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Question 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

1. Because of the risk of material misstatements due to fraud (fraud risk), an audit of financial statements in accordance with generally accepted auditing standards should be performed with an attitude of objective judgment. independent integrity. professional skepticism. impartial conservatism. 2. Which of the following circumstances is most likely to cause an auditor to consider whether material misstatements due to fraud exist in an entitys financial statements? Management places little emphasis on meeting earnings projections of external parties. The board of directors oversees the financial reporting process and internal control. Significant deficiencies in internal control previously communicated to management have been corrected Transactions selected for testing are not supported by proper documentation. 3. Which of the following characteristics is most likely to heighten an auditors concern about the risk of material misstatements due to fraud in an entitys financial statements? The entitys industry is experiencing declining customer demand. Employees who handle cash receipts are not bonded Internal auditors have direct access to the board of directors and the entitys management. The board of directors is active in overseeing the entitys financial reporting policies. 4. Which of the following circumstances is most likely to cause an auditor to increase the assessment of the risk of material misstatement of the financial statements due to fraud? Property and equipment are usually sold at a loss before being fully depreciated Unusual discrepancies exist between the entitys records and confirmation replies. Monthly bank reconciliations usually include several in-transit

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items. Clerical errors are listed on a computer-generated exception report. 5. If an independent audit leading to an opinion on financial statements causes the auditor to believe that a material misstatement due to fraud exists, the auditor should first consider the implications for other aspects of the audit and discuss the matter with the appropriate levels of management. make the investigation necessary to determine whether fraud has actually occurred. request that management investigate to determine whether fraud has actually occurred consider whether fraud was the result of a failure by employees to comply with existing controls. 6. As a result of analytical procedures, the auditor determines that the gross profit percentage has increased from 30 percent in the preceding year to 40 percent in the current year. The auditor should document managements plans for maintaining this trend. evaluate managements performance in causing the improvement in gross profit. require footnote disclosure. consider the possibility of fraud or other misstatements in the financial state ments. 7. Cash receipts from sales on account have been misappropriated. Which of the following acts will conceal this embezzlement and be least likely to be detected by the auditor? Understating the sales journal. Overstating the accounts receivable control account. Overstating the accounts receivable subsidiary records. Understating the cash receipts journal. 8. An auditor discovers that a clients accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate that fictitious credit sales have been recorded during the year. employees have stolen inventory just before year-end. the client recently tightened its credit-granting policies. an employee has been lapping receivables in both years. 9. Which of the following internal controls will best detect the theft

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of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars? Maintain a perpetual inventory of only the more valuable items, with frequent periodic verification of the validity of the perpetual inventory records Have an independent auditing firm examine and report on managements assertion about the design and operating effectiveness of the control activities relevant to inventory Have separate warehouse space for the more valuable items, with sequentially numbered tags. Require an authorized officers signature on all requisitions for the more valuable items 10. An IT system is designed to ensure that management possesses the information it needs to carry out its functions through the integrated actions of data-gathering, analysis, and reporting functions. a computer-based information retrieval and decision-making system. statistical and analytical procedures functions. production budgeting and sales forecasting activities. 11. Which of the following conditions will not normally cause the auditor to question whether material misstatements exist? Bookkeeping errors are listed on an IT-generated error listing. Differences exist between control accounts and supporting master files. Transactions are not supported by proper documentation. Differences are disclosed by confirmations. 12. As general IT controls weaken, the auditor is most likely to reduce testing of automated application controls done by the computer increase testing of general IT controls to conclude whether they are operating effectively. expand testing of automated application controls used to reduce control risk to cover greater portions of the fiscal year under audit. ignore obtaining knowledge about the design of general IT controls and whether they have been implemented. 13. Which of the following is an example of an application control? The client uses access security software to limit access to each
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of the accounting applications. Employees are assigned a user ID and password that must be changed every quarter. ) The sales system automatically computes the total sale amount and posts the total to the sales journal master file. Systems programmers are restricted from doing applications programming functions. 14. Which of the following client IT systems generally can be audited without examining or directly testing the computer programs of the system? A system that performs relatively uncomplicated processes and produces detailed output A system that affects a number of essential master files and produces limited output A system that updates a few essential master files and produces no printed output other than final balances A system that does relatively complicated processing and produces little detailed output 15. Which of the following is true of generalized audit software programs? They can be used only in auditing online computer systems. They can be used on any computer without modification. They each have their own characteristics that the auditor must carefully consider before using in a given audit situation. They enable the auditor to do all manual tests of control procedures less expensively. 16. Assume that an auditor estimates that 10,000 checks were issued during the accounting period. If an automated application control that does a limit check for each check request is to be subjected to the auditors test data approach, the sample should include approximately 1,000 test items. a number of test items determined by the auditor to be sufficient under the circumstances. a number of test items determined by the auditors reference to the appropriate sampling tables. one transaction. 17. An auditor will use the test data approach to obtain certain assurances with respect to the input data.

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machine capacity. procedures contained within the program. degree of data entry accuracy. 18. The auditor looks for an indication on duplicate sales invoices to see whether the invoices have been verified. This is an example of a test of details of balances. a test of control. a substantive test of transactions. both a test of control and a substantive test of transactions. 19. Analytical procedures may be classified as being primarily tests of controls. substantive tests. tests of ratios. tests of details of balances. 20. To support the auditors initial assessment of control risk below maximum, the auditor performs procedures to determine that internal controls are operating effectively. Which of the following audit procedures is the auditor performing? Tests of details of balances Substantive tests of transactions Tests of controls Tests of trends and ratios 21. The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process. To minimize this risk, the auditor relies primarily on substantive tests. tests of controls. internal control. statistical analysis. 22. Which of the following statements about tests of controls is most accurate? Auditing procedures cannot concurrently provide both evidence of the effectiveness of internal control procedures and evidence required for substantive tests. Tests of controls include observations of the proper segregation of duties. Tests of controls provide direct evidence about monetary misstatements in transactions.
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Tests of controls ordinarily should be performed as of the balance sheet date or during the period subsequent to that date. 23. Which of the following will be least likely to be included in an auditors tests of controls? Documentation Observation Inquiry Confirmation 24. The primary objective of performing tests of controls is to obtain a reasonable degree of assurance that the clients internal controls are operating effectively on a consistent basis throughout the year. sufficient, appropriate audit evidence to afford a reasonable basis for the auditors opinion, without the need for additional evidence. assurances that informative disclosures in the financial statements are reasonably adequate. knowledge and understanding of the clients prescribed procedures and methods. 25. Which of the following is ordinarily considered a test of control audit procedure? Sending confirmation letters to banks. Counting and listing cash on hand. Examining signatures on checks. Preparing reconciliations of bank accounts as of the balance sheet date. 26. A conceptually logical approach to the auditors evaluation of internal control consists of the following four steps: I. Determining the internal controls that should prevent or detect errors and fraud. II. Identifying control deficiencies to determine their effect on the nature, timing, or extent of auditing procedures to be applied and suggestions to be made to the client. III. Determining whether the necessary procedures are prescribed and are being followed satisfactorily. IV. Considering the types of errors and fraud that can occur. What should be the order in which these four steps are performed? I, II, III, and IV I, III, IV, and II III, IV, I, and II

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IV, I, III, and II 27. The sequence of steps in gathering evidence as the basis of the auditors opinion is substantive tests, initial assessment of control risk, and tests of controls initial assessment of control risk, substantive tests, and tests of controls. initial assessment of control risk, tests of controls, and substantive tests. tests of controls, initial assessment of control risk, and substantive tests. 28. When a customer fails to include a remittance advice with a payment, it is common for the person opening the mail to prepare one. Consequently, mail should be opened by which of the following four company employees? Credit manager Sales manager Accounts receivable clerk Receptionist 29. A key internal control in the sales and collection cycle is the separation of duties between cash handling and record keeping. The objective most directly associated with this control is to verify that cash receipts recorded in the cash receipts journal are reasonable. cash receipts are correctly classified. recorded cash receipts result from legitimate transactions. existing cash receipts are recorded. 30. Which of the following internal controls will most likely reduce write-offs of uncollectible accounts receivable? Employees responsible for authorizing sales and write-offs of uncollectible accounts receivable are denied access to cash. Shipping documents and sales invoices are matched by an employee who does not have the authority to write off uncollectible accounts receivable. Employees involved in the credit-granting function are separated from the sales function. Accounts receivable master file records are reconciled to the control account by an employee who is not involved in the creditgranting function.

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31. A manufacturing company received a substantial sales return in the last month of the year, but the credit memorandum for the return was not prepared until after the auditors had completed their field work. The returned merchandise was included in the physical inventory. Aged trial balance of accounts receivable is prepared Credit memoranda are pre-numbered and all numbers are accounted for A reconciliation of the trial balance of customers accounts with the general ledger control is prepared periodically. Receiving reports are prepared for all materials received and such reports are accounted for on a regular basis. 32. Which of the following controls most likely will be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs? Employees responsible for authorizing sales and bad debt write-offs are denied access to cash. Shipping documents and sales invoices are matched by an employee who does not have the authority to write off bad debts. Employees involved in the credit-granting function are separated from the sales function. Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit. 33. A sales invoice for $5,200 was computed correctly but, by mistake, was key-entered as $2,500 to the sales journal and to the accounts receivable master file. The customer remitted only $2,500, the amount on his monthly statement. Prelistings and predetermined totals are used to control postings. Sales invoice numbers, prices, discounts, extensions, and footings are independently checked. The customers monthly statements are verified and mailed by a responsible person other than the bookkeeper who prepared them. Unauthorized remittance deductions made by customers or other matters in dispute are investigated promptly by a person independent of the accounts receivable able function. 34. Copies of sales invoices show different unit prices for apparently identical items. All sales invoices are checked as to all details after their preparation.

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Differences reported by customers are satisfactorily investigated. Statistical sales data are compiled and reconciled with recorded sales. All sales invoices are compared with the customers purchase orders 35. Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities? Unrecorded acquisitions. Unrecorded sales. Merchandise acquisitions being charged to selling and general expense. Fictitious sales. 36. An auditor is performing substantive tests of transactions for sales. One step is to trace a sample of debit entries from the accounts receivable master file back to the supporting duplicate sales invoices. What will the auditor intend to establish by this step? Sales invoices represent existing sales. All sales have been recorded. All sales invoices have been correctly posted to customer accounts Debit entries in the accounts receivable master file are correctly supported by sales invoices. 37. To verify that all sales transactions have been recorded, a substantive test of transactions should be completed on a representative sample drawn from entries in the sales journal. the billing clerks file of sales orders. a file of duplicate copies of sales invoices for which all pre-numbered forms in the series have been accounted. the shipping clerks file of duplicate copies of bills of lading. 38. Which audit procedure is most effective in testing credit sales for overstatement? Trace a sample of postings from the sales journal to the sales account in the general ledger Vouch a sample of recorded sales from the sales journal to shipping documents.

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Prepare an aging of accounts receivable. Trace a sample of initial sales orders to sales recorded in the sales journal. 39. NO MC Questions for chapter 15 no yes

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