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model based testing for embedded systems
Wiley CPA Exam Review Problems And Solutions Vol 2 2011-2012 38th Edition O. Ray Whittington, Patrick R. Delaney - Solutions
In determining whether transactions have been recorded, the direction of the audit testing should be from thea. General ledger balances.b. Adjusted trial balance.c. Original source documents.d. General journal entries.
Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?a. Compare the amounts included in the statement of cash flows to similar amounts in the prior year’s statement of cash flows.b. Reconcile the cutoff bank statements to verify the
The auditor will most likely perform extensive tests for possible understatement ofa. Revenues.b. Assets.c. Liabilities.d. Capital.
In the context of an audit of financial statements, substantive tests are audit procedures thata. May be eliminated under certain conditions.b. Are designed to discover significant subsequent events.c. May be either tests of transactions, direct tests of financial balances, or analytical tests.d.
The objective of tests of details of transactions performed as substantive tests is toa. Comply with generally accepted auditing standards.b. Attain assurance about the reliability of the accounting system.c. Detect material misstatements in the financial statements.d. Evaluate whether
Which of the following is the best example of a substantive test?a. Examining a sample of cash disbursements to test whether expenses have been properly approved.b. Confirmation of balances of accounts receivable.c. Comparison of signatures on checks to a list of authorized signers.d. Flowcharting
To be effective, analytical procedures in the overall review stage of an audit engagement should be performed bya. The staff accountant who performed the substantive auditing procedures.b. The managing partner who has responsibility for all audit engagements at that practice office.c. A manager or
Which of the following comparisons would an auditor most likely make in evaluating an entity’s costs and expenses?a. The current year’s accounts receivable with the prior year’s accounts receivable.b. The current year’s payroll expense with the prior year’s payroll expense.c. The budgeted
Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate thata. Irregularities exist among the relevant account balances.b. Internal control activities are not
An auditor’s analytical procedures most likely would be facilitated if the entitya. Segregates obsolete inventory before the physical inventory count.b. Uses a standard cost system that produces variance reports.c. Corrects material weaknesses in internal control before the beginning of the
For all audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent In the planning stage As a substantive test In the review stagea. Yes No Yesb. No Yes Noc. No Yes Yesd. Yes No No
A basic premise underlying the application of analytical procedures is thata. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations.b. Statistical tests of financial information may lead to the discovery of material misstatements in the financial
Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests?a. Relationships involving balance sheet accounts.b. Transactions subject to management discretion.c. Relationships involving income statement accounts.d. Data subject to audit
Analytical procedures used in the overall review stage of an audit generally includea. Gathering evidence concerning account balances that have not changed from the prior year.b. Retesting control procedures that appeared to be ineffective during the assessment of control risk.c. Considering
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?a. Accounts receivable.b. Interest expense.c. Accounts payable.d. Travel and
An entity’s income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor most likely could have detected this fraudulent financial reporting bya. Tracing a sample of journal entries
An auditor may achieve audit objectives related to particular assertions bya. Performing analytical procedures.b. Adhering to a system of quality control.c. Preparing auditor working papers.d. Increasing the level of detection risk.
What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts when reviewing the financial statements of a nonpublic entity?a. Trend analysis.b. Regression analysis.c. Ratio analysis.d. Risk analysis.
Which of the following would not be considered an analytical procedure?a. Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked.b. Projecting an error rate by comparing the results of a statistical sample with the actual
A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year-end, the auditor would be most concerned abouta. Suspense debits that management believes will benefit future operations.b. Suspense debits
In testing the existence assertion for an asset, an auditor ordinarily works from thea. Financial statements to the potentially unrecorded items.b. Potentially unrecorded items to the financial statements.c. Accounting records to the supporting evidence.d. Supporting evidence to the accounting
In evaluating an entity’s accounting estimates, one of an auditor’s objectives is to determine whether the estimates area. Not subject to bias.b. Consistent with industry guidelines.c. Based on objective assumptions.d. Reasonable in the circumstances.
In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumptions that area. Consistent with prior periods.b. Similar to industry guidelines.c. Objective and not susceptible to bias.d. Deviations from historical patterns.
Which of the following procedures would an auditor ordinarily perform first in evaluating management’s accounting estimates for reasonableness?a. Develop independent expectations of management’s estimates.b. Consider the appropriateness of the key factors or assumptions used in preparing the
Which of the following is not a basic procedure used in an audit?a. Risk assessment procedures.b. Substantive procedures.c. Tests of controls.d. Tests of direct evidence.
In evaluating the reasonableness of an entity’s accounting estimates, an auditor normally would be concerned about assumptions that area. Susceptible to bias.b. Consistent with prior periods.c. Insensitive to variations.d. Similar to industry guidelines.
Which of the following types of audit evidence is the least persuasive?a. Prenumbered purchase order forms.b. Bank statements obtained from the client.c. Test counts of inventory performed by the auditor.d. Correspondence from the client’s attorney about litigation.
Which of the following statements relating to the appropriateness of audit evidence is always true?a. Audit evidence gathered by an auditor from outside an enterprise is reliable.b. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed
Which of the following presumptions is correct about the reliability of audit evidence?a. Information obtained indirectly from outside sources is the most reliable audit evidence.b. To be reliable, audit evidence should be convincing rather than persuasive.c. Reliability of audit evidence refers to
Which of the following types of audit evidence is the most persuasive?a. Prenumbered client purchase order forms.b. Client work sheets supporting cost allocations.c. Bank statements obtained from the client.d. Client representation letter.
Which of the following is a general principle relating to the reliability of audit evidence?a. Audit evidence obtained from indirect sources rather than directly is more reliable than evidence obtained directly by the auditor.b. Audit evidence provided by copies is more reliable than that provided
Which of the following is not an assertion relating to classes of transactions?a. Accuracy.b. Consistency.c. Cutoff.d. Occurrence.
Which of the following best describes what is meant by the term generally accepted auditing standards?a. Procedures to be used to gather evidence to support financial statements.b. Measures of the quality of the auditor’s performance.c. Pronouncements issued by the Auditing Standards Board.d.
Lake, CPA, is auditing the financial statements of Gill Co. Gill uses the EDP Service Center, Inc. to process its payroll transactions. EDP’s financial statements are audited by Cope, CPA, who recently issued a report on EDP’s internal control. Lake is considering Cope’s report on EDP’s
Computer Services Company (CSC) processes payroll transactions for schools. Drake, CPA, is engaged to report on CSC’s policies and procedures implemented as of a specific date. These policies and procedures are relevant to the schools’ internal control, so Drake’s report will be useful in
The auditor who audits the processing of transactions by a service organization may issue a report on controls Implemented Operating effectivenessa. Yes Yesb. Yes Noc. No Yesd. No No
Payroll Data Co. (PDC) processes payroll transactions for a retailer. Cook, CPA, is engaged to express an opinion on a description of PDC’s internal controls implemented as of a specific date. These controls are relevant to the retailer’s internal control, so Cook’s report may be useful in
Dunn, CPA, is auditing the financial statements of Taft Co. Taft uses Quick Service Center (QSC) to process its payroll. Price, CPA, is expressing an opinion on a description of the controls implemented at QSC regarding the processing of its customers’ payroll transactions. Dunn expects to
In assessing the objectivity of internal auditors, an independent auditor shoulda. Evaluate the quality control program in effect for the internal auditors.b. Examine documentary evidence of the work performed by the internal auditors.c. Test a sample of the transactions and balances that the
If the independent auditors decide that the work performed by the internal auditor may have a bearing on their own procedures, they should consider the internal auditor’sa. Competence and objectivity.b. Efficiency and experience.c. Independence and review skills.d. Training and supervisory skills.
In assessing the competence and objectivity of an entity’s internal auditor, an independent auditor would least likely consider information obtained froma. Discussions with management personnel.b. External quality reviews of the internal auditor’s activities.c. Previous experience with the
When assessing the internal auditor’s competence, the independent CPA should obtain information about thea. Organizational level to which the internal auditors report.b. Educational background and professional certification of the internal auditors.c. Policies prohibiting the internal auditors
During an audit an internal auditor may provide direct assistance to an independent CPA in Obtaining an understanding of internal control Performing tests of controls Performing substantive testsa. No No Nob. Yes No Noc. Yes Yes Nod. Yes Yes Yes
An internal auditor’s work would most likely affect the nature, timing, and extent of an independent CPA’s auditing procedures when the internal auditor’s work relates to assertions about thea. Existence of contingencies.b. Valuation of intangible assets.c. Existence of fixed asset
The work of internal auditors may affect the independent auditor’s I. Procedures performed in obtaining an understanding of internal control.II. Procedures performed in assessing the risk of material misstatement.III. Substantive procedures performed in gathering direct evidence.a. I and II
For which of the following judgments may an independent auditor share responsibility with an entity’s internal auditor who is assessed to be both competent and objective?Assessment of Assessment of inherent risk control riska. Yes Yesb. Yes Noc. No Yesd. No No
In assessing the competence of an internal auditor, an independent CPA most likely would obtain information about thea. Quality of the internal auditor’s working paper documentation.b. Organization’s commitment to integrity and ethical values.c. Influence of management on the scope of the
When an examination has been performed on the effectiveness of entity’s internal control over financial reporting and a material weakness has been noted, the practitioner’s report should express an opinion ona. The assertion.b. The subject matter to which the assertion relates.c. Neither of the
When an independent auditor reports on internal control based on criteria established by governmental agencies, the report shoulda. Not include the agency’s name in the report.b. Indicate matters covered by the study and whether the auditor’s study included tests of controls with the procedures
How do the scope, procedures, and purpose of an examination of internal control compare to those for obtaining an understanding of internal control and assessing control risk as part of an audit?Scope Procedures Purposea. Similar Different Similarb. Different Similar Similarc. Different Different
An engagement to examine internal control will generallya. Require procedures that duplicate those already applied in assessing control risk during a financial statement audit.b. Increase the reliability of the financial statements that have already been audited.c. Be more extensive in scope than
Which of the following best describes a CPA’s engagement to report on an entity’s internal control over financial reporting?a. An attestation engagement to form an opinion on the effectiveness of its internal control.b. An audit engagement to provide negative assurance on the entity’s
In reporting on an entity’s internal control over financial reporting, a practitioner should include a paragraph that describes thea. Documentary evidence regarding the control environment factors.b. Changes in internal control since the prior report.c. Potential benefits from the
Should an auditor communicate the following matters to those charged with governance of an audit client?Significant audit adjustments recorded by the entity Management’s consultation with other accountants about significant accounting mattersa. Yes Yesb. Yes Noc. No Yesd. No No
Which of the following matters is an auditor required to communicate to an entity’s audit committee?I. Disagreements with management about matters significant to the entity’s financial statements that have been satisfactorily resolved.II. Initial selection of significant accounting policies in
Which of the following statements is correct about an auditor’s required communication with those charged with governance of an audit client?a. Any matters communicated to the entity’s audit committee also are required to be communicated to the entity’s management.b. The auditor is required
An auditor would least likely initiate a discussion with those charged with governance of an audit client concerninga. The methods used to account for significant unusual transactions.b. The maximum dollar amount of misstatements that could exist without causing the financial statements to be
Which of the following statements is correct concerning an auditor’s required communication with those charged with governance of an audit client?a. This communication is required to occur before the auditor’s report on the financial statements is issued.b. This communication should include
In identifying matters for communication with those charged with governance of an audit client, an auditor most likely would ask management whethera. The turnover in the accounting department was unusually high.b. It consulted with another CPA firm about accounting matters.c. There were any
During the audit the independent auditor identified the existence of a weakness in the client’s internal control and communicated this finding in writing to the client’s senior management and those charged with governance. The auditor shoulda. Consider the weakness a scope limitation and
Which of the following statements concerning material weaknesses and significant deficiencies is correct?a. An auditor should not identify and communicate material weaknesses separately from significant deficiencies.b. Compensating controls may limit the severity of a material weakness or
Which of the following representations should not be included in a report on internal control related matters noted in an audit?a. Significant deficiencies related to internal control exist.b. There are no significant deficiencies in the design or operation of internal control.c. Corrective
Which of the following statements is correct concerning significant deficiencies noted in an audit?a. Significant deficiencies are material weaknesses in the design or operation of specific internal control components.b. The auditor is obligated to search for significant deficiencies that could
Which of the following statements is correct concerning an auditor’s required communication of significant deficiencies?a. A significant deficiency previously communicated during the prior year’s audit that remains uncorrected causes a scope limitation.b. An auditor should perform tests of
An auditor’s letter issued on significant deficiencies relating to an entity’s internal control observed during a financial statement audit shoulda. Include a brief description of the tests of controls performed in searching for significant deficiencies and material weaknesses.b. Indicate that
Which of the following statements is correct concerning significant deficiencies in an audit?a. An auditor is required to search for significant deficiencies during an audit.b. All significant deficiencies are also considered to be material weaknesses.c. An auditor may communicate significant
Which of the following matters would an auditor most likely consider to be a material weakness to be communicated to those charged with governance of an audit client?a. Management’s failure to renegotiate unfavorable long-term purchase commitments.b. Recurring operating losses that may indicate
Which of the following is not an accurate statement about communication of internal control related matters to management on a nonissuer (nonpublic) company?a. The auditor must communicate both material weaknesses and significant deficiencies.b. The auditor must communicate in writing.c. Previously
In general, material fraud perpetrated by which of the following are most difficult to detect?a. Cashier.b. Keypunch operator.c. Internal auditor.d. Controller.
When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performsa. Tests of controls and extensive tests of property and equipment balances at the end of the year.b. Analytical procedures for current year
Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities?a. An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities.b. The internal auditor
Which of the following controls would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?a. Senior management verifies that securities in the bank safe-deposit box are registered in the entity’s name.b. The internal auditor compares the
A company holds bearer bonds as a short-term investment.Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to thea. Chief Accountant.b. Internal Auditor.c. Cashier.d. Treasurer.
Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained?a. Direct access to securities in the safe-deposit box is limited to only one corporate officer.b. Personnel who post investment transactions to the general
Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions?a. Are requests for major repairs approved at a higher level than the department initiating the request?b. Are prenumbered
A weakness in internal control over recording retirements of equipment may cause an auditor toa. Inspect certain items of equipment in the plant and trace those items to the accounting records.b. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment
Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed?a. The investment committee of the board of directors periodically reviews the investment decisions delegated to the treasurer.b. Two company officials
Which of the following is not a control that is designed to protect investment securities?a. Custody over securities should be limited to individuals who have recordkeeping responsibility over the securities.b. Securities should be properly controlled physically in order to prevent unauthorized
Where no independent stock transfer agents are employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates shoulda. Be defaced to prevent reissuance and attached to their corresponding stubs.b. Not be defaced but segregated from other stock
The primary responsibility of a bank acting as registrar of capital stock is toa. Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation.b. Account for stock certificates by comparing the total shares outstanding to the total in the shareholders
Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?a. Are assets that collateralize notes payable critically needed for the entity’s continued existence?b. Are two or more authorized signatures required on checks that repay
Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries?a. Personnel.b. Treasurer.c. Controller.d. Payroll.
The auditor may observe the distribution of paychecks to ascertain whethera. Pay rate authorization is properly separated from the operating function.b. Deductions from gross pay are calculated correctly and are properly authorized.c. Employees of record actually exist and are employed by the
To minimize the opportunities for fraud, unclaimed cash payroll should bea. Deposited in a safe-deposit box.b. Held by the payroll custodian.c. Deposited in a special bank account.d. Held by the controller.
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate thea. Authorization of transactions from the custody of related assets.b. Operational responsibility from the recordkeeping responsibility.c. Human resources function from the controllership
Proper internal control over the cash payroll function would mandate which of the following?a. The payroll clerk should fill the envelopes with cash and a computation of the net wages.b. Unclaimed pay envelopes should be retained by the paymaster.c. Each employee should be asked to sign a
In meeting the control objective of safeguarding of assets, which department should be responsible for Distribution Custody of of paychecks unclaimed paychecksa. Treasurer Treasurerb. Payroll Treasurerc. Treasurer Payrolld. Payroll Payroll
Which of the following controls most likely would prevent direct labor hours from being charged to manufacturing overhead?a. Periodic independent counts of work in process for comparison to recorded amounts.b. Comparison of daily journal entries with approved production orders.c. Use of time
An auditor most likely would assess control risk at a high level if the payroll department supervisor is responsible fora. Examining authorization forms for new employees.b. Comparing payroll registers with original batch transmittal data.c. Authorizing payroll rate changes for all employees.d.
In determining the effectiveness of an entity’s controls relating to the existence or occurrence assertion for payroll transactions, an auditor most likely would inquire about anda. Observe the segregation of duties concerning personnel responsibilities and payroll disbursement.b. Inspect
Which of the following is a control that most likely could help prevent employee payroll fraud?a. The personnel department promptly sends employee termination notices to the payroll supervisor.b. Employees who distribute payroll checks forward unclaimed payroll checks to the absent
An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance thata. Payments to employees are computed at authorized rates.b. Employees work the number of hours for which they are paid.c. Segregation of duties exist between the preparation
The objectives of internal control for a production cycle are to provide assurance that transactions are properly executed and recorded, and thata. Production orders are prenumbered and signed by a supervisor.b. Custody of work in process and of finished goods is properly maintained.c. Independent
Which of the following is a question that the auditor would expect to find on the production cycle section of an internal control questionnaire?a. Are vendors’ invoices for raw materials approved for payment by an employee who is independent of the cash disbursements function?b. Are signed checks
Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate controls over the invoicing function allow goods to be shipped that are not invoiced.The inadequate controls could cause ana. Understatement of revenues, receivables, and inventory.b. Overstatement of revenues
Sound internal control dictates that defective merchandise returned by customers should be presented initially to thea. Salesclerk.b. Purchasing clerk.c. Receiving clerk.d. Inventory control clerk.
Which of the following controls most likely addresses the completeness assertion for inventory?a. Work in process account is periodically reconciled with subsidiary records.b. Employees responsible for custody of finished goods do not perform the receiving function.c. Receiving reports are
A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probablya. Insist that the client perform physical counts of inventory items several times during the year.b. Apply gross profit tests to ascertain the
Which of the following controls most likely would be used to maintain accurate inventory records?a. Perpetual inventory records are periodically compared with the current cost of individual inventory items.b. A just-in-time inventory ordering system keeps inventory levels to a desired minimum.c.
In obtaining an understanding of a manufacturing entity’s internal control over inventory balances, an auditor most likely woulda. Analyze the liquidity and turnover ratios of the inventory.b. Perform analytical procedures designed to identify cost variances.c. Review the entity’s descriptions
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