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principles of auditing and other assurance services

Questions and Answers of Principles Of Auditing And Other Assurance Services

In meeting the control objective of safeguarding of assets, which depart- ment should be responsible for the following?
For an appropriate segregation of duties, journalizing and posting sum- mary payroll transactions should be assigned toa. The treasurer's department.b. General accounting.c. Payroll accounting.d. The
An auditor who is testing IT controls in a payroll system would most likely use test data (discussed in Advanced Module 1 in Chapter 6) that contain conditions such asa. Deductions not authorized by
It would be appropriate for the payroll department to be responsible for which of the following functions?a. Approval of employee time records.b. Preparation of periodic governmental reports as to
Which of the following audit tests would most likely be used to test the occurrence assertion for payroll transactions?a. Trace a sample of time sheets to the payroll register.b. Recompute the
An auditor is most likely to perform substantive tests of details on payroll transactions and balances whena. Cutoff tests indicate a substantial amount of accrued payroll expense.b. The level of
The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and thata. Independent internal verification of
Which of the following control activities would be most likely to as- sist in reducing the control risk related to the occurrence of inventory transactions?a. Inventory manager does not have ability
Which of the following would most likely be an internal control activity de- signed to detect errors and fraud concerning the custody of inventory?a. Periodic reconciliation of work in process with
Independent internal verification of inventory (i.e., proper segregation of duties) occurs when employees whoa. Issue raw materials obtain materials requisitions for each issue and prepare daily
An auditor's tests of controls over the issuance of raw materials to pro- duction would most likely includea. Reconciliation of raw materials and work-in-process perpetual inven- tory records to
After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all itemsa. Included in the listing have been
Periodic or cycle counts of selected inventory items are made at various times during the year rather than via a single inventory count at year-end. Which of the following is necessary if the auditor
When auditing prepaid insurance, an auditor discovers that the original insurance policy on a key piece of manufacturing equipment is not available for inspection. The policy's absence most likely
Which of the following internal controls is most likely to justify a reduction of control risk concerning plant and equipment acquisitions?a. Periodic physical inspection and reconciliation of plant
To strengthen control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodica. Increase in insurance coverage.b. Inspection of equipment and
Due to a weakness observed in a client's control over recording retirement of equipment, the auditor may decide toa. Trace additions to the "other assets" account to search for equipment that is
Which of the following procedures is most likely to prevent the improper disposition of equipment?a. Separation of duties between those authorized to dispose of equipment and those authorized to
Which of the following situations would not support the auditor's decision to reduce control risk below maximum for the audit of intangible assets?a. The client employs a qualified specialist who
Which of the following control activities would most likely allow for a reduction in the scope of the auditor's tests of depreciation expense?a. Review and approval of the periodic equipment
When there are numerous property and equipment transactions during the year, an auditor who plans to set the control risk at a low level usually performsa. Substantive analytical procedures for
Which of the following combinations of procedures would an auditor be most likely to perform to obtain evidence about fixed-asset additions?a. Inspecting documents and physically examining assets.b.
A client has established a bond sinking fund to repurchase a portion of the outstanding bonds each year. The auditor can best verify the client's bond sinking fund transactions and year-end bond
The primary responsibility of a bank acting as a registrar of capital stock is toa. Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation.b.
To obtain evidence on the authorization assertion, an auditor should trace corporate stock issuances and treasury stock transactions to thea. Numbered stock certificates.b. Articles of
Although the quantity and content of audit working papers vary with each particular engagement, an auditor's permanent files most likely includea. Schedules that support the current year's adjusting
An auditor compares the current-year revenues and expenses with those of the prior year and investigates all changes exceeding 5 percent. By this procedure the auditor would be most likely to learn
Which of the following comparisons would be most useful to an auditor in evaluating the overall financial results of an entity's operations?a. Prior-year accounts payable to current-year accounts
Dynegy, Inc. is a large energy company based in Houston, Texas. In the spring of 2003, Dynegy restated four years of earnings, increasing the loss from 1999 through the third quarter of 2002 by
The tick mark most likely indicates that the amount was traced to thea. December cash disbursements journal.b. Outstanding check list of the applicable bank reconciliation.c. January cash
The tick mark most likely indicates that the amount was traced to thea. Deposit in transit of the applicable bank reconciliation.b. December cash receipts journal.c. January cash receipts journal.d.
An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. One purpose of this
On receiving the cutoff bank statement, the auditor should voucha. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal.b. Checks dated before year-end
To establish the existence and rights of a long-term investment in the common stock of a publicly traded company, an auditor ordinarily performs a security count ora. Relies on the client's internal
Which of the following is likely to be the most effective audit procedure for verifying dividends earned on investments in publicly traded equity securities?a. Trace deposits of dividend checks to
The audit firm's valuation specialist would likely be brought in to assist in the audit of fair value measurements at an entity when the following is present:a. The entity is a new audit client.b.
An auditor would be most likely to identify a contingent liability by obtaining a(n)a. Accounts payable confirmation.b. Bank confirmation of the client's cash balance.c. Letter from the entity's
An auditor should request that an audit client send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request
Final analytical procedures are generally intended toa. Provide the auditor with a final, overall evaluation of the relationships among financial statement balances.b. Test transactions to
An auditor includes a separate paragraph in an otherwise unmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related
Eagle Company had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle's inventory account. Assuming the
In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or an adverse opinion on a client's financial statements?a. Departure from generally
King, CPA, was engaged to audit the financial statements of Chang Company after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct
Comparative financial statements include the prior year's statements, which were audited by a predecessor auditor. The predecessor's report is not presented along with the comparative financial
When reporting on comparative financial statements, which of the following circumstances should ordinarily cause the auditor to change the previously issued opinion on the prior year's financial
Which of the following best describes the auditor's responsibility for "other information" included in the annual report to stockholders that contains financial statements and the auditor's report?a.
When reporting on financial statements prepared on the basis of accounting used for income tax purposes, the auditor should include in the report a paragraph thata. Emphasizes that the financial
When an auditor is asked to express an opinion on an entity's rent and royalty revenues, he or she maya. Not accept the engagement because to do so would be tantamount to agreeing to issue a
Distinguish between sampling for attributes and sampling for variables.
Describe the nature and components of audit risk.
You are planning interim tests of credit approval procedures for a December 31 year-end client, a manufacturer of name-brand children's toys. The attribute of interest is the credit manager's
Distinguish between consulting and assurance services.
Distinguish between engagement team and firmwide independence.
Engagement team independence:a. Minimizes risk.b. Modernizes the rules of independence.c. Defends against liability.d. Achieves compliance with the standards of field work.
What type of opinions might an auditor issue if a newly adopted accounting principle is not generally accepted? Why?
What are tests of controls?
What are substantive tests of details?
In 2003 and 2004, an auditor found that approximately 4 percent of processed sales invoices were not mathematically accurate. In late 2004, the client implemented a control requiring that all sales
When applying analytical procedures, an auditor could develop an independent expectation of an account balance to compare to:a. Management's unaudited balance.b. Management's unaudited balance
Audit programs should:a. Summarize the nature, timing, and extent of audit procedures applied.b. Be prepared for all financial statement accounts.c. Be prepared by audit partners.d. Be prepared in
The working papers an auditor prepares in a financial statement audit are:a. Owned by the auditor.b. Owned by the audit client.c. The principal support for audit conclusions.d. Retained in the
The most common personal computer application in audit practice is:a. Internet access.b. Spreadsheet software.c. Trial balance preparation.d. Time and expense reports.
The quantity of audit working papers compiled on an engagement would most be affected by:a. Management's integrity.b. Control risk.c. A new engagement.d. The auditor's experience.
What strategies and business characteristics are included in a client strategy template, and how can the template be used in practice?
How is quality defined in an audit service and in an assurance service?
What questions can benchmarking potentially address that historical financial statements alone cannot?
What does a reliability index measure?
In the pharmaceutical industry:a. The cost to develop a prescription drug is less than the cost of a 747 jumbo jet.b. Managed care organizations insure less than 75 percent of U.S. employees.c. The
Merck & Co., Inc., a research-based pharmaceutical company:a. Dominates the market for generic substitutes.b. Offers a full line of prosthetic replacement limbs.c. Shares risk through strategic
Among other things, client strategy templates address:a. The relevance of management's growth strategy and financial and operating goals.b. The reliability of management's strategic alliances and
Compared to financial statement audits, an assurance service on the relevance of performance measures:a. Leverages off of benchmarking.b. Leverages off of a different skill set.c. Ignores measures of
EMC Corp., the world's leading supplier of intelligent enterprise storage and retrieval technology, has pioneered two breakthrough developments in stand-alone digital storage. In the 1980s, when many
Headquartered in Houston, Exxon Corporation enjoys earnings approaching \(\$ 5\) billion dollars, a return on equity exceeding 20 percent, proven reserves over 1 billion gallons, and a market
The Gillette Company, a Boston-based global manufacturer and marketer of consumer products, has a \(\$ 50\) billion market capitalization, among the 50 largest in the U.S. Annual sales exceed \(\$
Coca-Cola, the world's largest manufacturer, distributor, and marketer of soft drink concentrates and syrups, has a market capitalization of \(\$ 165\) billion. Rather than produce finished soft
You are auditing Balforoni Waste, Inc., a publicly traded, solid waste disposal company that dominates the household and commercial hauling markets in the upper Midwest. In conversations with
The financial community has long recognized the importance of-and has endorsed forming-audit committees. For example, audit committees were first encouraged by the Securities and Exchange Commission
An engagement partner distributes a spreadsheet detailing six proposed audit adjustments to the audit committee of Abadon Industries, a publicly traded manufacturer of automotive parts and
Is Share Price Influenced by Netting Passed Adjustments Against Unexpected Gains? One year after Beldon Company management waived audit adjustments aggregating \(\$ 1.5\) million, management
The Boeing Company, one of the world's leading aerospace companies, operates in two principal industries: commercial aircraft (e.g., jet transport aircraft) and information, space, and defense
Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded?a. The billing department supervisor sends a copy of each approved sales
Smith Corporation has numerous customers. A customer file is kept on disk. Each customer file contains a name, an address, a credit limit, and an account balance. The auditor wishes to test this file
If accounts receivable turnover (credit sales/receivables) was 7.1 times in 2009 compared to only 5.6 times in 2010, it is possible that there werea. Unrecorded credit sales in 2010.b. Unrecorded
If the number of days' sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated?a.
Which of the following is most likely to be detected by an auditor's review of a client's sales cutoff?a. Unrecorded sales for the year.b. Lapping of year-end accounts receivable.c. Excessive sales
Negative confirmation of accounts receivable is less effective than posi- tive confirmation of accounts receivable becausea. A majority of recipients usually lack the willingness to respond
An auditor should perform alternative procedures to substantiate the existence of accounts receivable whena. No reply to a positive confirmation request is received.b. No reply to a negative
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion ofa.
In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition, and receiving report are verified. The next step in the system isa. Cancellation
Internal control is strengthened when the quantity of merchandise or- dered is omitted from the copy of the purchase order sent to thea. Department that initiated the requisition.b. Receiving
Which of the following control activities is not usually performed in the accounts payable department?a. Matching the vendor's invoice with the related receiving report.b. Approving vouchers for
In a properly designed purchasing process, the same employee most likely would match vendors' invoices with receiving reports and alsoa. Post the detailed accounts payable records.b. Recompute the
For effective internal control purposes, which of the following individu- als should be responsible for mailing signed checks?a. Receptionist.b. Treasurer.c. Accounts payable clerk.d. Payroll clerk.
Purchase cutoff procedures should be designed to test whether all inventorya. Purchased and received before the end of the year was paid for.b. Ordered before the end of the year was received.c.
The Sarbanes-Oxley Act of 2002 requires management to include a report on the effectiveness of ICFR in the entity's annual report. It also requires auditors to report on the effectiveness of ICFR.
A control deviation caused by an employee performing a control proce- dure that he or she is not authorized to perform is always considered aa. Deficiency in design.b. Deficiency in operation.c.
Which of the following is not a factor that might affect the likelihood that a control deficiency could result in a misstatement in an account balance?a. The susceptibility of the related assets or
Entity-level controls can have a pervasive effect on the entity's ability to meet the control criteria. Which one of the following is not an entity-level control?a. Controls to monitor results of
Which of the following controls would most likely be tested during an interim period?a. Controls over nonroutine transactions.b. Controls over the period-end financial reporting process.c. Controls
If the financial reporting risks for a location are low and the entity has good entity-level controls, management may rely on which of the follow- ing for their assessment.a. Documentation and test

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