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Multiple Choice Questions
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670 views9 pagesAudit Planning and Internal Control Procedures
Multiple Choice Questions
Uploaded by
FlorencioCopyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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/ 9
wah of the following procedures would an
lL ee in planning a financial aiaiaonr wae See rene
an Performing analytical procedures to identify areas that ma
© represent specific risks. ij
b, Reviewing investment transactions of the audit period to
determine whether related parties were credited.
¢. Reading the minutes of stockholder and director meetings to
discover whether any unusual transactions have occurred...
gd. Obtaining = written representation letter from the cent to
emphasize management's responsibilities.
7. Which of the following procedures would an auditor least likely
perform in planning a financial statement audit?
a. Reading the current year’s interim financial statements.
b. Coordinating the assistance of entity personnel in data
preparation.,
c. Discussing matters that may affect the audit with fum
personnel responsible for non-audit services to the entity.
d) Selecting a sample of vendor's invoices for comparison to
receiving reports.
3. The element of the audit planning process most likely to be agreed
upon with the client before implementation of the audit strategy is
the determination of the
a. Rwidence to be gathered to provide a sufficient basis for the
auditor's opinion.
b. Procedures to be undertaken to discover litigation, claims and
assessments.
© Pending legal matters to be included in the inquiry of the client's
attomey.
@ Timing of inventory observation procedures to be performed. Use the following information for questions 4 to 8.
Emong, CPA, ‘is the engagement partner on the financial state,
audit of Open Sesame Computer Services Co. (OSCS) for the yea! ‘Ment
December 31,2010, On January 6, 2011, Bobads, the senior mated
assigned to the engagement, hed the following conversation ain
Emong concerning the planning phase of the audit:
Emong: Do you have all the audit programs updated yet for the'Oscg
engagement? —
Bobads: Mostly. I still have work to do on the fraud risk assessment,
Emong: Why? Our “errors and irregularities” program from last year ig
still OK. It’s passed peer review several times. Besides, we don’t have
specific duties regarding fraud. If we find it, we'll deal with it then.
Bobads: | don’t think so. That new CEO, Koriks, has almost no salary,
mostly bonuses and stock options. Doesn’t that concern you?
Emong: No, Koriks’ employment contract was approved by the Board of
’ Directors just three months ago. It was passed unanimously.
Bobads: I guess so, but Koriks told those stock analysts that OSCS’s
earnings would increase 30% next year. Can Koriks deliver numbers
like that?
Emong: Who knows? We're auditing the 2010 financial statements, not
2011. Koriks will probably amend that forecast every month between
now and next January. -
Bobads: Sure, but ail this may change our other audit programs.
Emong: No, it won't. The programs are fine as is. If you find fraud in
any of your tests, just let me know. Maybe we'll have to extend the
tests. Or maybe we'll just report it to the audit committee.
Bobads: What would they do? Rey is the audit committee’s chair, and
remember, Rey hired Koriks. They've been best friends for years.
Besides, Koriks is calling all the shots now. Larry, the old CEO, is still
on the Board, but Larry’s never around, Larry’s even been skipping the art mectines. Nobody in management or on the Board will stand'up
to Koriks-
ng: That's nothing new. Larry was-like that Sago. Larry
Erieed frequent-disputes with Rommel, CPA, the proicocesn auditor.
Three years ago, Rommel told Larry how ineffective the internal audit
department was then. Next thing you know, Rommel is out and I’m in.
y bother? I'm just’ as. Happy that. those understaffed internal
auditors’ don’t get im our way. Just remember, the bottom line is. . -
are the financial statements fairly presented? And they always have
been. We don’t provide any assurances about fraud. That's
management's job.
Bobads: But what about the lack of segregation. of duties in the cash
disbursements. departments? That clerk could write a check - for.
anything.
Emong; Sure. That’s repartabie ‘condition every year and probably will
be again this year. But:were.talking cost-effectiveness here, not fraud.
We just have to do lots of testing on cash disbursements and report it
again. ;
Bobads: “What about the big layoffs coming up next month? It’s more
than a rumor. Even the employees know it’s going to happen, and
they’re real uptight about it. .
Emong: I know it’s the worst kept secret at OSCS, but we don’t have to
consider that now. Even if it happens, it will only improve next year’s
financial results. Larry shotild have let these people go years ago. Let’s
face it, how else can Koriks ¢ven come close to the 30% earnings
increase next year? ¥
4. Which of the following leaSt likely describe the fraud, risk factors
that are indicated in the’dialogue above?
a. Koriks’ compensation on bonuses and stock options.
b. . Aggressive and unrealiti forecast.
©. Koriks’ employment -contract was approved by the Board. of
a Directors. ; .
Koriks dominates management 5. Which of the following most likely describe the fraud
that are indicated in the dialogue above? Tia fhetaey
a Disputes with Board of Directors and predecessor audite,
b. Rey ia the chair of the audit committee. *
« The financial statements are presented fajtty in prior yenyy,
ad. Existence of internal audit department.
6. Which of the following least likely describe Emong’s misconceng;
regarding the consideration of fraud in the audit of OSCS's aot"
atements that are contained in the dialogue above?
a. Overall responsibilities for frand.
& Lack of concern over Korika' contract.
. Lack of concern over forecast.
@ = Allof the above are misconceptions,
7. Which of the following most likely describe Emong’s misco
regarding the consideration of fraud in the audit of OSCS's financial
‘statements that are contained in the dialogue abore?
@ Lack of concern over internal audit department.
b. Lack of concern over uncorrected reportable conditions.
«. Lack of concern over layoffs.
& The auditor should document
= Fraud risk factors identified as being present during the
auditor's assesament process.
b. The suditor’s response to fraud risk factors identified
@ Bothaandb,
d. Neither a nor b.
Use the following information for questions 9 and 10.
Roy, CPA, is considering audit risk at the financial statement level
planning the audit of Toxic Waste Disposal (TWD) Company's
statements for the year ended December 31, 2010. TWD is a privately
owned entity thet contracta with municipal governments to remare
environmental wastes. Its chief executive officer, Jay Ar, controls
majority of Unt Loard of disectors, Audet risk at the financial statement
level is influenced by the risk of material miastatementa, which May
indicated by a combination of factors related to management.
industry, and the entity. Based only on the informa abon, ‘
% Bee ad dosrmne adivehecs which of the following would
The accounting department i
a of key personne, ‘Xperienced a high rate of tumover
@ This was the year TWD operated at a profit since
because the municipalities increased unde toe
enviroamental purposes.
é TWD's board of directors is controlled by, Jay Ar, the a: i
stockholder, who also acts as the chief executive officer, ae
4. The internal auditor reports to the controller and the controller
reports to Jay Ar,
10, Based only on the information above, which of the following would
most likely increase audit risk?
a. TWD's bank has a loan.officer who meets regularly with TWO's
CEO.and controller to monitor TWD's financial -
b, TWD's employees are paid biweekly.
@. An initial public offering of TWD's stock is planned for late 2012.
d. Roy has audited TWD for five years.
LL. Analytical procedures, which means the analysis of significant
ratios and trends including the resulting — z of
fluctuations and relationships that arc inconsistent with other
relevant information or which deviate from predicted amounts, ure
Mot required to be applied
a. At the planning stage of the audit
©. As substantive procedures
¢. Overall review stage of the audit
d. None of the above
12, Analytical proced! .used in planning an audit focus on
e Understanding the business and in ideniilying areas of potential
risk.
b. Detecting terial misstatements in the financial statemente.
« Obiaining audit evidence about the suitability of design and
effective operation of the accounting and internal control
4. Whether the financial statemente.as a whole are consistent with
the avditor’s knowledge of the business. a eee ee eae te ne er ein eked cg en ee a, |
13. Analytical procedures used in planning an audit
Providing asgurance that potential material misstaett on
ete ditor’n understanding of the clien, ”
Enhancing the audi ‘un jent's g
Asseaning the adequacy of the available evidential mage te
Reducing the scope of tests of controls and substantive teats
14. Which of the fellowing nonfinancial information woulg
modt likely consider in performing analytical procedures durin
Planning phas= of an audit? the
@ Square footage of selling space.
b, Turnover of personnel in the accounting department,
¢. Objectivity of audit committee members.
a. Management's plans to repurchase stock.
'S. The auditor observed that the inventory turnover intreaseg
substantially fron: the prior year, Which of the following is the leas:
likely explanation for the increase in inventory turnover?
& Items shipped on consignment during the last month of the
were recorded as sales, ™
b. Year end purchases of inventory were understated by incorrectly
excluding items received before year end.
@ Year end purchascs of inventory were overstated by incorrecdy
including items received in the first month of the subsequen:
year.
¢. A significant number of credit memos for returned merchandise
that were isaued during the last month of the year were not
BO @ ps
& Items shipped on consignment during the last month of the year
Were recorded as salea,
b. taemificant number of credit memos for returned merchandise
that were issued during the last month of the year were
recorded.
©. A larger percenunge of gales occurred during the Inst moath 0
the year, 44 Compared to the prior 5
a, Salea increased nt a lower percentage than cost of goods sol!
increased, as compared to the prior yeas. 17. The auditor observed that the allowance for doubtful accounts
increased from the prior year, but allowance for doubtful accounts
as . ae oe accounts receivable decreased from prior year.
Whi ¢ following is the least likely explana’ i
tention? © tion for this
A smaller percentage of soles occurred du the Inst month of
‘femn dkionsl on ocean eer. a
b. Items ship; on consignment during th
—_ Seine alee luring t ¢ last month of the year
« A significant number of credit memos for returned merchandise
that were issued during the last month-of the year were not
recorded.
d. A larger percentage of sales occurred during the last month of
the year, as compared to the prior year.
18. The auditor observed that the long term debt increased from the
prior year, but interest cxpense increased a larger-than-
proportionate amount than long-term debt. Which of the following
is the most likely explanution for this situation? -
a. Interest expense decreased, as compared.to the prior year.
b. Short-term borrowing was refinanced on a long term basis at
the same interest rate.,
c. Short-term borrowing was refinanced on a long term basis at
lower interest rate. *
a Short-term barrowing was tefinanced on a long term basis at
higher interest rate.
19. The auditor observed that’ the operating income increased from the
prior year although the entity was less profitable than in the prior
year: Which of the following is the most likely explanation for this
situation?
@ The effective income tax rate increased, ns compared to the prior
year,
b. Interest expense decreased, as comipared to the prior year.
¢; Short-term borrowirig wae refinanced on a long term basis at
“lower interest rate.
d. The effectivg income tax rate decreased, as compared to the
prior year. AVUKMUMOAMM
