QUIZ 2 AT REVIEW

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unmodified opinion has been issued is the

• Inherent risk.

• Acceptable audit risk.

• Control risk.

• Detection risk.

Which of the following is not one of the three primary objectives of effective internal control?

• Reliability of financial reporting.

• Efficiency and effectiveness of operations.

• Compliance with laws and regulations.

• Assurance of elimination of business risk.

Which of the following statements concerning the relevance of various types of controls to a financial statement audit is correct?

• All controls are ordinarily relevant to a financial statement audit.

• Controls over safeguarding of assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant.

• Controls over the reliability of financial reporting are ordinarily most directly relevant to a financial statement audit, but other controls may also be relevant.

• An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken.

An auditor should consider two key issues when obtaining an understanding of a client’s internal controls. These issues are

• The effectiveness and efficiency of the controls.

• The frequency and effectiveness of the controls.

• The design and implementation of the controls.

• The implementation and efficiency of the controls.

Authorizations can be either general or specific. Which of the following is not an example of a general authorization?

• Automatic reorder points for raw materials inventory.

• A sales manager’s authorization for a sales return.

• Credit limits for various classes of transactions.

• A sales price list for merchandise.

An auditor should obtain sufficient knowledge of an entity’s information system, including the related business processes relevant to financial reporting, to understand the

• Policies used to detect the concealment of fraud.

• Process used to prepare significant accounting estimates.

• Safeguards used to limit access to computer facilities.

• Procedures used to assure proper authorization of transactions.

Which of the following controls most likely would provide reasonable assurance that all credit sales transactions of an entity are recorded?

• The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.

• The accounting department supervisor independently reconciles, on a monthly basis, the accounts receivable subsidiary ledger to the accounts receivable control account.

• The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

• The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances.

Which of the following control activities in an entity’s revenue/receipt cycle would provide reasonable assurance that all billed sales are correctly posted to the accounts receivable ledger?

• Each shipment of goods on credit is supported by a prenumbered sales invoice.

• The accounts receivable subsidiary ledger is reconciled daily to the accounts receivable control account in the general ledger.

• Daily sales summaries are compared to daily postings to the accounts receivable ledger.

• Each sales invoice is supported by a prenumbered shipping document.

Which of the following controls is not usually performed in the accounts payable department?

• Indicating on the voucher the affected asset and expense accounts to be debited.

• Approving vouchers for payment by having an authorized employee sign the vouchers.

• Accounting for unused prenumbered purchase orders and receiving reports.

• Matching the vendor’s invoice with the related purchase requisition, purchase order, and receiving report.

Which of the following is of least concern to an auditor in assessing the risks of material misstatement?

• Signed checks are distributed by the controller to approved payees.

• Checks are signed by one person.

• Cash receipts are not deposited intact daily.

• Treasurer does not verify the names and addresses of check payees.