Polytechnic University of the Philippines ACC 3016 1)For a particular assertion, control risk is the risk that controls will not detect a material misstatement that occurs

Polytechnic University of the Philippines

ACC 3016

1)For a particular assertion, control risk is the risk that

1. 1. controls will not detect a material misstatement that occurs.
   2. audit procedures will fail to detect a weak control system.
   3. the prescribed control procedures will not be applied uniformly.
   4. a material misstatement will occur in the accounting process.

2. Which of the following is an incorrect statement?
   1. An example of a completeness assertion would be that notes payable in the balance sheet includes all such obligations of the entity.
   2. An example of an occurrence assertion would be that sales in the income statement represent exchanges of goods or services that actually take place.
   3. An example of a rights/obligations assertion would be that amounts capitalized for leases in the balance sheet represent the cost of the entity?s rights to leased property.
   4. An example of a valuation/allocation assertion would be that property, plant, and equipment are recorded at market value.

3. A distinction must be made between general audit objectives and specific audit objectives for each account balance. Which of the following is an incorrect statement?
   1. The general audit objectives are applicable to every account                                balance on the financial statements.
   2. The specific audit objectives are applicable to every account balance on the financial statements.
   3. The general audit objectives are tailored to the engagement.
   4. The specific audit objectives are tailored to the engagement.

4. Which of the following “general transaction-related audit objectives” is not part of the valuation or allocation assertion?
   1. Completeness
   2. Accuracy
   3. Classification
   4. Timing

5. Only three of the following management assertions are associated with transaction-related audit objectives. Which one of the following is not?
   1. Existence or occurrence
   2. Completeness
   3. Valuation or allocation
   4. Presentation and disclosure

6. Which of the following statements is incorrectly stated?
   1. Balance-related audit objectives are applied to account balance.
   2. Transaction-related audit objectives are applied to classes of transactions.
   3. Balance-related audit objectives are applied to the ending balance in balance sheet accounts.

1. 4. Balance-related audit objectives are applied to both beginning and ending balances in the balance sheet accounts.

7. The detail tie-in objective is not concerned that the details in the account balance
   1. agree with related subsidiary ledger accounts.
   2. are properly disclosed, in accordance with PFRS.
   3. foot to the total in the account balance.
   4. agree with the total in the general ledger.

8. The disclosure objective is concerned that
   1. the account balance is properly presented in the financial statements.
   2. disclosure requirements are properly presented in the financial statements and in the footnotes.
   3. both responses are correct.
   4. both responses are incorrect.

9. If a long-term note receivable is included in the account receivable listing, there is a violation of the
   1. existence objective.
   2. completeness objective.
   3. classification objective.
   4. timing objective.

10. After the general objectives are understood, specific objectives for each account balance on the financial statements can be developed. Which of the following statements is true?
    1. There should be at least one specific objective for each relevant general objective.
    2. There will be only one specific objective for each relevant general objective.
    3. There will be many specific objectives developed for each relevant general objective.
    4. There must be one specific objective for each general objective.

11. Which of the following is not a proper matching of auditor?s objective with management?s assertion?
    1. Validity matches with existence or occurrence
    2. Completeness matches with completeness
    3. Ownership matches with rights and obligations
    4. Classification matches with presentation/disclosure

12. An audit process is a well-defined methodology for organizing an audit to ensure that
    1. the evidence gathered is both sufficient and competent.
    2. all appropriate audit objectives are specified.
    3. all appropriate audit objectives are met.
    4. All of the responses are correct

13. Which of the following is correct?
    1. The evidence that the auditor accumulates remains the same from audit to audit, but the general objectives vary, depending on the circumstances.

1. 2. The general audit objectives remain the same from audit to audit, but the evidence varies, depending on the circumstances.
   3. The circumstances may vary from audit to audit, but the evidence accumulated remains the same.
   4. The general audit objectives may vary from audit to audit, but the circumstances remain the same.

14. Auditing standards require the auditor to accumulate sufficient competent evidence to support the opinion issued. Because of the nature of audit evidence, it is
    1. unlikely that the auditor will be completely convinced that the opinion is correct.
    2. likely that the auditor will be completely convinced that the opinion is correct.
    3. unlikely that the auditor will arrive at a conclusion.
    4. likely that the auditor would change his/her mind about the opinion if he/she takes the time to gather additional evidence.

15. Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion?
    1. The audit program
    2. The auditor's judgment
    3. Philippine Standards on Auditing
    4. The auditor's working papers

16. In the final analysis, the amount and kinds of evidential matter that are required to support the auditor?s opinion should be determined by
    1. the audit committee.
    2. auditor?s judgment.
    3. professional standards.
    4. standards of auditing.

17. To adequately plan the extent of the audit evidence to gather, the generally accepted auditing standards require the auditor to gain an understanding of
    1. the internal control structure.
    2. client?s organization charts.
    3. client?s procedural manuals.
    4. All of these

18. When unable to obtain sufficient competent evidential matter to determine whether certain client management?s acts are non-compliance to laws and regulations, the auditor would most likely issue
    1. an unqualified opinion with a separate explanatory paragraph.
    2. either a qualified opinion or an adverse opinion.
    3. either a disclaimer of opinion or a qualified opinion.
    4. either an adverse opinion or a disclaimer of opinion.

19. An audit evidence is generally considered relevant when it is
    1. derived through valid statistical sampling.

1. 2. objective and unbiased.
   3. factual, adequate, and convincing.
   4. consistent with the audit objectives.

20. Two overriding considerations that affect an auditor?s judgment in accumulating evidence are:

1. Sufficient competent evidence must be accumulated to meet the auditor?s professional responsibility.
2. Cost of accumulating evidence should be minimized.

In evaluating these conditions,

1. 1. the first is more important than the second.
   2. the second is more important than the first.
   3. they are equally important.
   4. it is impossible to prioritize one.

21. Most of the independent auditor's work in formulating an opinion on the financial statements consists of
    1. studying and evaluating internal control.
    2. obtaining and examining evidential matter.
    3. examining cash transactions.
    4. comparing recorded accountability with assets.

22. There are four subcategories of decisions that the auditors must make in accumulating audit evidence. Which of the following is not one of those subcategories?
    1. Audit procedures to be used
    2. Reasons for deciding not to test controls
    3. Sample size
    4. Timing of the audit procedures

23. Evidential matter supporting the financial statements consists of the underlying accounting data and all corroborating information available to the auditor. Which of the following is an example of corroborating information?
    1. Minutes of meetings of the board of directors
    2. General and subsidiary ledgers
    3. Accounting manuals
    4. Worksheets supporting cost allocations

24. Which of the following is not one of the major phases in anaudit process?
    1. Plan and design an audit approach
    2. Test controls and transactions
    3. Inform client of any adjustments or corrections to be made in the financial statements
    4. Complete the audit and issue the report

25. Evidential matter is generally considered sufficient when

1. 1. it is competent.
   2. there is enough of it to afford a reasonable basis for an opinion on the financial statements.
   3. it has the qualities of being relevant, objective, and free from known bias.
   4. it has been obtained through random selection.

26. In making decisions about evidence for a given audit, the auditor?s goal is to obtain a sufficient amount of timely, reliable evidence that is relevant to the information being verified, and to do so
    1. no matter what the cost involved in obtaining such evidence.
    2. only if the cost is reasonable.
    3. at the lowest possible total cost.
    4. at any cost because the costs are billed to the client.

27. Which of the following is not a distinguishing feature of risk-based auditing?
    1. Identifying areas posing the highest risk of financial statement errors
    2. Analysis of internal control
    3. Collecting and evaluating evidence
    4. Concentrating audit resources in those areas presenting the highest risk of financial statement errors

28. The competence of evidence available to an auditor is least likely affected by
    1. the relevance of such evidence to the financial statement assertion being investigated.
    2. the relationship of the source of such an evidence to the entity being audited.
    3. the timeliness of the audit evidence obtained.
    4. the sampling method employed by the auditor to obtain a number of samples as evidence.

29. Which of the following procedures would provide the auditor the most reliable audit evidence?
    1. Inquiries of the client?s internal audit staff held in private.
    2. Inspection of prenumbered client purchase orders filed in the vouchers payable department.
    3. Analytical procedures performed by the auditor on the entity?s trial balance.
    4. Inspection of bank statements obtained directly from the client?s financial institution.

30. The most reliable forms of documentary evidence are those documents that are
    1. prenumbered.
    2. easily duplicated.
    3. internally generated.
    4. authorized by a responsible official.

31. You have been assigned to audit the maintenance department of an organization. Which of the following is likely to produce the least reliable audit evidence?
    1. Notes on discussions with mechanics in the maintenance operation.

1. 2. A schedule comparing actual maintenance expenses with budgeted expenses and those of the prior period and disclosing important differences.
   3. A narrative covering review of user reports on maintenance service.
   4. An analysis of changes in certain maintenance department ratios.

32. Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess
    1. control risk at below the maximum level.
    2. inherent risk at the maximum level.
    3. the difficulty in controlling the incremental audit risk.
    4. materiality for the accounts tested as insignificant.
33. Before applying principal substantive tests to the details of accounts at an interim date, an auditor should
    1. assess control risk as below the maximum for the assertions embodied in the accounts selected for interim testing.
    2. determine that the accounts selected for interim testing are not material to the financial statements taken as a whole.
    3. consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.
    4. obtain written representations from management that all financial records and related data will be made available.

34. If an auditor conducts an audit of financial statements in accordance with generally accepted auditing standards, which of the following will the auditor most likely detect?
    1. Misposting of recorded transactions
    2. Forgery
    3. Unrecorded transactions
    4. Collusive fraud

35. Which of the following best explains the difference between audit objectives and audit procedures?
    1. Audit procedures establish broad general goals; audit objectives specify the detailed work to be performed.
    2. Audit objectives are tailor-made for each assignment; audit procedures are generic in application.
    3. Audit objectives define specific desired accomplishments; audit procedures provide the means of achieving audit objectives.
    4. Audit procedures and audit objectives are essentially the same.

36. In gathering audit evidence in the performance of substantive tests, the auditor
    1. should use the test month approach.
    2. relies on persuasive rather than convincing evidence in the majority of cases.
    3. would consider the client?s documentary evidence more competent than evidence gathered from observation and physical inspection.
    4. would express an adverse opinion if he has substantial doubt as to any significant assertion.

37. The auditor will not ordinarily initiate discussion with the audit committee concerning the
    1. extent to which the work of internal auditors will affect the scope of the examination.
    2. extent to which a change in the company?s organization will influence the scope of the examination.
    3. details of potential problems that the auditor believes might cause a qualified opinion.
    4. details of the procedures that the auditor intends to apply.

38. The objective of dual-purpose tests is to
    1. evaluate whether internal controls are operating effectively.
    2. detect material misstatements in the financial statements.
    3. identify unusual trends or patterns in comparative financial statements.
    4. test internal controls as well as transactions and balances using the same test procedures.

39. To test for unsupported entries in the ledger, the direction of audit testing should be from the
    1. ledger entries.
    2. journal entries.
    3. externally generated documents.
    4. original source documents.

40. The least costly form of testing is usually
    1. tests of controls.
    2. tests of details of balances.
    3. tests of details of transactions.
    4. analytical procedures.

41. Tracing from source documents to journals most directly addresses which financial statement assertion?
    1. Valuation
    2. Completeness
    3. Existence
    4. Rights

42. An auditor is examining the detailed debit and credit entries in an account. The auditor is most likely performing
    1. analytical procedures.
    2. tests of details of balances.
    3. tests of details of transactions.
    4. tests of controls.

43. Choices about audit evidence are influenced by all of the following except:
    1. The auditor?s understanding of the business and industry
    2. Assessment of inherent and control risk

1. 3. Comparisons of the auditor?s expectation of the financial statements with the client?s books and records
   4. Decisions about immaterial risk factors

44. The auditor is performing substantive tests several months before the end of the year. This most likely means that
    1. inherent risk is set at moderate to high.
    2. detection risk is set at moderate to high.
    3. control risk is set at maximum.
    4. detection risk is set at low to very low.

45. In testing the existence assertion for an asset, an auditor ordinarily works from the
    1. financial statements to the potentially unrecorded items.
    2. potentially unrecorded items to the financial statements.
    3. accounting records to the supporting evidence.
    4. supporting evidence to the accounting records.

46. WB Industries has significant information that is transmitted, processed, maintained, and accessed electronically. The auditor has concluded that it is not possible to reduce detection risk to an acceptable level by performing only substantive tests for a number of financial statement assertions. The auditor?s alternative strategy is to
    1. increase the acceptable audit risk.
    2. focus audit tests on other assertions for which substantive tests prove to be effective.
    3. require management to change its information system to provide appropriate evidence.
    4. perform tests of controls to gather evidential matter to be used as basis of assessing control risk related to those assertions.

47. The decision on the part of the auditor to perform substantive tests during the interim period will be based upon
    1. audit risk control and cost effectiveness.
    2. the approach followed in the past.
    3. the auditor?s time convenience.
    4. the cooperation extended by the client staff.

48. Choose the best illustration of objective audit evidence from the following:
    1. The paid invoice file containing invoices matched with receiving reports and purchase orders.
    2. Management's assertion that payment procedure requires matching of invoice with receiving report and purchase order.
    3. Clerical staff assurances  that  management policy regarding payment of invoices-- matching of invoice with receiving report and purchase order--is always followed.
    4. The treasurer's statement of not remembering any exceptions in which an invoice was submitted for payment that is not accompanied by a covering receiving report and purchase order.

49. Which of the following audit procedures best supports the valuation objective?

1. 1. Performing a lower of cost or market test of the client's inventories
   2. Reviewing a contingent liability disclosure for proper wording
   3. Searching for unrecorded liabilities
   4. Observing the client's year-end physical inventory taking

50. Which of the following is not an appropriate auditing procedure supporting the fairness of financial-statement presentation?
    1. Inspecting plant asset additions for existence
    2. Recalculating accrued interest on notes payable
    3. Examining invoices in support of legal fees recorded during the fiscal year
    4. Reviewing the client's production quality control program

51. Audit procedures are normally performed
    1. early in the accounting period being examined.
    2. throughout the accounting period being examined, but with emphasis on the transactions near the end.
    3. within one to three months after the close of the accounting period.
    4. During all three of the above periods

52. The auditor would unlikely perform early substantive testing of account balances when:
    1. A number of significant deviations from control policies and procedures were detected during tests of controls.
    2. Due to economic factors, the fourth quarter activity this year is expected to be somewhat sluggish.
    3. The client uses a natural business year.
    4. The taking of the client?s inventory is performed at an early date.

53. As the acceptable level of detection risk decreases, an auditor may change the
    1. timing of substantive tests by performing them at an interim date rather than at year- end.
    2. nature of substantive tests from a less effective to a more effective procedure.
    3. timing of tests of controls by performing them at several dates rather than at one time.
    4. assessed level of inherent risk to a higher amount.

54. The auditor is concerned that a client usually fails to bill customers for shipments. An audit procedure that would gather relevant evidence would be to
    1. select a sample of duplicate sales invoices and trace each to related shipping documents.
    2. trace a sample of shipping documents to related duplicate sales invoices.
    3. trace a sample of Sales Journal entries to Accounts Receivable subsidiary ledger.
    4. compare the total of the Schedule of Accounts Receivable with the balance of the Accounts Receivable account in the general ledger.

55. The extent of testing normally applies
    1. exclusively to the number of items to be tested.
    2. to both the number of items tested and the number of tests performed.

1. 3. exclusively to the number of substantive tests performed.
   4. to both the nature of items tested and the number of tests performed.

56. Which of the following, when performed by the auditor, is not a test of mechanical accuracy?
    1. Extending sales invoices
    2. Adding journals and ledgers
    3. Tracing amounts from journals to ledgers
    4. Calculating the current ratio

57. In the examination of the financial statements of Delta Company, the auditor determines that in performing a test of internal control effectiveness, the rate of error in the sample does not support the auditor's preconceived notion of a tolerable occurrence rate when, in fact, the actual error rate in the population does meet the auditor's notion of effectiveness. This situation illustrates the risk of
    1. underassessment of control risk.
    2. overassessment of control risk.
    3. incorrect rejection.
    4. incorrect acceptance.

58. Several risks are inherent in the evaluation of audit evidence which has been obtained through the use of statistical sampling. Which of the following risks is an example of the risk of underassessment of control risk?
    1. Failure to properly define the population to be sampled.
    2. Failure to draw a random sample from the population.
    3. Failure to accept the statistical hypothesis that internal control is unreliable when, in fact, it is.
    4. Failure to accept the statistical hypothesis that a book value is not materially misstated when the true book value is not materially misstated.

59. As a result of tests of controls, an auditor underassessed control risk and decreased substantive testing. This underassessment occurred because the true occurrence rate in the population was
    1. Less than the risk of underassessment in the auditor's sample.
    2. Less than the occurrence rate in the auditor's sample.
    3. More than the risk of underassessment in the auditor's sample.
    4. More than the occurrence rate in the auditor's sample.

60. Which of the following sampling plans would be designed to                                 estimate a numerical measurement of a population, such as a peso value?
    1. Numerical sampling.
    2. Discovery sampling.
    3. Sampling for attributes.
    4. Sampling for variables.

61. Which of the following statements is an advantage of classical variables sampling?

1. 1. If no errors are expected, classical variables sampling will result in a smaller sample size than probability-proportional-to-size sampling.
   2. A classical variables sampling plan can begin before the completed population is available.
   3. Classical variables sampling may result in a smaller sample size than probability- proportional-to-size sampling if there are many differences between recorded and audited amounts.
   4. Classical variables sampling does not require recorded values for individual sampling units.

62. What is the primary objective of using stratification as a sampling method in auditing?
    1. To increase the confidence level at which a decision will be reached from the results of the sample selected.
    2. To determine the occurrence rate for a given characteristic in the population being studied.
    3. To decrease the effect of variance in the total population.
    4. To determine the precision range of the sample selected.

63. An auditor is applying PPS sampling. In determining the sample size, which of the following is not necessary?
    1. a reliability factor for overstatement errors
    2. a reliability factor for understatement errors
    3. tolerable error
    4. anticipated error

64. In a variable sampling plan, an auditor must generally consider each of the following except
    1. variation within the population.
    2. acceptable risk of incorrect acceptance.
    3. tolerable error.
    4. Population.

65. When sampling methods are used in a substantive test, all of the following factors must be considered in determining an optimum sample size, except the
    1. variation in the population.
    2. risk levels that the auditor is willing to accept.
    3. deviation occurrence rate that the auditor expects to exist in the sample.
    4. tolerable misstatement.
66. PPS sampling is most appropriate when the auditor
    1. anticipates understatement errors.
    2. anticipates overstatement errors.
    3. expects no errors.
    4. has assessed control risk at the maximum.

67. The mean-per-unit estimation method calculates the estimated total audited value of a population of accounts receivable as:

1. 1. A summation of the total individual accounts values in the population.
   2. The sample mean audited value multiplied by the number of items in the population.
   3. The estimated total audited value of the population multiplied by the number of items in the sample.
   4. The summation of the sample multiplied by the number of discrete samples in the population.

68. What is the best description of "tolerable misstatement" for mean-per-unit estimation?
    1. The maximum misstatement that may exist without causing an account to be materially misstated.
    2. The "bounds" around the sample mean that we would expect the value to fall within to be correct.
    3. The "projected" misstatement in the population based upon the sample chosen.
    4. The upper limit (or lower limit for liabilities) of asset values for which the book value may exceed that sample mean without being materially misstated.

69. When are the ratio estimation and difference estimation techniques most likely to be preferable to the mean-per-unit estimation method?
    1. The choice between any of the methods is irrelevant, since they all provide similar results.
    2. When differences between book and audited values are infrequent.
    3. When differences between book and audited values are frequent.
    4. When differences between book and projected misstatement is estimated to be small.

70. What is one of the main advantages of the probability-proportional-to-size sampling technique over the classical variables approach?
    1. It provides a more accurate estimation of the sample mean.
    2. It provides a wider range for acceptance so that less substantive testing needs to be done.
    3. It provides a smaller range for acceptance so that more errors are discovered.
    4. It often requires a smaller sample size to be selected.

71. Probability-proportional-to-size sampling will result in what type of sample items being selected?
    1. Highly representative of the population because it is wholly randomized.
    2. A higher proportion of small value items then large value items because of the sampling interval used.
    3. A higher proportion of large value items than small value items because of the sampling interval used.
    4. A biased sample means that may not be representative of the population.

72. While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of
    1. alpha risk.
    2. assessing control risk too low.

1. 3. beta risk.
   4. assessing control risk too high.

73. The risk of incorrect acceptance relates to the:
    1. Effectiveness of the audit.
    2. Efficiency of the audit.
    3. Preliminary estimate of materiality.
    4. Allowable risk of tolerable error.

74. Sample results support the conclusion that a recorded account balance is materially misstated but, unknown to the auditor, the account is not misstated, suggesting the risk of
    1. incorrect rejection.
    2. assessing control risk too high.
    3. incorrect acceptance.
    4. assessing control risk too low.

75. Which of the following business functions is associated with the revenue/receipt cycle?
    1. Obligations are paid to vendors and employees.
    2. Resources are distributed to outsiders in exchange for promises of future payments.
    3. Resources are used, held, or transformed.
    4. Capital funds are received from investors and creditors.

76. Which of the following is not a common activity in the revenue/receipt cycle?
    1. Order entry
    2. Receiving
    3. Inventory control
    4. cash collection

77. The cash account is involved in which cycle?
    1. Revenue and collection.
    2. Acquisition and expenditure.
    3. Production and conversion.
    4. All of the given choices.

78. Which of the following is an appropriate audit procedure to test cancelled checks for authorized signatures?
    1. Compare the check date with the first cancellation date.
    2. Determine that all checks are to be signed by individual officers who are authorized by the board.
    3. Examine a representative sample of signed checks and trace their signatures to the specimen signature book of authorized signatories.
    4. Confirm the signatures from a sample of checks directly with the bank.

79. Which of the following is not likely a source of information about the accounting system in the revenue area?
    1. Direct inquiry of customers.

1. 2. Prior experience with the client.
   3. Systems flowcharts prepared by the EDP department.
   4. Financial reporting manuals.

80. Which of the following gives an indication of a potential fraudulent activity?
    1. Numerous credit memoranda have been issued to the company's biggest customer.
    2. Internal auditor cannot locate several credit memoranda to support reductions of customers' balances.
    3. The year-end bank reconciliation has no outstanding checks or deposits older than 15 days.
    4. No one was absent the day the auditors handed out the paychecks.

81. Which of the following control procedures could prevent or detect errors or frauds arising from shipments made to unauthorized parties?
    1. Document policies and procedures for scheduling the shipments of goods.
    2. Establish procedures for reviewing and approving the prices and sales terms before sale.
    3. Prenumber the bills of lading and assure that the related billings are made on a periodic basis.
    4. Prepare and periodically update the lists of authorized customers.

82. Which of the following control procedures would most likely assure that access to shipping, billing, inventory control, and accounting records is restricted to personnel authorized by management?
    1. Segregate the responsibilities for authorization, execution, and recording, and prenumber and control the custody of documents.
    2. Establish the cash receipts function in a centralized location and require a  daily reconciliation of cash receipts records with deposit slips.
    3. Establish policy and procedures manuals, organization charts, and supporting documentation.
    4. Periodically substantiate and evaluate the recorded account balances.

83. An entity has implemented a control procedure which requires that authorized personnel reconcile the total of individual customer accounts receivable with control totals. This control relates to which of the following control objectives?
    1. Sales, cash receipts, and related transactions should be recorded at the correct amounts, in the proper period, and should be properly classified.
    2. Recorded accounts receivable balances should reflect underlying transactions and events.
    3. Billings, collections, and related adjustments transactions should be posted accurately to individual customer accounts.
    4. Access to cash and cash-related records should be restricted to personnel authorized by management.

84. Which of the following internal control procedures most likely would deter lapping of collections from customers?

1. 1. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries.
   2. Authorization of writeoffs of uncollectible accounts by a supervisor who is independent of credit approval.
   3. Segregation of duties between receiving cash and posting collections to the accounts receivable ledger.
   4. Supervisor?s comparison of the daily cash summary with the sum of the cash receipts journal entries.

85. What sequence of steps does an auditor undertake when identifying control procedures that are potentially reliable in assessing control risk below the maximum?
    1. Consider the errors or frauds that might occur, determine control procedures, identify control objectives, and design tests of controls.
    2. Determine control procedures, design tests of controls, consider the errors or frauds that might occur, and identify control objectives.
    3. Identify control objectives, consider the errors or frauds that might occur, determine control procedures, and design tests of controls.
    4. Design tests of controls, determine control procedures, consider the errors or frauds that might occur, and identify control objectives.

86. Assuming cash receipts from credit sales have been misappropriated, which of the following is likely to conceal the misappropriation and unlikely to be detected?
    1. Understating the sales journal.
    2. Overstating the accounts receivable control account.
    3. Overstating the accounts receivable subsidiary ledger.
    4. Overstating the cash receipts journal.

87. Which of the following is most likely to provide management with incentives to overstate earnings?
    1. Projected quarterly dividends.
    2. Issuance of preferred stock.
    3. Unbudgeted increase in materials prices.
    4. A projected stock split.

88. Under which of the following circumstances does management have some discretion in timing the recognition of revenue?
    1. The timing of revenue is not reasonably determinable and the earnings process is not complete.
    2. The amount and timing of revenue is reasonably determinable.
    3. The earning process is complete or reasonably complete.
    4. The transaction is at arm?s length.

89. After preparing a flowchart of internal control for sales and cash receipts transactions and evaluating the design of the system, the auditor would perform tests of controls on all control procedures
    1. That are documented in the flowchart.

1. 2. that are considered to be deficiencies that might allow errors to enter the accounting system.
   3. that are considered to be strengths that the auditor plans to rely on in assessing control risk.
   4. that would help in preventing irregularities.

90. Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mail room?
    1. The cashier posts the receipts to the accounts receivable subsidiary ledger.
    2. The cashier makes the daily deposit at a local bank.
    3. The cashier makes the daily deposit of cash collections.
    4. The cashier endorses the checks.

91. Which of the following is not a universal rule for achieving control over cash?
    1. Separate the cash-handling and record-keeping functions.
    2. Decentralize the receiving of cash as much as possible.
    3. Deposit each day?s cash receipts by the end of the day.
    4. Have bank reconciliation prepared by employees who do not handle cash.

92. On conducting an audit in which point in an ordinary sales transaction of a wholesaling business is a lack of specific authorization of least concern to the auditor?
    1. Granting of credit.
    2. Shipment of goods.
    3. Determination of discounts.
    4. Selling of goods for cash.

93. An auditor who examines check disbursements discovers a missing check number. Upon inquiry to the person responsible for disbursements and reconciliation of the cash account, he is told that the check number is missing because the check was voided. What is the auditor's next step?
    1. Prepare a bank transfer schedule to identify the check.
    2. Examine the bank confirmation to determine whether the check cleared.
    3. Since the person responsible for disbursements also reconciles the account, no additional procedures are necessary.
    4. Examine the voided checks file to determine whether the check is in the file.

94. Of the following, which procedure or document is most effective for detecting kiting?
    1. A bank cut-off statement.
    2. A bank statement.
    3. A bank kiting statement.
    4. Confirmation of bank balance.
95. Which of the following is confirmed on the standard form used for cash balances at financial institution?
    1. Factored accounts receivable.
    2. Loss contingencies.
    3. Loans payable.