Practice Exam #3
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.
d.Consideration of fraud risks discovered during recent audits of other clients.
2.When the auditor suspects that fraud may be present, SAS No. 99 requires the auditor to:
a.terminate the engagement with sufficient notice given to the client.
b.issue an adverse opinion or a disclaimer of opinion.
c.obtain additional evidence to determine whether material fraud has occurred.
d.all of the above.
3.With whom should the auditor communicate whenever he or she determines that fraud may be present, even if the matter might be considered inconsequential?
c.An appropriate level of management that is at least one level above those involved
d.All of the above
4.Management is responsible for:
a.identifying and measuring fraud risks.
b.taking steps to mitigate identified risks.
c.both a and b.
d.neither a nor b.
5.For inquiry to be effective, auditors need to be skilled at listening and _______ an interviewee’s response to questions.
6.Auditors may identify conditions during fieldwork that change or support a judgment about the initial assessment of fraud risks. Which of the following conditions should alert an auditor about the initial assessment?
a.Missing or conflicting evidence
b.Discrepancies in the accounting records
c.Unusual relationships between the auditor and management
d.All of the above
7.As part of designing and performing procedures to address management override of controls, auditors must perform which of the following procedures?
a.Examine journal entries and other adjustments for evidence of possible misstatements due to fraud.
b.Review accounting estimates for biases.
c.Both a and b.
d.Neither a nor b.
8.As part of the brainstorming sessions, auditors are directed to emphasize:
a.areas where fraud may occur.
b.the need for professional skepticism.
c.the audit team’s response to potential fraud risks.
d.all of the above.
9.This type of inquiry often elicits “yes” or “no” responses to the auditor’s uestions.
10.In the fraud triangle, fraudulent financial reporting and misappropriation of assets:
a.share little in common.
b.share most of the same risk factors.
c.share the same three conditions.
d.share most of the same conditions.
11.Which of the following is not an application control?
a.Preprocessing authorization of sales transactions.
b.Reasonableness test for unit selling price of sale.
c.Post-processing review of sales transactions by the sales department.
d.Separation of duties between computer programmer and operators.
12.It is common in IT systems to have certain types of transactions initiated automatically by the computer. Which of the following activities would not be an appropriate candidate for automatic computer initialization?
a.In a bank, periodic calculation of interest on customer accounts.
b.In a manufacturing facility ordering inventory at preset order levels.
c.In a hospital, the ordering of oxygen when pre-specified levels are achieved.
d.In an investment brokerage firm, the sale of pharmaceutical stocks when the Dow-Jones Industrial Average falls below a certain level.
13.Application controls vary across the IT system. To gain an understanding of internal control for a private company, the auditor must evaluate the application controls for every:
a.every audit area.
b.every material audit area.
c.every audit area in which the client uses the computer.
d.every audit area where the auditor plans to reduce assessed control risk.
14.Many clients have outsourced the IT functions. The difficulty the independent auditor faces when a computer service center is used is to:
a.gain the permission of the service center to review their work.
b.find compatible programs that will analyze the service center’s programs.
c.determine the adequacy of the service center’s internal controls.
d.try to abide by the Code of Professional Conduct to maintain the security and confidentiality of client’s data.
15.An auditor who is testing IT controls in a payroll system would most likely use test data that contain conditions such as:
a.time tickets with invalid job numbers.
b.overtime not approved by supervisors.
c.deductions not authorized by employees.
d.payroll checks with unauthorized signatures.
16.Which of the following is not a general control?
a.The plan of organization and operation of IT activity.
b.Procedures for documenting, reviewing, and approving systems and programs.
17.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.
18.______ link equipment in large geographic regions.
a.Cosmopolitan area networks (CANs)
b.Local area networks (LANs)
c.Wide area networks (WANs)
d.Virtual area networks (VANs)
19.When using the test data approach:
a.test data should include only exception conditions.
b.application programs tested must be virtually identical to those used by employees.
c.select data may remain in the client system after testing.
d.none of the above statements is correct.
20.What tools do companies use to limit access to sensitive company data?
d.All of the above.
21.Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal controls, represent the auditor’s:
b.tests of controls.
c.risk assessment procedures.
d.tests of transactions.
22.Which of the following procedures are frequently performed in response to the auditor’s assessment of the risk of material misstatement?
b.Tests of transactions
c.Tests of details of balances
d.All of the above
23.The purpose of tests of controls is to provide reasonable assurance that the:
a.accounting treatment of transactions and balances is valid and proper.
b.internal control procedures are functioning as intended.
c.entity has complied with GAAP disclosure requirements.
d.entity has complied with requirements of quality control.
24.The most important consideration in developing the audit plan and audit program is the:
c.audit firm’s available personnel.
d.the audit risk model used in its planning form.
25.When the auditor finds that there are missing controls in an area of the accounting system, the audit program in that area would be modified in such a way as to:
a.increase the amount of tests of controls.
b.increase the reliance on tests of controls.
c.cause the issuance of a qualified or adverse opinion.
d.eliminate the need for a test of controls.
26.A procedure designed to test for monetary misstatements directly affecting the correctness of financial statement balances is a:
a.test of controls.
c.test of attributes.
d.monetary-unit sampling test.
27.The primary emphasis in most tests of details of balances is on the:
a.balance sheet accounts.
b.income statement accounts.
c.cash flow statement account.
d.all of the above.
28.Which of the following audit tests is usually the least costly to perform?
b.Tests of controls.
c.Tests of balances.
d.Substantive tests of transactions.
29.Auditors who test manual controls that rely on IT-generated reports must consider:
a.the benefits of relying on IT-generated reports.
b.the effectiveness of management’s review.
c.the controls related to the accuracy of the information in the report.
d.both b and c.
30.Which of the following types of evidence is not available when using substantive tests of transactions?
c.Inquiries of the client.
31.Which of the following is not one of the five classes of transactions included in the sales and collection cycle?
a.Sales returns and allowances
b.Charge-off of uncollectible accounts
c.Bad debt expense
32.What event initiates a transaction in the sales and collection cycle?
a.Receipt of cash.
b.Delivery of product to a customer.
c.Identification of a new customer.
d.Customer request for goods.
33.What critical event must take place before goods can be shipped?
a.Determination of correct delivery address
c.Receipt of cash
d.Receipt of sales order from the customer
34.Which of the following is not a business function within the “Sales” class of transactions?
a.Processing customer orders.
c.Processing and recording sales returns and allowances.
35.The process which postpones entries for the collection of receivables to conceal an existing cash shortage is referred to as:
36.When sales invoices are automatically calculated and posted by a computer, the auditor may be able to reduce substantive tests of transactions for which, if any, objective?
d.None of the above
37.The most important aspects of the billing function include all but which of the following?
a.Making sure that all shipments have been billed.
b.Making sure that no shipment has been billed more than twice.
c.Making sure that each shipment is billed at the correct amount.
d.All of the above are correct.
38.In which of the following will sales return and allowances not be recorded?
a.Sales returns and allowances transaction file
b.Accounts receivable master file
c.Cash receipts journal
d.Sales returns and allowances will be recorded in all of the above
39.Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts?
b.Temporary employees in the town where the lockbox is located.
d.None of the above.
40.For most firms, the function of indicating credit approval is recorded on the:
41.Describe the sources of information gathered to assess fraud risks.
When the auditor is assessing fraud risks the following information sources should be considered:
•Information obtained from communications among audit team members about their knowledge of the company and its industry, including how and where the company’s financial statements might be susceptible to material misstatements due to fraud.
•Responses to auditor inquiries of management about their views of the risks of fraud and about existing programs and controls to address specific identified fraud risks.
•Specific risk factors in fraudulent financial reporting or misappropriation of assets.
•Analytical procedures results obtained during planning that indicate possible implausible or unexpected analytical relationships.
•Knowledge obtained through other procedures such as client acceptance and retention decisions, interim review of financial statements, and consideration of inherent and control risks.
42.Describe three computer auditing techniques available to the auditor.
Computer auditing techniques available to the auditor are:
•Test data approach. Using this approach, the auditor develops different types of transactions that are processed under his or her own control using the client’s computer programs on the client’s IT equipment.
•Parallel simulation. Using parallel simulation, the auditor writes a computer program that replicates some part of the client’s application system. The client’s data is then processed using the auditor’s computer program. The auditor then compares the output generated by his or her program with that generated by the client’s program to test the correctness of the client’s program. Generalized audit software may be used.
•Embedded audit module. Using this approach, the auditor inserts an audit module in the client’s application system to capture transactions with characteristics that are of interest to the auditor.
43.There are seven types of audit evidence: physical examination, confirmation, documentation, observation, inquiries of the client, reperformance, and analytical procedures. For each of the following types of audit tests, indicate the type(s) of evidence that can be obtained through the test: (1) tests of controls, (2) substantive tests of transactions, (3) analytical procedures, and (4) tests of details of balances.
1.Tests of controls. Documentation, observation, inquiries of the client, reperformance.
2.Substantive tests of transactions. Documentation, inquiries of the client, reperformance.
3.Analytical procedures. Inquiries of the client, analytical procedures.
4.Tests of details of balances. Physical examination, confirmation, documentation, inquiries of the client, reperformance.
44.State the five classes of transactions that comprise the sales and collection cycle.
The five classes of transactions that comprise the sales and collection cycle are:
•Sales (cash and sales on account)
•Sales returns and allowances
•Charge-off of uncollectible accounts
•Bad debt expense.