Book Multiple Choice Questions

Chapter 1

1. Which of the following best describes the relationship between assurance services & attest services?
 Attest services are a subset of assurance services
 All attest services are assurance services, but not all assurance services are attest services
2. Which of the following has primary responsibility for the fairness of the representations made in financial statements?
 Client’s management
 Client’s management is primarily responsible for representations contained in the financial statements
 Independent auditors are responsible for performing their audit in accordance with generally accepted
auditing standards
3. The most important benefit of having an annual audit by a public accounting firm is to:
 Provide assurance to investors and other outsiders that the financial statements are reliable
 Expansion of securities market has tremendously increased the need for verification of financial statements
performed by competent, independent persons
4. The Sarbanes Oxley Act created the Public Company Accounting Oversight Board (PCAB). Which of the following is
not one of the responsibilities of that board?
A. Establish independence standards for the auditors of public companies
B. Review financial reports filed with the SEC
C. Establish auditing standards for audits of public companies
D. Sanction registered audit firms
 PCAOB ordinarily does not review financial reports filed with the SEC—although they may review such
reports to accomplish their other responsibilities
 Other three are explicit responsibilities of the PCAOB
5. Which of these organizations has the responsibility to perform inspections of auditors of public companies?
 Public Company Accounting Oversight Board
6. Governmental auditing, in addition to including audits of financial statements, often includes audits of efficiency,
effectiveness and
 Compliance
7. In general, internal auditors’ independence will be greatest when they report directly to the:
 Audit committee of the board of directors
 Normally, the higher in an organization an internal auditor reports, the greater the degree of independence
 Reporting to the audit committee of the board of directors increases the likelihood that the internal auditor
will be able to act independently of those being audited
8. Which of the following did not precipitate the passage of the Sarbanes-Oxley Act of 2002 to regulate public accounting
firms?
A. Disclosures related to accounting irregularities at Enron & WorldCom
B. Restatements of financial statements by a number of public companies
C. Conviction of the accounting firm of Arthur Andersen LLP
D. Ethical scandals at the AICPA
9. Which of the following organizations establish standards for US government agencies?
 The Federal Accounting Standards Advisory Board
 Federal Accounting Standards Advisory Board establishes accounting standards for US governmental
agencies
 Governmental Accounting Standards Board establishes accounting standards for state & local
governmental entities
10. Which of the following is correct about forensic audits?
 Forensic audits are usually performed in situations in which fraud has been found or is suspected
11. What best describes the purpose of the auditors’ consideration of internal control in a financial statement audit for a
nonpublic company?
 To determine the nature, timing, and extent of audit testing
 Because the auditors’ purpose for considering internal controls are to (a) plan the audit, and (b), to
determine the nature, timing and extent of the tests to be performed
12. Which of the following is an example of a compliance audit?
A. An audit of financial statements (FINANCIAL STMT AUDIT)
B. An audit of a company’s policies and procedures for adhering to environmental laws and
regulations
C. An audit of a company’s internal control over financial reporting (FINANCIAL STMT AUDIT)
D. An audit of the efficiency and effectiveness of a company’s legal department (OPERATIONAL)
Chapter 2

1. Which of the following organizations can revoke the right of an individual to practice as a CPA?
i. The PCAOB
ii. The AICPA
iii. The SEC
iv. The applicable state board of accountancy
 The license to practice as a CPA is granted by the state, the applicable state, through its state board of
accountancy. Therefore the applicable state board of accountancy has the right to revoke the right of an
individual to practice as a CPA.
2. The AICPA over time has played an important role in standards setting. Which of the following standards are
currently established by the AICPA?
i. Accounting standards applicable to nonpublic companies
ii. Auditing standards applicable to audits of nonpublic companies
iii. Quality control standards applicable to audits of public companies
iv. Standards for reviews of the interim financial information issued by public companies
 The AICPA has authority to establish auditing standards for nonpublic companies
 The FASB has authority for accounting standards of both public and nonpublic companies
 The PCAOB has the authority to establish quality control standards and standards of for interim reviews of
public companies
3. Which of the following are not interpretive publications under the AICPA’s hierarchy of generally accepted auditing
standards?
i. Statements on Auditing Standards
ii. Appendices to Statements on Auditing Standards
iii. Auditing guidance in the AICPA Audit and Accounting Guides
iv. AICPA auditing Statements of position
 Statements on Auditing Standards are standards, not interpretive publications
4. The three AICPA generally accepted auditing standards classified as standards of fieldwork may be summarized as:
i. The need to maintain an independence in mental attitude throughout the audit
ii. The criteria for audit planning and evidence gathering
iii. The criteria for the content of the auditors’ report on financial statements
iv. The competence, independence and professional care to be exerted while performing the audit (GENERAL
STANDARDS)
 The three standards of field work relate specifically to criteria of audit planning and evidence gathering
5. A basis objective of a CPA firm is to provide professional services that confirm with professional standards.
Reasonable assurance of achieving this basic objective is provided through:
i. Compliance with generally accepted reporting standards
ii. A system of quality control
iii. A system of peer review
iv. Continuing professional education
 Quality control standards were established to provide reasonable assurance that professional services confirm
with professional standards
6. Which of the following is not explicitly included in an unqualified standard audit report for a nonpublic company?
i. The CPA’s opinion that the financial statements comply with GAAP
ii. The generally accepted auditing standards were followed during the audit
iii. The internal control of the client was satisfactory
iv. An identification of the financial statements audited
 For nonpublic traded companies, the internal control of the client is not explicitly mentioned in the unqualified
standard report, although its implicit in the reference to generally accepted auditing standards
7. The general group of the AICPA generally accepted auditing standards that:
i. The auditors maintain an independent mental attitude
ii. The audit be conducted in conformity with generally accepted accounting principles
iii. Assistants, if any, be properly be supervised (FIELD WORK)
iv. The auditors obtain an understanding of internal control (FIELD WORK)
 An independent mental attitude on the part of the auditor is required by the second general standard of the
generally accepted accounting principles
8. Which AICPA quality control standard would most likely be satisfied when a CPA maintains records indicating which
partners or employees of the firm were previously employed by the CPA firm’s clients?
i. Professional relationship
ii. Engagement performance
iii. Relevant ethical requirements
iv. Monitoring
  Such a quality control policy is designed to assure that personnel assigned to an engagement are independent to
perform the work, an ethical requirement
9. An audit provides reasonable assurance of detecting material:
i. Fraudulent Financial Reporting (YES); Misappropriation of Assets (YES)
ii. Fraudulent Financial Reporting (YES); Misappropriation of Assets (NO)
iii. Fraudulent Financial Reporting (NO); Misappropriation of Assets (YES)
iv. Fraudulent Financial Reporting (NO); Misappropriation of Assets (NO)
 An audit provides reasonable assurance of detecting misstatements, due to fraud, regardless of whether due to
fraudulent financial reporting or misappropriation of assets.
10. Which of the following is not included in an integrated audit report on the financial statements of a public company?
i. The report states that the audit was performed in accordance with AICPA standards (public
traded company—standards of PCAOB)
ii. The report indicates that the financial statements are the responsibility of management
iii. The report indicates that the auditors have also audited the effectiveness of the company’s internal controls
iv. The report is signed in the name of the CPA firm
11. Audit firms that are subject to inspects by the PCAOB staff include:
i. All audit firms
ii. Audit firms that are registered with the SEC
iii. Audit firms that are registered with the PCAOB
iv. Audit firms that are registered with the state board of accountancy
12. Which of the following is not a difference noted when comparing the AICPA audit report to the international audit
report?
i. The international audit report has an expanded discussion of management’s responsibility for the financial
statements and internal controls
ii. The international audit report may be singed using the personal name of the audit partner, the audit firm, or
both
iii. The international audit report contains an enhanced description of the nature of an audit
iv. The international audit report includes an opinion on internal control

Chapter 3

1. Which of the following is not a covered member for an attest engagement under Rule 101 of the AICPA Code of
Professional Conduct?
i. An individual assigned to the attest engagement
ii. A partner in the office of the partner in charge of the attest engagement
iii. A manager who is in charge of providing tax services to the attest client
iv. A partner in the national office of the firm that performs marketing services
 A partner in the national office of the firm that performs marketing services is not considered a covered member
as it is unlikely that this partner will be in a position to influence the attest engagement.
2. Which of the following is not prohibited by the AICPA Code of Professional Conduct?
i. Advertising in newspapers
ii. Payment of commission to obtain an audit client
iii. Acceptance of a contingent fee for a review of financial statements
iv. Engaging in discriminatory employment practices
 Advertising in newspapers is an acceptable practice.
 The other three are all prohibited by the Code of Professional Conduct
3. In which of the following situations, would a public accounting firm have violated the AICPA Code of Professional
Conduct in determining its fee?
i. A fee based on whether or not the public accounting firm’s audit report leads to the approval
of the client’s application for bank financing
ii. A fee is to be established at a later date by the Bankruptcy Court
iii. A fee is based on the nature of the engagement rather than upon the actual time spent on the engagement
iv. A fee is based on the fee charged by the client’s former auditors
 A fee for audit clients which is dependent upon the results achieved by the CPA’s efforts is a contingent fee and is
prohibited by audit clients by Rule 302
4. A public accounting firm would least likely be considered in violation of the AICPA independence rules in which of the
following instances?
i. A partner’s checking account, which is fully insured by the FDIC, is held at a financial
institution for which the public accounting firm performs attest services
ii. A manager of the firm donates services as VP of a charitable organization that is an audit client of the firm
iii. An attest client owes the firms fees for this and last year’s annual engagements
iv. A covered member’s dependent son owns stock in the attest client
  An auditor’s independence would not be considered to be impaired with respect to a financial institution in
which the auditor maintains a checking account which is fully insured.
5. Which of the following is implied when a CPA signs the preparer’s declaration on a federal income tax return?
i. The return is not misleading based on all information of which the CPA has knowledge
ii. The return is prepared in accordance with GAAP
iii. The CPA has audited the return
iv. The CPA maintained an impartial mental attitude while preparing the return
 The declaration requires the preparer to acknowledge that the return is “true, correct, and complete… based on
all information of which the preparer has any knowledge.”
6. The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in
the course of a professional engagement except with the consent of a client. This rule may preclude a CPA from
responding to an inquiry made by:
i. An investigative body of a state CPA society
ii. The trial board of the AICPA
iii. A CPA-shareholder of the client corporation
iv. An AICPA quality review body
 CPAs in public practice are prohibited from disclosing confidential information without the consent of the client,
except in certain specified circumstances.
 The three circumstances above are situations where disclosure of information is permitted
7. Which of the following is most likely to be a violation of the AICPA Rules of Conduct by Bill Jones, a sole practitioner
with no other employees?
i. Jones performs consulting services for a percentage of the client’s savings; these are the only services
provided for the client
ii. Jones names his firm Jones and Smith, CPAs
iii. Jones advertises the services he provides in an Internet set of telephone “yellow pages”
iv. Jones, without client consent, makes available working papers for purposes of a peer review of his practice
 Rule 505 requires that a firm practice under a firm name that is not misleading.
 In this situation, the name is misleading because it implies that there are 2 CPAs practicing, but it’s really only
Bill Jones, lone CPA.
8. Bill Adams, CPA, accepted the audit engagement of Kelly Company. During the audit, Adams became aware of his lack
of competence required for the engagement. What should Adams do?
i. Disclaim an opinion
ii. Issue an adverse opinion
iii. Suggest that Kelly Company engage another CPA to perform the audit
iv. Rely on the competence of the client personnel
 Rule 201-A prohibits a public accounting firm from accepting an engagement that the firm is not competent to
perform
 If technical competence problems develop during the engagement, the CPAs should advise the client and
withdraw from the engagement
9. Which of the following nonattest services may be performed by the auditors of a public company?
i. Internal audit outsourcing
ii. Tax planning for all company officers
iii. Bookkeeping services
iv. Preparation of the company’s tax return
 Auditors may currently prepare the company’s tax return
 The Sarbanes Oxley Act as implemented by the PCAOB prohibits internal audit outsourcing, performing tax
planning for the company’s officers, and performing bookkeeping services
10. In providing nonattest services to an attest client, A CPA is allowed to perform which of the following functions?
i. Maintain custody of client’s securities
ii. Training client employees
iii. Supervising client employees
iv. Acting as the third approver of large client expenditures
 A CPA may help train client employees for an attest client
 Code of Professional Conduct prohibits maintaining custody of client assets, supervising client employees, and
authorizing transactions
11. Rule 202—Compliance with Standards, requires CPAs to adhere to all of the following applicable standards except:
i. Statements on Standards of Consulting Services
ii. Statements on Auditing Standards
iii. Statements on Standards for Attestation Engagements
iv. Statements on Responsibilities in Tax Practice
 Statements on Responsibilities in Tax Practice are meant to provide guidance to CPAs, but are not directly
enforceable under the Code of Professional Conduct.
  The other standards are enforceable under Rule 202 of the Code
12. Which of the following provisions is not included in The Institute of Internal Auditors Code of Ethics?
i. Performance of work with honesty, diligence, and responsibility
ii. Prudence in the use and protection of information acquired in the course of their duties
iii. Use of appropriate sampling methods to select arenas for audit
iv. Continual improvement in proficiency and effectiveness and the quality of services provided

Chapter 6

1. In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud:
fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for
misappropriation of assets?
i. Generous performance-based compensation systems (FRAUDULENT FINANCIAL REPORTING)
ii. Management preoccupation with increased financial performance (FRAUDULENT FINANCIAL REPORTING
iii. An unreliable accounting system
iv. Strained relationship between management and the auditors (FRAUDULENT FINANCIAL REPORTING)
 An unreliable accounting system provides an opportunity for an individual to misappropriate assets
 The other items create risks of fraudulent financial reporting
2. The audit committee of a company must be made up of:
i. Representatives from the client’s management, investors, suppliers and customers
ii. The audit partner, the chief financial officer, the legal counsel and at least one outsider
iii. Representatives of the major equity interests, such as preferred and common stockholders
iv. Members of the board directors who are not officers or employees
 Members of the audit committee should be independent of management
 Individuals should be board members who are not employees or officers & who do not have relationships with
management that might impair their objectivity
3. Which of the following should not normally be included in the engagement letter for an audit?
i. A description of the responsibilities of client personnel to provide assistance
ii. An indication of the amount of the audit fee
iii. A description of the limitations of an audit
iv. A listing of the client’s branch offices selected for testing
 Management should not be informed about which branches were selected for testing at all or at least not until
just before testing
4. Which portion of an audit is least likely to be completed before the balance sheet date?
i. Tests of controls
ii. Issuance of an engagement letter
iii. Substantive procedures
iv. Assessment of control risk
 Substantive procedures substantiate the account balances as of the balance sheet date and therefore cannot be
completed prior to that date.
 Other items pertain to the operation of the system during the year under audit and could be completed in the
interim period
5. Which of the following should the auditors obtain from the predecessor auditors before accepting an audit
engagement?
i. Analysis of balance sheet accounts
ii. Analysis of income statement accounts
iii. All matters of continuing accounting significance
iv. Facts that might bear on the integrity of management
 Before accepting an engagement, the possible successor auditor should ask questions about the integrity of
management, disagreements with management, and the reason for the change in auditors
 The other entries—represent information that the successor may wish to obtain after accepting the engagement
6. As one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the
accounts receivable subsidiary ledger. This test provides evidence as to whether:
i. Each recorded sale represents a bona fide transaction
ii. All sales have been recorded in the sales journal
iii. All debit entries in the accounts receivable subsidiary ledger are properly supported by sales journal entries
iv. Recorded sales have been properly posted to customer accounts
 Because entries in the sales journal represent recorded sales, tracing entries from its debits in the A/R ledger
provides evidence on whether recorded sales have been properly posted to customer accounts
7. The primary objective of tests of details of transactions performed as substantive procedures is to:
i. Comply with generally accepted auditing standards
ii. Attain assurance about the reliability of the accounting system
 iii. Detect material misstatements in the financial statements
iv. Evaluate whether management’s policies and procedures are operating effectively
 The objective of tests of details of transactions performed as substantive procedures is to detect material
misstatements in the financial statements.
 Transactions are tested to determine whether they have been properly recorded
8. The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist
in an account balance when, in fact, such misstatement does exist, is referred to as:
i. Business risk
ii. Engagement risk
iii. Control risk
iv. Detection risk
 Detection risk is the risk that the auditor will conclude, based on substantive testing/procedures, that material
misstatement does not exist in an account balance, when in fact, such misstatement does exist
9. Which of the following elements underlies the application of generally accepted auditing standards, particularly the
standards of fieldwork and reporting?
i. Adequate disclosure
ii. Quality control
iii. Materiality and audit risk
iv. Client acceptance
 Materiality and audit risk underlie the application of generally accepted auditing standards in that so many
audit decisions are affected by the amount used as a materiality measure and the level of audit risk assumed on
the engagement
10. Which of the following best describes what is meant by the term “fraud risk factor”?
i. Factors that, when present, indicate that risk exists
ii. Factors often observed in circumstances have occurred
iii. Factors, that when present, require modification of planned audit procedures
iv. Weaknesses in internal control identified during an audit
 Fraud risk factors are factors that have been observed in circumstances in which fraud has occurred
 Fraud risk factors were identified by researchers and practitioners through analyses of many past frauds
 None of the factors were always present in the various individual cases included in the analyses
11. Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions
i. Incentive or pressure
ii. Opportunity
iii. Supervisory position
iv. Attitude
12. Which of the following is most likely to be an overall response to fraud risks identified in an audit?
i. Supervise members of the audit team less closely and rely more upon judgment
ii. Use less predictable audit procedures
iii. Use only CPAs on the engagement
iv. Place increased emphasis on the audit of objective transactions rather than subjective transactions.
 Less predictable audit procedures are likely to be used when fraud risks are high
 SAS 99 Auditors have increased skepticism, assign more skilled staff and consider further management’s
selection & application of accounting procedures

Chapter 7

1. Which of the following would be least likely to be considered an objective of internal control?
i. Checking the accuracy and reliability of accounting data
ii. Detecting management fraud
iii. Encouraging adherence to managerial policies
iv. Safeguarding assets
 Detecting management fraud is generally not considered to be an objective of internal control
 Inherent limitations of internal control is that it is subject to override by management
 All other answers represent valid objectives of internal control
2. An entity’s ongoing monitoring activities often include:
i. Periodic audits by internal audits
ii. The audit of the annual financial statements
iii. Approval of cash disbursements
iv. Management review of weekly performance reports
 Management review of weekly performance reports is an ongoing monitoring activity that may detect errors or
fraud
  Periodic audits by internal audits monitoring activity, best classified as separate reports & not ongoing
monitoring activities
 Approval of cash disbursements  control activity
3. A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors
with:
i. Knowledge necessary to determine the nature, timing and extent of audit procedures
ii. Audit evidence to use in reducing detection risk
iii. A basis of modifying tests of controls
iv. An evaluation of the consistency or application of management policies
 Auditors’ purpose for considering internal controls are to obtain the necessary knowledge to:
a) Assess the risk of material misstatement
b) to determine the nature, timing and extent of the tests to be performed
4. An auditor may compensate for a weakness in internal control by increasing the extent of:
i. Tests of controls
ii. Detection risk
iii. Substantive tests of details
iv. Inherent risk
 An increase in the substantive procedures will decrease detection risk and thereby compensate for the increased
level of control risk due to a weakness in internal control
5. Controls over the financial reporting are often classified as preventative, detective or corrective. Which of the
following is an example of a detective control?
i. Segregation of duties over cash disbursements (PREVENTATIVE)
ii. Requiring approval of purchase transactions (PREVENTATIVE)
iii. Preparing bank reconciliations
iv. Maintaining backup copies of key transactions
 Preparing bank reconciliations will detect a variety of misstatements, related to cash and is a detective control
in the sense that it does not prevent the misstatement from occurring, but may detect it
6. When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and
extent of the CPA’s procedures, the CPA should consider the competence and objectivity of the internal auditors.
Relative to objectivity, the CPA should
i. Consider the organizational level to which the internal auditors report the results of their
work
ii. Review the internal auditors’ work
iii. Consider the qualifications of the internal audit staff
iv. Review the training program in effect for the internal audit staff
 The internal auditors’ objectivity refers to their relative independence from the organizational units they have
been evaluating
7. Effective internal control in a small company that has an insufficient number of employees to permit proper
separation of responsibilities can be improved by:
i. Employment of temporary personnel to aid in the separation of duties
ii. Direct participation by the owner in key record keeping and control activities of the business
iii. Engaging a CPA to perform monthly write-up work
iv. Delegation of full, clear-cut responsibility for a separate major transaction cycle to each employee
 Involvement of the owner in key control functions should be a major step toward preventing material errors or
defalcations
 Answer 4 would weaken internal controls because one employee is responsible for the entire transaction
8. Of the following statements about internal control, which one is not valid?
i. No one person should be responsible for the custody and the recording of an asset
ii. Transactions should be properly authorized before such transactions are processed
iii. Because of the cost/benefit relationship, a client may apply controls on a test basis
iv. Controls reasonably ensure that collusion among employees cannot occur
 A limitation of internal control is that it may be circumvented through collusion among employees
9. Proper segregation of functional responsibilities call for the separation of the:
i. Authorization, record keeping and custodial functions
ii. Authorization, execution and payment functions
iii. Receiving, shipping and custodial functions
iv. Authorization, approval, and execution functions
10. To have an adequate basis to issue a management report on internal control under the Section 404(a) of the Sarbanes-
Oxley Act, management must do all of the following, except
i. Establish internal control with no material weakness
ii. Accept responsibility for the effectiveness of internal control
iii. Evaluate the effectiveness of internal control using suitable control criteria
 iv. Support the evaluation with sufficient evidence
 Management may issue a report on internal control regardless of whether it has discovered a material
weakness
11. When the auditors are performing a first time internal control audit in accordance with the Sarbanes-Oxley Act, and
PCAOB standards, they must:
i. Modify their report for any significant deficiencies identified
ii. Use a bottom up approach to identify controls to test
iii. Test controls for all significant accounts
iv. Perform a separate assessment of controls over operations

Chapter 10

1. Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client’s
employees?
i. A bank lockbox system
ii. Pre-numbered remittance advices
iii. Monthly bank reconciliations
iv. Daily deposit of cash receipts
 A bank lock box is a post office box controlled by a company’s bank at which cash remittances from customers
are received
 The bank collects the remittances, immediately credits the cash to the company’s bank account and forwards the
remittances to the company
 Use of a bank lockbox system makes it extremely difficult for employees to divert cash receipts since those cash
receipts are sent directly to the post office box controlled by the bank
 Monthly bank reconciliations and daily deposit of cash receipts are controls, but controls that ordinarily are not
as effective as a bank lockbox system
2. To provide assurance that each vouch is submitted and paid only once, the auditors most likely would exam a sample
of paid vouchers and determine whether each voucher is:
i. Supported by a vendor’s invoice
ii. Stamped “paid” by the check signer
iii. Pre-numbered and accounted for
iv. Approved for authorized purchases
 The auditors will determine whether each voucher is stamped “paid” by the check signer to avoid a situation in
which supporting documents are used a second time to elicit a second payment
3. In testing internal controls over cash disbursements, the auditors most likely would determine that the person who
signs the checks also:
i. Reviews the monthly bank reconciliation
ii. Returns the checks to accounts payable
iii. Is denied access to the supporting documents
iv. Is responsible for mailing the checks
 When checks are signed, they should not be returned to the accounting department—this control is used so as to
avoid a situation in which the A/P department fabricates documents and then collects the checks
 Individuals who are otherwise independent of the cash function prepare and review the monthly bank rec
 Individual cannot be denied access to the supporting documents because he or she needs them to determine
whether or not the expenditure is proper
4. To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the
following except:
i. Cutoff bank statement
ii. Year end bank statement
iii. Bank confirmation
iv. General ledger
 The general ledger will not have information on the balance per bank
 Cutoff bank statement, year-end bank statement & bank confirmation
5. You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures
relating to cash. You decide that it would be preferable to:
i. Count the cash in advance of the balance sheet date in order to disclose any kiting operations at the end of
year
ii. Coordinate the count of cash with the cutoff of accounts payable
iii. Coordinate the count of cash with the count of marketable securities and other negotiable
assets
iv. Count the cash immediately upon the return of confirmation letters from the financial institution
  Unless all negotiable assets are verified at one time, an opportunity exists for a dishonest officer or employee to
conceal a shortage by transferring it from one asset category to another, a step ahead of the auditors
6. Which of the following procedures would the auditors most likely perform to test controls relating to management’s
assertion about the completeness of cash receipts for cash sales at a retail outlet?
i. Observe the consistency of the employees’ use of cash registers and tapes
ii. Inquire about employees’ access to recorded but un-deposited cash
iii. Trace deposits in the cash receipts journal to the cash balance in the general ledger
iv. Compare the cash balance in the G/L with the bank confirmation request
7. Reconciliation of the bank account should not be performed by an individual who also:
i. Processes cash disbursements
ii. Has custody of securities
iii. Prepares the cash budget
iv. Reviews inventory reports
 The individual who reconciles the bank account should not be involved in the processing of cash receipts or
disbursements
 All of the other functions are compatible with reconciliation responsibilities
8. The auditors suspect that a client’s cashier is misappropriating cash receipts for personal use by lapping customer
checks received in the mail. IN attempting to uncover this embezzlement scheme, the auditors most likely would
compare the:
i. Details of bank deposit slips with details of credits to customer accounts
ii. Daily cash summaries with the sums of cash receipts journal entries
iii. Individual bank deposit slips with the details of the monthly bank statements
iv. Dates uncollectible accounts are authorized to be written off with the dates write-offs are actually recorded
 Lapping will result in a delay in the recording of specific remittance credits in the financial records, but the
checks will be deposited in the bank as they are received
 Comparison of the checks deposited to the credits to customer accounts will likely uncover the scheme
9. In order to guard against the misappropriation of company-owned marketable securities, which of the following is the
best course of action that can be taken by a company with a large portfolio of marketable securities?
i. Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where
securities are kept
ii. Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for
their access
iii. Require that employees involved in the safekeeping function maintain a subsidiary control ledger for
securities on a current basis
iv. Require that the safekeeping function for securities be assigned to a bank or stockbroker that
will act as a custodial agent
 Having the securities held in safekeeping by a bank or stockbroker provides strong internal control because
they are not available to employees responsible for maintaining the accounting records of the securities
 Separation of the custody of securities from the accounting function is complete
10. Hall Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase
securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The
best person or persons to make periodic reviews of the investment activity would be
i. The investment committee of the board of directors
ii. The COO
iii. The corporate controller
iv. The treasurer
 The investment committee of the board of directors is not involved in the routine of making buy and sell
decisions and can therefore review the transactions objectively
 COO, corporate controller and treasurer may be closely associated on a daily basis with the financial executive
responsible for the investment decisions
11. The auditors who physically examine securities should insist that a client representative be present in order to:
i. Detect fraudulent securities
ii. Lend authority to the auditors’ directives
iii. Acknowledge the receipt of securities returned
iv. Coordinate the return of securities to the proper locations
 Because the liquidity of many securities, the auditor should insist that a client representative be present in order
acknowledge the receipt of securities returned
 In the event of subsequent “disappearance” of a security, the auditor will not be a suspect
12. The best way to verify the amounts of dividend revenue received during the year is:
i. Recomputation
ii. Verification by reference to dividend reference books
iii. Confirmation with dividend paying companies
iv. Examination of cash disbursements records
 Comparing the recorded amount of dividend revenue with dividend record books (published by investment
advisory services) provides evidence of the amount of dividend revenue that should have been recorded
throughout the year
 Impossible to confirm the receipt of dividends with the company paying those dividends