the year end.

Back 23

a. Compare the latest available interim financial statements with the financial statements being audited.

ask prof.: does this include cutoff bank statements from proceeding years?

Front 24

11.46 The primary reason auditors request responses to attorney letters is to provide auditors

a. The probable outcome of asserted claims and pending or threatened litigation.

b. Corroboration of the information furnished by management about litigation, claims, and assessments.

c. The attorney's opinions of the client's historical experiences in recent similar litigation.

d. A description and evaluation of litigation, claims, and assessments that existed at the balance sheet date.

Back 24

b. Corroboration of the information furnished by management about litigation, claims, and assessments.