Which of the following questions should not appear in an internal control questionnaire relating to cash disbursements?
Are prelistings made of all cash receipts?Prelisting of cash receipts is performed in the mail room as part of the sales-receivables-cash receipts cycle. This question is inappropriate in a questionnaire relating to cash disbursements. The questionnaire should list inquiries as to whether (1) supporting documentation is mutilated upon signing, (2) issuing a check to cash or bearer is prohibited, (3) signing blank checks is prohibited, (4) unused checks are controlled, (5) voided checks are retained and accounted for, and (6) the check signer is responsible for mailing signed checks.
Under the ethical standards of the profession, which of the following investments by a CPA in a corporate client is an indirect financial interest?
An investment held through a regulated mutual fund.Independence is impaired if, during the period of the professional engagement, a covered member had a direct or material indirect financial interest in the client. Ownership of fund shares is a direct financial interest in the fund. Underlying investments in the fund are indirect interests.
Which of the following most likely would indicate the existence of related parties?
Borrowing money at an interest rate significantly below the market rate.The following suggest possible related party transactions: (1) exchanging property for similar property in a nonmonetary transaction, (2) borrowing or lending at rates significantly above or below market rates, (3) selling realty at a price materially different from its appraised value, and (4) making loans with no scheduled repayment terms.
A senior auditor conducted a dual-purpose test on a client’s invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed?
Tests of controls and tests of details.Dual-purpose testing involves performing (1) a test of details and (2) a test of controls on the same transaction. Tests of controls are used to determine whether controls are operating effectively. Determining whether the invoice was approved verifies that the control was effective. Ascertaining the amount and terms of the invoice is used to detect material misstatements in financial statement assertions, which is a test of details.
Although substantive tests may support the accuracy of underlying information used in monitoring, these tests may provide no affirmative evidence of the effectiveness of monitoring controls because
The information used in monitoring may be accurate even though it is subject to ineffective control.When obtaining an understanding of each of the five components of internal control (including monitoring), the auditor must perform procedures to understand the design of relevant controls and must determine whether controls have been implemented. If (s)he intends to rely on the controls, (s)he must also determine their effectiveness. However, when controls based on monitoring leave no audit trail, for example, documentation of design or operation, evidence about effectiveness of design or operation may be obtained only by inquiries, observations, and computer-assisted audit methods. Moreover, substantive procedures likewise may provide no affirmative evidence of the effectiveness of monitoring controls because the information may be accurate even though controls over its creation are ineffective. Thus, the ineffectiveness of monitoring would not be revealed by substantive procedures unless the detection of material misstatements resulted in performance of additional audit procedures directed at the controls.
What assurance does the auditor provide that errors, fraud, and direct-effect noncompliance with laws and regulations that are material to the financial statements will be detected?Errors:Fraud:
Direct-effect noncompliance:
ReasonableReasonableReasonableThe auditor’s responsibility for detection of noncompliance having direct and material effects and of material errors and fraud is to design the audit to provide reasonable assurance of detection.
Tests of controls in a financial statement audit are least likely to be omitted with regard to
Accounts representing many transactions.For high-volume accounts, the auditor ordinarily tests controls because of efficiency considerations. The auditor tests suitably designed controls given an expectation that controls are operating with some degree of effectiveness.
Which of the following auditor concerns usually is so serious that the auditor might conclude that a financial statement audit cannot be conducted?
The integrity of the entity’s management is suspect.The financial statements contain assertions by management, so the integrity of management is crucial to the auditor’s evaluation of the (1) sufficiency and (2) appropriateness (relevance and reliability) of the evidence obtained to support those assertions. Thus, if the integrity of management is suspect, the auditor may be unable to obtain sufficient appropriate evidence to support an opinion.
Which of the following is an operating control over the staffing function?
Making background checks on all new hires.Staffing provides the necessary personnel to achieve organizational objectives efficiently. Because honest and capable personnel also help create an environment that promotes effective internal control, hiring policies and procedures are crucial. Background checks, for example, may screen out potential hirees of questionable character.
Which of the following observations made during the preliminary survey of a local department store’s disbursement cycle reflects a control strength?
The CFO’s office prepares checks for suppliers based on vouchers prepared by the accounts payable department.Accounting for payables is a recording function. The matching of the supplier’s invoice, the purchase order, and the receiving report (and usually the purchase requisition) should be the responsibility of the accounting department. These are the primary supporting documents for the payment voucher prepared by the accounts payable section that will be relied upon by the CFO in making payment.
Which of the following audit risk components may be assessed in nonquantitative terms?Control risk:Detection risk:
Inherent risk:
YesYesYesThe components of audit risk may be assessed in quantitative terms such as percentages or in nonquantitative terms that range, for example, from high to low.
In a properly designed internal control system, the same employee most likely would match vendors’ invoices with receiving reports and also
Recompute the calculations on vendors’ invoices.The vouchers payable clerk (1) matches purchase orders, vendors’ invoices, and receiving reports; (2) tests the calculations and terms on the vendors’ invoices; and (3) prepares a disbursement voucher.
An administrative tool that aids in the control of the financial management function is a cash budget. The principal aim of a cash budget is to
Ensure that sufficient funds are available at all times to satisfy maturing liabilities.
Cash budgets are plans to have sufficient funds available to satisfy maturing liabilities. The CFO is usually responsible for this planning tool.
Although substantive procedures may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because
The records may be accurate even though they are maintained by a person who performs incompatible functions.Substantive procedures, such as reconciliations or confirmations, may provide no affirmative evidence of segregation of duties because the records may be accurate even though maintained by a person who performs incompatible functions. Thus, lack of segregation of duties might not be revealed by substantive procedures unless the detection of material inaccuracies resulted in performance of further procedures.
The client has equity securities classified as available for sale. The auditor is most concerned about controls related to
The determination of the fair value measurements of the securities.The auditor should obtain an understanding of (1) the client’s process for the determination of fair value measurements and disclosures and (2) the relevant controls. Available-for-sale and trading securities are required to be reported at fair value by U.S. GAAP.
Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control activity that provides for
Investigation of variances within a formal budgeting system.A formal planning and budgeting system that estimates maintenance expense at a certain level will report a significant variance if capital expenditures are charged to the account. Investigation of the variance is likely to disclose the misclassification.
When assessing an internal auditor’s competence, an auditor ordinarily obtains information about all of the following except
Access to information about related parties.If the external auditor plans to use the work of the internal auditors to obtain evidence or to provide direct assistance, the competence and objectivity of the internal auditors should be assessed. Assessing competence involves obtaining information about (1) education and experience; (2) professional certification and CPE; (3) audit policies, programs, and procedures; (4) practices regarding assignment of internal auditors; (5) supervision and review of their activities; (6) quality of audit documentation, reports, and recommendations; and (7) evaluation of internal auditors’ performance. An internal auditor’s access to information is related to objectivity.
Which of the following is the most serious password security problem?
Users are assigned passwords when accounts are created, but they do not change them.Proper user authentication by means of a password requires password-generating procedures to ensure that valid passwords are known only by the proper individuals. If passwords are assigned, users should change passwords frequently so that they are the only persons with access under those identifiers.
In assessing risks of material misstatement for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?
OccurrenceA voucher signifies a liability. Its issuance is recorded in the voucher register after comparison of the vendor’s invoice with the purchase requisition, purchase order, and receiving report. The direction of testing is an important consideration in determining the relevant assertion. Selecting a sample of recorded entries in the voucher register and vouching them to the supporting documentation provides evidence that the transactions occurred.
Which of the following is an element of a CPA firm’s quality control system that should be considered in establishing its quality control policies and procedures?
Managing human resources.The quality control element of human resources requires establishment of policies and procedures to provide reasonable assurance that only qualified persons with the required technical training and proficiency perform the work.