Q&A Hero

Q: A well-designed organizational structure at an entity A) has operations and programming personnel tasks combined. B) clearly defines authority and responsibility assignments. C) requires that wage rates are recorded and tracked by the human resources department. D) has the internal audit department report to the Chief Financial Officer.

Q: To help with corporate governance and a positive "tone at the top," the board of directors and its committees, such as the audit committee, should A) rubber stamp the financial statements once per year. B) consist of all members of executive management. C) follow the policies and procedures approved by management. D) take an active role in overseeing the company.

Q: The board of directors is essential for effective corporate governance because it has ultimate responsibility to A) make sure management implements proper internal control and financial reporting processes. B) assist management in the preparation of the financial statements. C) test internal controls and ensure they are working properly. D) provide a report to the auditor confirming that internal controls are working properly.

Q: The control environment consists of actions, policies and procedures that A) reflect the overall attitudes of top management, the directors and the owners of an entity about control and its importance. B) govern access to particular applications, such as how employees use passwords to change master file payroll rates. C) are recorded on the web site, for example, access policies to data. D) help implement the ethical attitudes at the organization, such as a computer usage policy.

Q: The essence of an effectively controlled organization lies in the A) effectiveness of its auditor. B) effectiveness of its internal auditor. C) attitude of its employees. D) attitude of its management.

Q: You, PA, have been assigned as in charge auditor of a long-time audit client of your firm, Mikla Tool Inc. (MTI). MTI is owned by George Mikla, an experienced machinist. George established the business over 20 years ago, and it has grown into a $10 million a year business, with an excellent reputation for high quality machined parts. MTI has regular clients in the automobile parts sector and in the health care sector. The company has recently begun producing parts for environmentally friendly products, such as recycling containers. This is due to the business' versatility in dealing with a variety of metals as well as plastics using both manually controlled and machine controlled (computerized) equipment. The following description is based upon your review of prior files, and planning discussions with personnel at MTI. Equipment suppliers have helped MTI develop efficient operations, by providing sample programs for standard operations and by providing training to employees. One of the suppliers unfortunately sent sample programs that had been infected by a virus. George's daughter, Tiffany, had to cleanse the servers and each of the machines using her copy of the anti-virus software. When contacted, the supplier did not know that the software was infected, and apologized profusely! The company's four CAD/CAM terminals and printers are connected to the company's central local area network. The local area network is maintained by Toni Lee, the owner of a computer shop conveniently located three blocks away. All computer equipment, software and supplies are now purchased from Mr. Lee, who is responsible for attaching and maintaining equipment, upgrading software, and maintaining user profiles on the network. To reduce the amount of Mr. Lee's work as network administrator, he has set up passwords by function. There is one user identification code (userid) and password for accounting (shared by Tiffany, George and the accounting clerk, Isabel). The plant supervisors share another userid that is used for production control and to initiate the timekeeping system every morning. A separate userid and password allowing for only enquiry into the job costing system has also been set up, and can be used by all employees. A standard routine has been set up to back up the accounting systems. Either Tiffany or the accounting clerk inserts one of seven tape cartridges into the system at the end of the day (they are labelled with the day of the week), so that the company has a full set of accounting backups for the week. Tiffany keeps these in her office. These are particularly important, since during the last office move, two years ago, the original software for the accounting system was misplaced. The network has two central servers, eleven user stations, and five printers. The user stations are set up as follows: four CAD/CAM, two time keeping, two production planning and control, two accounting and one for George. It is almost ten years ago that Tiffany arranged for the implementation of the network, and the purchase of the standard integrated accounting packages (general ledger, order entry/accounts receivable, purchases/payable and payroll), and for the purchase of the job costing and time keeping systems. A variety of reports are printed daily, weekly, or monthly from the job costing system which are used for monitoring employee hours, the status of the jobs, the costs accumulated for particular jobs, and the work in progress inventory. The weekly report of hours from the job costing system is approved by the production supervisors, and is used as an input source for hours worked into the payroll system. The accounting clerk enters the hours into the accounting system, so that weekly payroll cheques and reports can be produced. The accounting clerk handles most data entry. Tiffany is really pleased with their accounting clerk, Isabel, who has been with the company for three years. She insists that fate had a hand in getting Isabel working for MTI. Isabel had been 'pounding the pavement,' having recently immigrated, and had no Canadian business experience. Her accounting skills were rudimentary, but she quickly learned the accounting software, and has reorganized the filing systems. Tiffany considers her as indispensable. When Isabel goes on holiday, many things just don't get done! Tiffany can do the payroll in a pinch, but accounts payable and cash disbursements are always done by Isabel. If she's away, suppliers are simply told to wait, or Tiffany issues a manual cheque for recording later. Isabel is very good at clearing queries from suppliers, and ensuring that new suppliers are set up properly. The purchasing supervisor and his staff rely on Isabel, for she checks the account allocation of purchases and makes any necessary corrections. Tiffany or George are signing officers, although Tiffany realizes that she checks supporting materials more thoroughly than George, who usually just queries Isabel verbally about larger purchases. In the past, MTI's audit has been entirely substantive. However, your partner has decided that with MTI's growth, it is time for the company to consider adding additional internal controls. Accordingly, he has asked you to draft a management letter, to be addressed to George and Tiffany. Required: A) Prepare a draft management letter, clearly identifying the weaknesses (W), impact or implications of the weaknesses (I), and recommendations for improvement (R). [The following is a theory question that does not require examples from the case, although examples could be used.] B) Explain how the control environment and general IT (information technology) controls are related. Describe the impact of the control environment and of general IT controls upon different types of application controls and upon the audit process. Answer:

Q: Joan is the owner of a small manufacturing company. In prior years, your firm has conducted a review engagement of the company. However, this year, Joan obtained a loan from the federal business development bank, and is required to have an audit of her financial statements. When you started asking about controls and procedures at the company, Joan got pretty upset. "All you need to be concerned about is the numbers! Why are you asking all of these questions? It takes too much time away from my staff to answer these questions! Just check the numbers and let us get on with our work!" You calmed her down a bit, and reminded her about the general discussion that occurred with the engagement letter. You invited her for coffee to briefly explain the following items: 1. Why auditors are concerned about internal controls 2. Why auditors are required to be concerned about internal controls 3. What you need to do to understand internal controls 4. What you will do once you have documented your understanding of internal controls Required: Explain what you would say to Joan.

Q: A) Describe the three basic concepts (assumptions) underlying the study of internal control and assessment of control risk. B) Describe the inherent limitations of internal control.

Q: A) Describe the three broad objectives of management when designing an effective system of internal control. B) Describe the aspect of internal control with which auditors are primarily concerned with for a financial statement audit.

Q: Which of the following is a factor that relates to "attitudes or rationalization" to commit fraudulent financial reporting? A) Significant accounting estimates involving subjective judgments B) Excessive pressure for management to meet debt repayment requirements C) Management's practice of making overly aggressive forecasts D) High turnover of accounting, internal audit and information technology staff

Q: Which of the following is a factor that relates to "incentives or pressures" to commit fraudulent financial reporting? A) Significant accounting estimates involving subjective judgments B) Excessive pressure for management to meet debt covenant requirements C) Management's practice of making overly achievable forecasts D) High turnover of accounting, internal audit and information technology staff

Q: Fraud risk factors are examples of factors that increase the risk of fraud. Which of the following is an example of a management "opportunities" risk factor? A) The company has lost a major account and income is falling. B) Two major competitors have gone bankrupt as margins decline in the industry. C) The chief executive officer owns forty percent of the outstanding share capital. D) New accounting standards provide three different methods for valuing financial instruments.

Q: Fraud risk factors are examples of factors that increase the risk of fraud. Which of the following is an example of a management "incentives or pressures" risk factor? A) Customer demand for a new product line was significantly less than expected. B) Management and the auditors disagree upon how to value a large contract in progress. C) There is only one board member who understands financial statements, and she has suffered a heart attack. D) There has been significant turnover in the accounting department in the last year.

Q: Three conditions for fraud are referred to as the "fraud triangle." One of the sides of this triangle is incentives or pressures. The other two sides are A) opportunities, a desire to meet debt repayment obligations. B) opportunities, attitudes or rationalizations. C) attitudes or rationalizations, the need to maintain stock prices. D) the need to maintain stock prices and meet debt repayment obligations.

Q: An act of two or more employees to work together to misstate records is called A) malfeasance. B) collusion. C) defalcation. D) felony.

Q: Which of the following best describes the inherent limitations that should be recognized by an auditor when considering the potential effectiveness of an accounting system? A) Procedures whose effectiveness depends on segregation of duties can be circumvented by collusion. B) The competence and integrity of client personnel provides an environment conducive to accounting control and provides assurance that effective control will be achieved. C) Procedures designed to assure the execution and recording of transactions in accordance with proper authorizations are effective against irregularities perpetrated by management. D) The benefits expected to be derived from effective accounting system usually do not exceed the costs of such control.

Q: It is important for the public accountant to consider the competence of the audit clients' employees because their competence bears directly and importantly upon the A) cost/benefit relationship of internal controls. B) achievement of the objectives of the system of internal control. C) comparison of recorded accountability with assets. D) timing of the tests to be performed.

Q: Internal controls can never be regarded as completely effective. Even if systems personnel could design an ideal system, its effectiveness depends on the A) adequacy of the computer system. B) proper implementation by management. C) ability of the internal audit staff to maintain it. D) competency and dependability of the people using it.

Q: The auditor may identify some risks that cannot be effectively tested by substantive tests alone, for example, when there are paperless transactions (perhaps using EDI - electronic data interchange). Then the auditor is required, to address those risks, to A) assess the design effectiveness of relevant controls, and test them B) obtain an understanding of the controls and test them if reliance is intended C) obtain an understanding of the controls and assess their design effectiveness D) test the controls that address the paperless aspects of the transactions

Q: The accuracy of the results of the accounting system (account balances) is heavily dependent upon the A) knowledge and skills of the auditor. B) adequacy of the entity level controls. C) accuracy of the inputs and processing (transactions). D) training provided to the personnel.

Q: To comply with the second examination standard, the auditor need not be concerned with all areas of internal control that apply to management. The auditor's primary concerns are with the system's ability to A) maintain reliable control systems pertaining to financial transactions. B) promote efficiency and encourage adherence to policy. C) prevent and detect financial statement fraud and error. D) provide reliable data and safeguard assets.

Q: Which one of the following controls would be of concern to management, but not to the auditor? Controls over the A) collection of accounts receivable amounts. B) entry of payroll wage rates into the computer systems. C) distribution of promotional information to present and potential clients. D) cost of inventory items as recorded in the perpetual inventory system.

Q: Carrie is the manager of the Bay Street Pharmacy. Carrie is considering implementing a security tag system to reduce the losses related to stolen goods at their store. The system Carrie is looking at currently costs $60,000 and is expected to be effective for 5 years. In order to justify the implementation of the security tag system, average theft per year should be at least A) $1,000. B) $12,000. C) $60,000. D) theft should be prevented at all costs.

Q: Management safeguards assets by A) having the internal auditors conduct periodic counts of physical assets. B) controlling access and by comparison of physical items to records. C) requiring the external auditors to do surprise audits. D) having management sign a management representation letter.

Q: Management's objectives with respect to internal control include A) having reasonable assurance that the financial statements are in accordance with IFRS or ASPE. B) ensuring that all policies and procedures are clearly documented to reduce employee training costs. C) preventing fraud and illegal activities at all costs. D) providing reasonable assurance that the goals and objectives important to the entity have been met.

Q: A system of internal control consists of policies and procedures designed to provide management with A) reasonable assurance that the company achieves its objectives. B) assurance that fraud will be prevented. C) reasonable assurance that fraud will be detected. D) assurance that the firm's resources will be used in the optimal way.

Q: 9.1 State the three primary objectives of effective internal control

Q:

Q: A major benefit of computerized analytical procedures is theA) ease of doing the calculations.B) ease of updating the calculations.C) ease of correcting math calculations.D) ability to push the work down to lower levels of the audit staff to do the analysis.

Q: The most common statistical technique for analytical procedures isA) analysis of variance.B) bell-curve analysis.C) time-series analysis.D) regression analysis.

Q:

Q:

Q: If most companies in the industry use FIFO inventory valuation and straight-line depreciation, and the audit client uses LIFO and double-declining balance, comparisons of client and industry dataA) will be a meaningful highlight of the result of these differences in accounting methods.B) will enable the auditor to spot errors but not irregularities.C) will enable the auditor to spot irregularities but not errors.D) may not be meaningful, affecting the comparability of data.

Q:

Q:

Q: For some audit objectives and in some circumstances, analytical procedures may be the most effective procedure to apply. The objectives that most likely would benefit from the use of analytical review with respect to the allowance for uncollectible accounts would beA) validity of sales transactions recorded for individual customer accounts.B) classification and completeness of transactions, accuracy of judgments and estimates.C) collectability of individual customer account balances.D) allocation of transactions to the proper accounting period.

Q:

Q: When a higher than normal ratio of long-term debt to net worth is coupled with a lower than average ratio of profits to total assets, the companyA) is highly successful.B) is comparable with industry standards.C) has a high risk of financial failure.D) has a liquidity problem.

Q: When an auditor calculates the gross margin as a percent of sales and compares it with previous periods, this type of evidence is calledA) physical examination.B) analytical procedures.C) observation.D) enquiries of client.

Q:

Q: The Bank of New Haven relies heavily on computers to calculate the settlements of amounts due to other banks. Given that the process is highly automated, the auditor would not be able to obtain sufficient evidence with substantive procedures. The auditors of the Bank of New Haven shouldA) design and perform tests of controls.B) qualify the opinion for the section on settlements.C) hire a specialist to give an opinion on the proper functioning of the system.D) perform a walkthrough of the system.

Q: Most auditors prefer to replace external confirmation with analytical procedures whenever possible because theA) analytical procedures are more reliable.B) external confirmations are more expensive.C) analytical procedures are more persuasive.D) tests of details are more difficult to interpret.

Q:

Q:

Q:

Q:

Q:

Q:

Q: Below are 12 audit procedures. Classify each procedure according to the following types of audit evidence: (1) inspection, (2) external confirmation, (3) recalculation, (4) observation, (5) inquiry of the client, (6) reperformance, and (7) analytical procedure.

Q:

Q:

Q:

Q: When comparing the reliability of external versus internal documents, the external documents are generally consideredA) more reliable.B) less reliable.C) equally reliable.D) unreliable.

Q:

Q:

Q:

Q: Inquiry is a valuable technique during the planning phase of the audit because itA) involves the rechecking of controls to ensure that they are conducted accurately.B) is a type of audit evidence that provides a very high level of assurance.C) is conclusive evidence from an independent source.D) helps obtain information about how procedures and internal controls operate.

Q: Although considerable evidence is obtained from the client through inquiry, it usually cannot be regarded as conclusive becauseA) the client may not have sufficient knowledge to answer the question.B) it is not from an independent source and may be biased.C) there is a risk that the auditor will misinterpret what the client said.D) the client cannot be trusted to provide persuasive information.

Q:

Q: An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use ofA) tests of details of balances.B) procedures to obtain an understanding of internal controls.C) specialized audit programs.D) analytical procedures.

Q: Reperformance is often conducted using computer-assisted audit techniques. The most effective use of generalized audit software for reperformance would be toA) recalculate a whole class of transactions, helping to quantify dollar errors.B) determine on a test basis whether posting and summarization is performed accurately.C) confirm whether evidence has been recorded for the entire period under audit.D) select a sample of transactions for recalculation.

Q: Mary is entering a fictitious transaction in the sales data entry system to see if the system will reject the order for a client that is already exceeding its credit limit. Mary is usingA) observation.B) analytical procedures.C) test data.D) generalized audit software.

Q: Confirmations from outside organizations such as banks and law firms areA) a highly regarded and often-used type of evidence.B) expensive and rarely used during the audit.C) difficult to obtain and infrequently required.D) internal documents that provide low quality evidence.

Q: Observation is an important audit technique where the auditor can use sight, hearing, touch, and smell. Observation needs to be used together with other audit techniques becauseA) employees will often perform their procedures consistently over time.B) it is a high cost technique that is rarely used by auditors.C) it is a point in time technique limited to the time of the observation.D) auditors may not accurately observe and interpret what is happening.

Q:

Q:

Q:

Q: Inspection of assets is not a sufficient form of evidence when the auditor wants to determine theA) existence of the asset.B) quantity and description of the asset.C) condition or quality of the asset.D) ownership of the asset.

Q: For income statement accounts, evidence is more persuasive if there is a sample fromA) the entire period under audit.B) the period closest to the end of the fiscal period.C) at least three months of the fiscal year.D) December, since this would include large holiday sales.

Q:

Q: Which of the following is an example of subjective evidence?A) a positive confirmation of an account receivableB) a bank confirmationC) inquiries of the credit manager about the collectability of noncurrent accounts receivableD) the physical count of securities and cash

Q:

Q: Gina is performing the audit of the payables section of Reno Inc. She wants to confirm the payables from an independent source. Which of the following sources would represent an independent provider?A) Confirm an interco payable with the CEO of the US branch of Reno Inc.B) Confirm the account payable with Clarkson Corp. The CFO of Clarkson is the wife of the controller of Reno.C) Confirm the line of credit balance with Citizen Bank. Reno does all its banking with Citizen and it also has a long-term loan there.D) Confirm the account payable to Suco Inc. The CEO of Reno owns 30% of the outstanding shares of Suco.

Q: Evidence can be obtained from others, or provided by the auditor, who has good knowledge of each industry but is not an expert. Which of the following types of evidence is considered to be most reliable?A) examination of diamond inventory by the auditorB) external confirmations from individual owners of condominium unitsC) examination of oil and gas reserves by the auditorD) external confirmations from financial institutions

Q:

Q: Which of the following types of evidence would be considered most reliable in the audit of accounts payable?A) review of internal budgets for the period under auditB) inquiry of management with respect to recent purchasesC) inspection of client purchase ordersD) inspection of supplier invoices

Q: Which of the following types of evidence is most appropriate in the audit of fixed assets?A) recalculation of the amortization schedule provided by the clientB) auditor inspection of recently acquired fixed assetsC) reperformance of the posting of depreciation expenses to the general ledgerD) analytical review to assess the reasonableness of depreciation expense

Q: Which of the following audit techniques would the auditor use to test the completeness of sales (i.e. test whether shipments have been billed to customers)?A) trace shipping documents to duplicate sales invoicesB) trace duplicate sales invoices to shipping documentsC) match data file versions of sales invoices to paper recordsD) look at subsequent payments after the year end for payments for outstanding invoices

Q: The auditor is tracing from the duplicate sales invoices to related shipping documents with respect to the occurrence transaction-related audit objective. This type of evidence isA) independent.B) relevant.C) timely.D) related to external documentation.

Q: To improve the appropriateness of audit evidence, the auditor shouldA) make sure to select a larger sample size for the items being tested.B) add additional population items into the sample, improving sample variety.C) select audit procedures that improve the reliability of the evidence.D) select a smaller sample size that is statistically valid.